April Marketing & Distributing Corp. v. Diamond Shamrock Refining & Marketing Co.

United States Court of Appeals,

Fifth Circuit.

No. 95-11096.

APRIL MARKETING & DISTRIBUTING CORPORATION, INC., Plaintiff-Appellee,

v.

DIAMOND SHAMROCK REFINING AND MARKETING COMPANY, Defendant-Appellant.

Jan. 10, 1997.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, GARWOOD and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

This appeal arises out of a franchise between Diamond Shamrock Refining and Marketing

Company ("Diamond Shamrock") and April Marketing and Distributing Corporation ("April

Marketing"). April Marketing brought suit against Diamond Shamrock in federal district court,

alleging constructive termination of the franchise in violation of the Petroleum Marketing Practices

Act ("PMPA"), 15 U.S.C. §§ 2801 et seq., and, alternatively, unjust enrichment and violation of the

duty of good faith and fair dealing under Texas state law. Diamond Shamrock moved for partial

summary judgment on April Marketing's PMPA wrongful termination claim. The district court denied

the motion and certified its order for interlocutory appeal to this court under 28 U.S.C. § 1292(b).

We granted Diamond Shamrock's petition for leave to appeal.

Because April Marketing has failed to allege any facts that would support a termination claim

under the PMPA, we reverse the order of the district court.

I.

April Marketing is a wholesale and retail distributor of motor fuel and related products in the

Dallas area. Diamond Shamrock refines and markets petroleum products. A series of "jobber

contracts" governed April Marketing's and Diamond Shamrock's franchise relationship. Under the

franchise agreement in effect when the termination allegedly occurred, Diamond Shamrock gave April

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Marketing the right to use Diamond Shamrock's trademarks, trade names, and brands, but only at

locations specifically approved by Diamond Shamrock in writing. Diamond Shamrock also agreed

to sell motor fuel and other products to April Marketing. April Marketing in turn agreed to pay

Diamond Shamrock's "established price" for these items in cash, unless the parties agreed upon

another arrangement. Although Diamond Shamrock as a matter of practice extended credit to April

Marketing, the agreement gave Diamond Shamrock the right to alter or suspend April Marketing's

credit at any time. In April of 1991, Diamond Shamrock exercised its right to terminate April

Marketing's credit line.

April Marketing's wrongful termination claim is premised on three basic assertions. First,

Diamond Shamrock entered into direct competition with April Marketing by opening its own retail

stores near April Marketing's stores and selling gasoline and other products to its own stores at or

below wholesale price. Second, Diamond Shamrock imposed onerous conditions before it would

allow April Marketing to use the Diamond Shamrock logo at new April Marketing locations and in

some cases refused to grant permission altogether. Third, Diamond Shamrock terminated April

Marketing's credit line, forcing April Marketing to pay cash for gasoline and other goods. April

Marketing alleges that these actions constructively terminated April Marketing's franchise in violation

of the PMPA.

II.

The centerpiece of the PMPA, 15 U.S.C. § 2802(a), prohibits a franchisor from terminating

a franchise or failing to renew a franchise relationship, except in the manner and for t e reaso ns
h

specified by the PMPA.1 The Act does not define "termination," other than to specify that it "includes

cancellation." Id. § 2801(17).

This circuit has not recognized a cause of action for "constructive termination" under the

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Congress provided a variety of remedies for the termination of a franchise in violation of the
PMPA, including monetary damages and injunctive relief. See 15 U.S.C. § 2805(b), (d), (e).

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PMPA.2 We need not address the question of whether a constructive termination is actionable under

the PMPA; in this case, Diamond Shamrock's actions did not breach any obligation it owed April

Marketing and thus cannot provide the basis for a termination claim under the PMPA.

Those courts that have recognized constructive termination under the PMPA have indicated

that there is no constructive termination absent a breach of the franchise.3 See May-Som Gulf, Inc.

v. Chevron U.S.A., Inc., 869 F.2d 917, 922 (6th Cir.1989); Barnes v. Gulf Oil Corp., 795 F.2d 358,

362-64 (4th Cir.1986);4 see also Fresher v. Shell Oil Co., 846 F.2d 45, 46-47 (9th Cir.1988)

(holding that the dismissal of a PMPA wrongful termination action was proper where the franchisee

2
In McGinnis v. Star Enter., No. 93-1234, 8 F.3d 20 (December 21, 1993) (unpublished), a
franchisee brought suit against a franchisor alleging that the franchisor had constructively
terminated a franchise in violation of the PMPA along with causes of action for breach of
contract, violation of the Texas Deceptive Practices Act, and antitrust violations. The majority of
the court's opinion focused on the effect of a release between the parties, which had resolved a
previous dispute. The court concluded broadly that "[e]ach of plaintiffs' claims is either barred by
the release clause or lacks adequate evidence to survive summary judgment." Id. at 10. Despite
this general conclusion, which would appear to have resolved all the plaintiff's claims, the court
nevertheless addressed the plaintiff's PMPA wrongful termination claim specifically. The court
discussed the lack of summary judgment proof of termination, including the fact that the franchise
had continued in effect "at all times relevant to this action." Id. at 9. Interestingly, the court went
further to state that "[t]he plain meaning of the [PMPA] does not provide for "constructive
termination.' " Id. We need not address whether this language from McGinnis is dictum or
whether, as April Marketing urges, it is a binding alternative holding; as discussed below, the
facts alleged by April Marketing do not state a claim for constructive termination even if such a
cause of action exists.
3
Within the meaning of the PMPA, a "franchise" consists of three core components: a contract
to use the refiner's trademark, a contract for the supply of motor fuel to be sold under the
trademark, and a lease of the premises at which the motor fuel is sold. Barnes v. Gulf Oil Corp.,
795 F.2d 358, 360 (4th Cir.1986) (citing S.REP. NO. 731, 95th Cong., 2d Sess. 17, 29 (1978),
reprinted in 1978 U.S.C.C.A.N. 873) (additional citations omitted).
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Most cases in which courts from other jurisdictions have recognized the possibility of a
constructive PMPA termination involve the assignment of a franchise by the franchisor to a third
party. See, e.g., May-Som, 869 F.2d at 918-19; Barnes, 795 F.2d at 359. Section 2806(b) of the
PMPA provides that the Act does not prevent a franchisor from assigning a franchise "as
authorized by the provisions of such franchise or by any applicable provision of State law." 15
U.S.C. § 2806(b). The Fourth and Sixth Circuits have interpreted this provision to mean that an
assignment in violation of state law will give rise to a cause of action under the PMPA. May-
Som, 869 F.2d at 922; Barnes, 795 F.2d at 363. Those courts have also held that even if an
assignment is permissible under state law, it may be actionable under the PMPA if it breaches
"one of the three statutory components of a franchise...." May-Som, 869 F.2d at 922; Barnes,
795 F.2d at 363.

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failed to allege "breach of any agreements which const itute components of their franchises"). Cf.

Smith v. Atlantic Richfield Co., 533 F.Supp. 264, 268-69 (E.D.Pa.) (recognizing that termination of

a core secondary arrangement can constitute a termination of a franchise in violation of the PMPA),

aff'd mem., 692 F.2d 749 (3d Cir.1982).

April Marketing does not dispute that none of Diamond Shamrock's actions in this case

violated the parties' agreement, nor does it claim that the contractual provisions that authorized

Diamond Shamrock's actions themselves violate the PMPA. Diamond Shamrock's actions were

clearly within its rights under the franchise. The agreement explicitly authorized Diamond Shamrock

both to refuse to brand additional April Marketing stores and to refuse to extend credit to April

Marketing. Further, neither the PMPA nor the contract prohibits Diamond Shamrock from

competing directly with April Marketing.

Still undaunted, April Marketing argues that a franchisor's actions, even if compliant with the

terms of the franchise, can be considered a PMPA termination because franchises are contracts of

adhesion. The short answer is that Congress could have chosen to prescribe the terms of franchise

agreements as a means of addressing the disparity of bargaining power between the parties, for

example, by requiring or regulating the extension of credit to franchisees. But it did not. The

legislative history of the PMPA indicates that Congress was well aware of the inequality in the

bargaining positions of franchisors and franchisees. See S.REP. NO. 731 at 17-19, 1978 U.S.C.C.A.N.

at 873, 875-878. Congress chose to address this problem not by regulating the details of the franchise

agreement but rather by limiting the franchisor's ability to employ the "extreme remedy" of

termination. See S.REP. NO. 731 at 18, 1978 U.S.C.C.A.N. at 876. Thus, we conclude that a

franchisor's actions, if those actions do not breach the franchise, cannot be considered a "termination"

within the meaning of the PMPA.

III.

We need not address whether a franchisee can ever state a cause of action for wrongful

termination under the PMPA absent a formal termination or cancellation of the franchise by the

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franchisor. We hold only that the PMPA's termination provision is not implicated if the franchisor

has acted within its rights under the franchise.5

Accordingly, we REVERSE the judgment of the district court and REMAND for further

proceedings consistent with this opinion.

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Because we conclude that the facts alleged by April Marketing do not support a cause of
action under the PMPA as a matter of law, we do not reach the PMPA statute of limitations issue.

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