Patel v. Sun Co Inc

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit

4-10-1998

Patel v. Sun Co Inc
Precedential or Non-Precedential:

Docket 96-2123

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Filed April 10, 1998

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NO. 96-2123

PRAKASH H. PATEL; SHOBHA P. PATEL, H/W
APPELLANTS

v.

SUN COMPANY, INC.; LANCASTER ASSOCIATES

On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civ. No. 94-cv-04318)

Argued: September 15, 1997

Before: BECKER, Chief Judge, SLOVITER and SCIRICA,
Circuit Judges.

(Filed April 10, 1998)

DIMITRI G. DASKAL, ESQUIRE
(ARGUED)
The Daskal Law Group
3 Church Circle
Suite 500
Annapolis, MD 21401

Attorney for Appellants
 JAMES M. BROGAN, ESQUIRE
(ARGUED)
CHRISTOPHER W. WASSON,
ESQUIRE
Piper & Marbury
18th & Arch Streets
3400 Two Logan Square
Philadelphia, PA 19103

VIRGINIA L. ROCKAFELLOW,
ESQUIRE
RICHARD GAINES,
ESQUIRE
Sun Company, Inc. (R&M)
Ten Penn Center
1801 Market Street, 17th Floor
Philadelphia, PA 19103

Attorneys for Appellee

OPINION OF THE COURT

BECKER,* Chief Circuit Judge.

Plaintiffs Prakash H. Patel and Shobha P. Patel appeal
from an order of the district court granting summary
judgment in favor of defendant Sun Company, Inc. ("Sun")
in a case brought under the Petroleum Marketing Practices
Act, 15 U.S.C. S 2801 et seq. ("PMPA" or "Act"). This
litigation has been ongoing since 1988, and the case has
been here before, see Patel v. Sun Co., Inc., 63 F.3d 248,
252 (3d Cir. 1995) ("Patel V"). The gravamen of the Patels'
complaint, then and now, is that Sun has made an "end
run" around a provision of the PMPA that requires service
station franchisors like Sun to make bona fide offers to
their franchisees before selling the service station premises
to a third party. See S 2802(b)(3)(D)(iii)(I).
_________________________________________________________________

* Edward R. Becker, United States Circuit Judge for the Third Circuit,
assumed Chief Judge status on February 1, 1998.

2
In 1987, Sun sold the land upon which the Patels had
operated their service station for twenty-two years to an
unrelated third party, Lancaster Associates ("Lancaster"),
without first offering it to them. Sun claims that it was not
required to make a bona fide offer to the Patels because it
did not terminate their franchise when it sold the property.
Instead, Sun took a six year leaseback from Lancaster and
did not disturb the Patels' franchise until that lease expired
in 1994. Sun contends that six years later it could rely on
the "expiration of an underlying lease" provision of the
PMPA, see S 2802(c)(4), which allows franchisors to
terminate or nonrenew franchises without first making a
bona fide offer to their franchisees when the leases
underlying the franchise expire.

The Patels offer four alternative theories under which
they claim that Sun should be liable for damages for selling
the premises to Lancaster without first making a bona fide
offer, despite the leaseback arrangement. First, they argue
that because the Lancaster-Sun lease was created after the
inception of the first franchise agreement between Sun and
the Patels, it does not qualify as an "underlying lease" for
the purposes of S 2802(c)(4). Therefore, according to the
Patels, Sun cannot rely on S 2802(c)(4) to skirt the bona fide
offer requirement in S 2802(b)(3)(D)(iii)(I). Second, they
contend that, even if the Lancaster-Sun lease technically
fits the S 2802(c)(4) definition of an underlying lease, Sun
should not be permitted to circumvent the bona fide offer
requirements simply by delaying the eventual nonrenewal
date through the use of a leaseback. To the extent that the
text of the PMPA seems to allow that result, the Patels urge
us to close that "unintended loophole" by reading a "sale-
leaseback offer requirement" into the Act. Third, the Patels
submit that we must inquire into the objective
reasonableness of Sun's business decision to avoid the
bona fide offer provision by creating the leaseback with
Lancaster. Fourth, the Patels assert that, at the very least,
Sun's decision to create the leaseback must have been
made subjectively "in good faith and in the normal course
of business" and not simply to avoid the bona fide offer
requirement.

Unfortunately for the Patels, none of their arguments
carry the day. Under a plain reading of the unambiguous

3
text of the Act, we find that the definition of "underlying
lease" in S 2802(c)(4) is clear, and that it includes leases,
like the Lancaster-Sun leaseback, created during the
business relationship between the franchisor and
franchisee. Additionally, we can find no statutory basis to
justify reading into the PMPA new provisions like a "sale
leaseback offer requirement" that have no grounding in the
Act's text or legislative history. Moreover, our decision in
Lugar v. Texaco, Inc., 755 F.2d 53 (3d Cir. 1985), precludes
the imposition of an objective reasonableness inquiry into
franchisor decisions to terminate or nonrenew franchises
based on the underlying lease exception in S 2802(c)(4).
Finally, while we agree with the Patels that under Slatky v.
Amoco Oil Co., 830 F.2d 476 (3d Cir. 1987) (en banc),
courts must engage in a subjective "in good faith and in the
normal course of business" review of franchisor decisions to
terminate or nonrenew the franchise when an underlying
lease expires, we cannot reverse on this ground. This is
because we are bound under the doctrine of law of the case
by the judgment in Patel V, which found that Sun acted in
good faith when it did not renew the Patels' franchise. For
all these reasons, the judgment of the district court will be
affirmed.

I.

Sun owned a parcel of land in Wayne, Pennsylvania, that
contained a commercial office building, a large parking
area, and other improvements. Sun leased a small portion
of this property to the Patels, who operated a Sunoco
service station there for twenty two years pursuant to a
series of franchise agreements with Sun. The first post-
PMPA agreement between Sun and the Patels began on
August 21, 1978.

In December of 1987, Sun sold the entire undivided
parcel, which included the Patels' service station on one
corner, to Lancaster Associates, an unrelated third party
developer. It is not clear from the record whether Sun first
offered the property to the Patels, and so for the purposes
of summary judgment review we must assume that Sun did
not. Lancaster agreed to lease the service station portion of
the parcel back to Sun until September 30, 1994. The

4
Lancaster-Sun leaseback did not, however, contain any
specific renewal provisions or options granting Sun the
right to re-purchase the property.

Sun, upon entering into the leaseback with Lancaster,
and as part of their 1988 Franchise Agreement,
immediately subleased the service station premises to the
Patels for a term of three years. The sublease provided that
Sun's right to grant possession of the premises was now
subject to the Lancaster-Sun "underlying" lease that would
expire on September 30, 1994. The sublease also informed
the Patels that the sublease might not be renewed at the
end of the lease period. While at no time during the
Lancaster sale and leaseback did Sun interrupt the Patels'
possession of the service station premises, according to the
testimony of Lancaster general partner Bruce Robinson,
Lancaster always expected that upon the expiration of the
leaseback, the Patels' franchise would not be renewed
because Sun had promised to remove the underground fuel
tanks and clean up any environmental problems that
existed on the property.

In 1991, upon the expiration of the first three-year
sublease, Sun and the Patels entered into a second three-
year sublease due to expire on August 21, 1994. This
sublease, like the first, provided that Sun's right to grant
possession of the premises was subject to the underlying
Lancaster-Sun lease which would expire on September 30,
1994, and it also informed the Patels that the sublease
might not be renewed at the end of the lease period. On
April 28, 1994, Sun sent written notification to the Patels
that their lease and franchise would not be renewed at the
end of the term due to the upcoming expiration of Sun's
underlying lease with Lancaster on September 30, 1994.

Beginning in 1988, the Patels filed a series of lawsuits
claiming that Sun had effected a constructive termination
or nonrenewal of their franchise in violation of the PMPA by
not first offering them the right of first refusal on the
"leased marketing premises" under the PMPA. See
SS 2801(9) and 2802(b)(3)(D). The district court rejected the
Patels' contentions in a series of decisions that ultimately
concluded that their legal action was premature. The court
reasoned that even if it were true that Sun had failed to

5
offer the Patels the premises, the other necessary predicate
act (termination or nonrenewal of the lease) had not yet
occurred, and indeed, might never occur. See Patel v. Sun
Ref. & Mktg. Co., No. 88-3958, slip op. at 1-2 (E.D. Pa. Oct.
14, 1988) ("Patel I"); Patel v. Sun Ref. & Mktg. Co., 710 F.
Supp. 1023 (E.D. Pa. 1989) ("Patel II"); Patel v. Sun Ref. &
Mktg. Co., No. 88-3958, 1992 WL 25737, at *2 (E.D. Pa.
Feb. 7, 1992) ("Patel III"). The Patels did not appeal these
decisions.

After receiving the notification of nonrenewal from Sun in
1994, the Patels filed another action, again contending that
the nonrenewal violated the PMPA because Sun had sold
the property in 1987 without first giving them an offer to
purchase it or a right of first refusal. The Patels sought
injunctive relief to prevent the nonrenewal as well as
monetary damages for Sun's alleged violation of the PMPA.
The district court denied the request for injunctive relief
because it found that the Patels had not satisfied the
S 2805(b)(2) preliminary injunction standard, which
requires the franchisee to show "sufficiently serious
questions going to the merits to make such questions a fair
ground for litigation." Patel v. Sun Co., Inc., 866 F. Supp.
871, 873-74 (E.D. Pa. 1994) ("Patel IV").

In a divided opinion, we affirmed the district court's
denial of the injunction, although on different grounds, not
reaching the merits determination made by the district
court. See Patel V, 63 F.3d at 252. We held that the
injunction was barred under S 2805(e)(1), which provides
that a court may not compel renewal of a franchise
relationship if the basis for the nonrenewal of the
relationship was a decision made in good faith and in the
normal course of business by the franchisor to sell its
interests in the leased marketing premises. See
S 2805(e)(1)(A)(iii). We remanded to the district court,
however, explaining, "[t]he Patels still have. . . the
opportunity to present to the district court their contention
that the nonrenewal of their franchise violatesS 2802
because the reason given for the nonrenewal, the expiration
of the underlying lease, was a condition created by the
franchisor when it sold the property without offering the
franchisee an opportunity to purchase it." Patel V, 63 F.3d
at 253.

6
On remand, both parties moved for summary judgment,
and the district court granted summary judgment in favor
of Sun. See Patel v. Sun Co., Inc., 948 F. Supp. 465 (E.D.
Pa. 1996) ("Patel VI"). The Patel VI court held that Sun
could refuse to renew the Patels' franchise without liability,
based upon the underlying lease exception in
SS 2802(b)(2)(C) and 2802(c)(4). The district court relied
upon our reasoning in Lugar, 755 F.2d at 53, and held that
the underlying lease exception was not subject to any
judicial inquiry into the circumstances surrounding Sun's
decision to sell and leaseback the premises. See Patel VI,
948 F. Supp. at 473 n.3.

The Patels appealed again, and the long-running saga of
"the Patels versus Sun" returns to this court anew. Section
2805(a) of the PMPA confers jurisdiction on the federal
courts and creates a civil cause of action against
franchisors for violations of the substantive sections of the
Act. Section 2805(d) provides for the award of actual and
exemplary damages, as well as reasonable attorney and
expert witness fees to a franchisee who prevails against a
franchisor in a civil action under the Act. Because our
standard of review is plenary, see Kelly v. Drexel Univ., 94
F.3d 102, 104 (3d Cir. 1996), we apply the same test the
district court should have applied in the first instance. See
Olson v. General Elec. Astrospace, 101 F.3d 947, 951 (3d
Cir. 1996); Helen L. v. DiDario, 46 F.3d 325, 329 (3d Cir.
1995). We must determine, therefore, whether the record,
when viewed in the light most favorable to the Patels,
shows that there is no genuine issue of material fact and
that Sun was entitled to summary judgment as a matter of
law. See, e.g., Olson, 101 F.3d at 951; Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249-50 (1986).

II.

A.

The PMPA regulates the relationship between franchisors,
motor fuel refiners and distributors, and their franchisees,
principally retail gas station operators. Many of these

7
franchisees (like the Patels) lease their station premises
from franchisors who (like Sun), own the premises. In 1978,
after examining this relationship and determining that
legislative protection for franchisees was necessary,
Congress enacted the PMPA. Congress passed this
legislation in large part because it was concerned that
franchisors had been using their superior bargaining power
to compel compliance with certain marketing policies and
to gain an unfair advantage in contract disputes. See
Slatky, 830 F.2d at 478 (citing S. Rep. No. 731, 95th Cong.,
2d Sess. 17-19, reprinted in 1978 U.S.C.C.A.N. 873, 875-
77) ("Senate Report"); Patel V, 63 F.3d at 250. In addition,
Congress wanted to protect franchisees from "arbitrary or
discriminatory terminations and non-renewals." Senate
Report at 18, 1978 U.S.C.C.A.N. 877. As we noted in
Slatky, when it passed the PMPA:

Congress determined that franchisees had a
"reasonable expectation[]" that "the [franchise]
relationship will be a continuing one." The PMPA's goal
is to protect a franchisee's "reasonable expectation" of
continuing the franchise relationship while at the same
time insuring that distributors have "adequate
flexibility . . . to respond to changing market conditions
and consumer preferences."

830 F.2d at 478 (citing the Senate Report at 18-19).

The PMPA prohibits franchisors from terminating or
nonrenewing franchises except under certain prescribed
situations. See S 2802(a). It also enumerates a series of
grounds that permit a franchisor to terminate or nonrenew
one of its franchisees without PMPA liability. See S 2802(b).
These bases can be roughly separated into two categories:
franchisee misconduct1 and legitimate franchisor business
_________________________________________________________________

1. For example, the Act permits the franchisor to terminate or nonrenew
a franchise if the franchisee fails to pay sums due under the franchise
agreement, see S 2802(b)(2)(C) (incorporating S 2802(c)(8)); if the
franchisee engages in fraud or criminal misconduct relevant to the
operation of the property, see S 2802(b)(2)(C) (incorporating S
2802(c)(1));
if the franchisor receives "numerous bona fide customer complaints"
about the franchisee's operation of the property, see S 2802(b)(3)(B); or
if
the franchisee fails to operate the property in a "clean, safe, and
healthful manner," see S 2802(b)(3)(C).

8
decisions. In this case, only the latter, which are designed
to ensure that franchisors maintain their ability to adjust to
changing market conditions, are implicated.

Among the acceptable business reasons for franchisee
termination or nonrenewal (assuming that certain
conditions in the Act are met) are the franchisor's decision
to leave the geographic market area, see S 2802(b)(2)(E);
failure of the franchisor and franchisee to agree in good
faith and in the normal course of business to changes or
additions to the franchise agreement, see S 2802(b)(3)(A);
conversion of the property to a use other than sale of motor
fuel, see S 2802(b)(3)(D)(i)(I); material alteration of the
property, see S 2802(b)(3)(D)(i)(II); sale of the premises, see
S 2802(b)(3)(D)(i)(III); unprofitability of the franchise, see
S 2802(b)(3)(D)(i)(IV); loss of an underlying lease, see
S 2802(b)(2)(C) (incorporating S 2802(c)(4)); and loss of
franchisor's right to grant the trademark which is the
subject of the franchise, see S 2802(b)(2)(C) (incorporating
S 2802(c)(6)). Of these possible "business reason"
exceptions, only two -- the sale of the premises and the
loss of an underlying lease -- are the subject of this appeal.
We therefore set out their requirements in greater detail.

First, under S 2802(b)(3)(D)(i)(III), a franchisor may
terminate or nonrenew a franchisee if the franchisor
determines "in good faith and in the normal course of
business" to sell the property. To qualify for this exception
to the general prohibition against terminations or
nonrenewals, however, the franchisor's purpose cannot be
to convert the property to direct management by its own
employees or agents. See S 2802(b)(3)(D)(ii). Moreover, the
franchisor must have made either a bona fide offer to sell
the property to the franchisee, or, if applicable, have
provided the franchisee a right of first refusal on an offer
made to a third party. See S 2802(b)(3)(D)(iii).

Second, a franchisor may terminate or decline to renew
a franchise agreement upon the "occurrence of an event
which is relevant to the franchise relationship and as a
result of which . . . nonrenewal of the franchise is
reasonable." S 2802(b)(2)(C). Section 2802(c) expands on the
general statement in S 2802(b)(2)(C) by enumerating a non-
exclusive list of events that qualify as "relevant". Included

9
in this list is "loss of the franchisor's right to grant
possession of the leased marketing premises through
expiration of an underlying lease." S 2802(c)(4). In 1994,
Congress amended this exception by requiring a franchisor
to offer to assign to the franchisee "any option to extend the
underlying lease or option to purchase the marketing
premises that is held by the franchisor" when certain
conditions are satisfied. See Petroleum Marketing Practices
Act Amendments of 1994, Pub. L. No. 103-371, sec. 3,
S 102(c)(4), 108 Stat. 3484, 3484 (codified at 15 U.S.C.
S 2802(c)(4)(B)). As there were no options in the Lancaster-
Sun lease, that provision is not relevant to our decision
here. We will, however, discuss the import of this
amendment on our PMPA jurisprudence infra.

B.

The Patels' overarching argument is that if Sun is allowed
to prevail here, it will have made a successful "end run"
around the bona fide offer requirement contained in the
sale exception to the PMPA's general rule prohibiting
franchise nonrenewal. To evaluate this argument, it is
necessary to understand the interplay between
SS 2802(b)(3)(D) and 2802(c)(4) (as incorporated by
S 2802(b)(2)(C)). As we have explained, S 2802(b)(3)(D)
requires that a franchisor make "a bona fide offer to sell,
transfer, or assign to the franchisee [his] interests" in the
leased marketing premises when the franchisor decides not
to renew the franchise relationship before it sells the
property to a third party. Thus, the Act contemplates a two-
event trigger to activate the bona fide offer requirement --
a sale of the property and a termination or nonrenewal of
the franchise.

In the ordinary case, the sale and the nonrenewal occur
together, and there is no question that the franchisor must
make a bona fide offer or grant a right of first refusal to the
franchisee before selling to avoid liability under the Act. But
the circumstances here are not "ordinary". In 1987, Sun's
sale of the premises did not lead immediately to its failure
to renew the Patels' franchise. Rather, Sun took a leaseback
from Lancaster and renewed the Patels' franchise for not
just one, but for two additional three year terms. Thus,

10
when Sun sold the property to Lancaster, there was no
nonrenewal, and the courts in Patel I-III, supra held that
the right of first refusal and bona fide offer requirements of
S 2802(b)(3)(D)(iii) had not yet been triggered. The Patels
were told, in effect, to wait and see if their franchise would
be terminated in the future. See Patel III, 1992 WL 25737
at *2 ("At this point in time, they have not been subjected
to a termination or non-renewal of their franchise. If such
an event occurs, plaintiffs will have the protection of the
PMPA at their disposal."). The Patels did not appeal these
decisions.

Barring another exception in the PMPA, Sun could not
have avoided liability under the PMPA when it ultimately
decided to nonrenew the Patels just because that
nonrenewal was delayed through the use of a leaseback (or
any other device). This is so, because the default regime of
the Act is that all terminations or nonrenewals are unlawful
unless otherwise excepted. See S 2802(a). In this case,
however, when Sun actually failed to renew the Patels'
franchise in 1994, it contended that a different provision --
S 2802(c)(4) -- shielded it from PMPA liability, because the
expiration of the Lancaster-Sun lease now qualified as a
relevant event under S 2802(b)(2)(C). Therefore, in Sun's
view, the sale exception (with its bona fide offer
requirement) no longer was relevant, for it could now rely
on the underlying lease exception (which had no bona fide
offer requirement). These are the mechanics of the "end
run" of which the Patels complain.

The Patels maintain that the district court should not
have interpreted the PMPA to permit a franchisor to evade
the bona fide offer requirement so easily, and they advance
several theories why Sun should be liable for damages (they
no longer seek injunctive relief).

1.

First, the Patels submit that the language of S 2802(c)(4)
itself prohibits franchisors from creating and using
leasebacks to avoid PMPA liability. They contend that a
lease cannot be an "underlying lease" for the purposes of
S 2802(c)(4) unless it predates the business relationship

11
between the franchisor and franchisee (in other words, the
lease must predate the creation of the initial franchise
between the parties).2 The Patels argue that a lease that
merely predates the existing franchise, like the Lancaster-
Sun leaseback in this case, should not be treated as an
"underlying lease" because that would permit the
subversion of the bona fide offer provision contained in the
sale exception.

We turn initially to the language of S 2802(c)(4) to
determine what Congress intended by the term "underlying
lease". The provision reads:

As used in subsection (b)(2)(C) of this section, the term
"an event which is relevant to the franchise
relationship and as a result of which termination of the
franchise or nonrenewal of the franchise relationship is
reasonable" includes events such as --

* * *

(4) loss of the franchisor's right to grant possession of
the leased marketing premises through expiration of an
underlying lease, if the franchisee was notified in
writing, prior to the commencement of the term of the
then existing franchise -- (A) of the duration of the
underlying lease, and (B) of the fact that such
underlying lease might expire and not be renewed
during the term of such franchise (in the case of
_________________________________________________________________

2. In the text, we use the words "business relationship" instead of the
perhaps more common-sensical term "franchise relationship" because we
wish to avoid any confusion with that term as it is defined in S 2801(2).
Our use of "business relationship" is intended to connote the entire
relationship between the franchisor and the franchisee, beginning with
the inception of the first franchise agreement and ending with the
termination or nonrenewal of the final franchise agreement. "Franchise
relationship", in contrast, is defined in S 2801(2) as "the respective
motor
fuel marketing or distribution obligations and responsibilities of a
franchisor and a franchisee which result from the marketing of motor
fuel under a franchise." Technically, a "franchise relationship", as it is
defined in the PMPA, is tied to the franchise agreement, which the PMPA
contemplates will periodically be modified and renewed. As that is not
the idea we are trying to convey here, we have selected the term
"business relationship".

12
 termination) or at the end of such term (in the case of
nonrenewal);3

There is no definition in the Act itself of the term
"underlying lease". See S 2801. But the term "franchise" is
defined, and it helps us determine what Congress meant by
"underlying lease". A franchise is defined as "any contract
between a refiner and a distributor, between a refiner and
a retailer, . . . under which a refiner or distributor . . .
authorizes or permits a retailer or distributor to use, in
connection with the sale, consignment, or distribution of
motor fuel, a trademark which is owned or controlled by
such refiner . . . ." S 2801(1)(A). It includes "any contract
under which a retailer or distributor . . . is authorized or
permitted to occupy leased marketing premises . . . in
connection with the sale, consignment, or distribution of
motor fuel under a trademark which is owned or controlled
by such refiner . . . ." S 2801(1)(B)(i). The statute
contemplates that the franchise will be renewed (and
perhaps modified) many times during the life of the
business relationship between the franchisor and the
franchisee. Indeed, other sections of the PMPA anticipate a
series of relatively short franchise terms between the
franchisor and franchisee. Section 2802(b)(2)(E), for
example, permits the franchisor to terminate or nonrenew
a franchise based upon a decision in good faith and in the
normal course of business to withdraw from the relevant
geographic market area, so long as the franchise term is
three years or longer.

Examining the use of the term "franchise" in the context
of S 2802(c)(4), particularly the notification provision, the
Patels' contention that an underlying lease must predate
the business relationship between the franchisor and the
franchisee must be incorrect. Under S 2802(c)(4), the
expiration of an "underlying lease" qualifies as a relevant
_________________________________________________________________

3. This is the pre-October 1994 version of the statute. It applies here
because both the 1987 sale and the 1994 nonrenewal occurred prior to
the amendments enacted in that year. We note that the current version
of S 2802(c)(4) contains a new subsection (B). The amendment modifies
the relevant language quoted above only insofar as Congress moved all
of the language in subsection (B) quoted above into the new subsection
(A) and added new subheadings. See infra page 21.

13
event exception "if the franchisee was notified in writing,
prior to the commencement of the term of the then existing
franchise." S 2802(c)(4) (emphasis supplied). This language
leaves no doubt that Congress anticipated that an
underlying lease could arise during the business
relationship, thereby requiring the franchisor to notify the
franchisee "prior to the commencement of the then existing
franchise" in which the franchisor decides to terminate (or
nonrenew) the franchise. If Congress had intended
otherwise, the statute would logically have been written to
require the franchisor to notify the franchisee prior to the
"inception of the initial franchise" or the"existence of any
business relationship between the franchisor and the
franchisee," rather than the "then existing franchise." The
words "then existing" are clear and they indicate to us that
a qualifying underlying lease under S 2802(c)(4) could arise
during the business relationship, so long as the franchisor
notifies the franchisee before they enter into the next
franchise agreement. Moreover, since the term "franchise"
is used repeatedly throughout the PMPA, and is a defined
term in S 2801, Congress's choice of language in
S 2802(c)(4) cannot be ignored by this Court, even given the
strong pro-franchisee tenor of the PMPA and its legislative
history. See generally, Slatky, 830 F.2d at 478, 483; Patel
V, 63 F.3d at 250.

In sum, the plain meaning of the language in S 2802(c)(4),
when read in context, is clear and we are bound by it. See
United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242
(1989) (" `The plain meaning of legislation should be
conclusive, except in rare cases [in which] the literal
application of a statute will produce a result demonstrably
at odds with the intentions of its drafters.' ") (quoting Griffin
v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)). The
term "underlying lease" refers to leases which underlie the
franchise term, but not necessarily the entire business
relationship between the franchisor and franchisee.
Therefore, under the facts of this case, the Lancaster-Sun
leaseback was an underlying lease for the purposes of
S 2802(c)(4) and potentially qualified Sun for an exception
to PMPA liability.

14
2.

The second theory offered by the Patels is that, even if
the Lancaster-Sun leaseback falls within the statutory
definition of an "underlying lease" in S 2802(c)(4), we should
simply read a new provision -- a so-called "sale-leaseback
bona fide offer requirement" -- into the PMPA, see Patel VI,
948 F. Supp. at 473, even though such a provision does
not exist anywhere in the text or the legislative history of
the statute. The Patels argue that, given our interpretation
of Congress's intent to protect the "franchisee's reasonable
expectations of continuing the franchise" and to "assure the
franchisee an opportunity to continue to earn a livelihood
from the property," see Slatky, 830 F.2d at 478, 484, Sun's
actions are fundamentally at odds with the underlying
purpose of the PMPA. In their view, Congress inadvertently
left a "loophole" in the PMPA when it included a bona fide
offer requirement under the sale provision in
S 2802(b)(3)(D)(iii)(I), but left one out of the underlying lease
provision in SS 2802(b)(2)(C) and 2802(c)(4). The Patels
maintain that we would be justified in closing up this
"loophole" by judicial fiat, because it allegedly permits
unscrupulous franchisors to evade the bona fide offer
requirement that Congress imposed on franchisors who
wish to sell their leased marketing premises out from under
their franchisees.

The Patels carry a heavy burden in trying to convince us
that the underlying purposes of the PMPA are so clear and
conclusive that they justify our imposition of an additional
requirement which, even the Patels admit, does not exist in
the plain language of the statute. See Ron Pair, 489 U.S. at
242. We have been down this path before and have
consistently rejected the requests of the Patels and others
to craft new protections eliminating so-called "gaps" in the
PMPA. Most recently, in the course of this very litigation,
we explained that "gap[s] in the provisions of the PMPA
. . . should be corrected by Congress if Congress decides
that [they] undermine its intent in passing the PMPA." Patel
V, 63 F.3d at 253 (discussing the interrelationship between
the underlying lease and the sale provisions, the same
sections of the statute at issue here). Moreover, our position
in Patel V was not novel. In Lugar, for example, we admitted

15
that while there may be many strong policy reasons to read
new pro-franchisee provisions into the PMPA, it was
Congress's responsibility to weigh the competing interests
and make those determinations. See 755 F.2d at 59 ("[W]e
cannot impose th[e] obligation [requiring franchisors to
assign purchase options to their franchisees] where
Congress did not.").4

Where Congress has "undert[aken] the delicate task of
balancing the competing interests of fuel franchisors and
their dealers," see id., we cannot impose new obligations on
franchisors without any statutory basis simply because we
prefer them, or because there are strong policy reasons for
their adoption, or because they are pro franchisee. In the
context of a detailed statutory structure such as the PMPA,
we simply need much more evidence to satisfy us that
"literal application of [the] statute will produce a result
demonstrably at odds with the intentions of its drafters."
Griffin, 458 U.S. at 571. The Act clearly says that a
franchisor may rely on the expiration of an underlying lease
as a valid exception to liability under the PMPA, so long as
the franchisee is notified "prior to the commencement of the
term of the then existing franchise."S 2802(c)(4) (emphasis
supplied); see S II.B.1 supra. For the same reasons that we
are convinced that the Lancaster-Sun leaseback qualifies as
an "underlying lease" under S 2802(c)(4), we cannot
conclude that Congress inadvertently omitted creating a
bona fide offer requirement from the underlying lease
exception in (c)(4) when the lease is created during the
business relationship between the franchisor and the
franchisee.

As discussed above and detailed in Slatky, the PMPA was
created to balance the needs of franchisees, who have a
_________________________________________________________________

4. We note in this regard that the oil franchisees have demonstrated
their ability to get Congress's attention. See , e.g., S 2802(c)(4) (as
amended 1994) (overturning our precedent in Lugar that permitted
franchisors to rely on the expiration of an underlying lease defense to
avoid PMPA liability even when their expiring leases contained
unexercised options to renew or purchase that had never been offered to
the franchisee); see also H.R. Rep. No. 737, 103d Cong., 2d Sess. (1994),
reprinted in 1994 U.S.C.C.A.N. 2779; S. Rep. No. 387, 103d Cong., 2d
Sess. (1994), available at 1994 WL 534750.

16
" `reasonable expectation' of continuing the franchise
relationship" if they do not engage in any misconduct, with
the needs of the franchisors, who need " `adequate flexibility
. . . to respond to changing market conditions and
consumer preferences.' " 830 F.2d at 478 (quoting Senate
Report at 19). Given these competing goals that Congress
attempted to balance, we cannot conclude that the lack of
a sale-leaseback bona fide offer requirement is
"demonstrably at odds" with the rest of the PMPA. In fact,
it appears to fit in comfortably with the rest of the
provisions of the Act whose purpose it is to maintain
franchisor flexibility to respond to new competitive
conditions. Accordingly, we decline the Patels' entreaties to
read new provisions in the PMPA that are plainly absent
from the text of the statute and its legislative history.

3.

Sun contends that once we have defined the term
"underlying lease" to include the Lancaster-Sun leaseback
and rejected the Patels' suggestions to read new pro-
franchisee provisions into the text of the PMPA, we must
affirm the district court's grant of summary judgment in its
favor. In its submission, all of the events in S 2802(c),
including the "underlying lease" exception, are per se
reasonable, obviating the ability of the courts to review the
circumstances of the creation and expiration of underlying
leasebacks. To Sun, this per se status means we may
conduct neither an objective nor a subjective inquiry into
the events and decisions surrounding the creation of the
Lancaster-Sun leaseback and the nonrenewal of the Patels'
franchise under S 2802(c)(4).5 While we agree with Sun that
_________________________________________________________________

5. An objective inquiry would require us to examine the reasonableness
of Sun's decision to sell the leased marketing premises to Lancaster and
take a six year leaseback, without first offering it to the Patels, as
viewed
from the perspective of a reasonable business person charged with
making such decisions. Application of this standard would obviously be
quite onerous because it would necessitate our reviewing and second-
guessing the substantive merits of Sun's business decisions about where
and how to best market its product. A subjective inquiry, however, would
clearly be less intrusive from Sun's perspective because it only would

17
a franchisor's reliance on S 2802(c)(4) is not subject to an
objective reasonableness test, we nevertheless also
conclude that its decision must be subjectively "in good
faith and in the normal course of business" to qualify for
the "underlying lease" exception. Here, however, since the
Patels have produced insufficient evidence to show bad
faith on Sun's part in either creating the Lancaster-Sun
leaseback or allowing it to expire, we ultimately conclude
that Sun can avoid PMPA liability for nonrenewing the
Patels' franchise under the "underlying lease" exception in
S 2802(c)(4).

a.

First, we deal with the question whether S 2802(c)(4) is
subject to an objective reasonableness test. We preface this
discussion with the acknowledgment that Sun's submission
that all of the S 2802(c) events are per se reasonable is
meritless. There is no question that at least some of the
S 2802(c) relevant event exceptions mandate some form of
judicial scrutiny. See Sun Refining & Mktg. Co. v. Rago, 741
F.2d 670, 673 (3d Cir. 1984) ("[I]n light of the Act's specific
intent to benefit franchisees, we decline to construe
S 2802(c) as a per se termination rule favoring
franchisors."); Lugar, 755 F.2d at 59 (recognizing that a
reasonableness inquiry into certain enumerated events
under S 2802(c) dealing with franchisee misconduct was
proper, but refusing to extend that rationale to S 2802(c)(4));
accord Marathon Petroleum v. Pendleton, 889 F.2d 1509,
1512 (6th Cir. 1989) ("[W]e must scrutinize the
reasonableness of terminations even when an event
enumerated in S 2802(c) has occurred.").

Sun's contention that courts are not authorized to second
guess franchisors' decisions pursuant to the underlying
lease exception in S 2802(c)(4) is grounded in our holding in
_________________________________________________________________

require us to probe into Sun's state of mind when it decided to create an
underlying leaseback with Lancaster. Under this standard, our focus
would be on whether the franchisor entered into the leaseback for
normal business reasons or simply in an effort to avoid the sale
exception's bona fide offer requirement in S 2802(b)(3)(D)(iii)(I).

18
Lugar that there is no statutory basis to inquire into the
objective reasonableness of franchisor business decisions
made in conformity with S 2802(c)(4). See 755 F.2d at 58.
The Patels challenge the viability of Lugar, arguing that the
decision is in conflict with our earlier opinion in Rago, 741
F.2d at 673 (holding that the enumerated events in
S 2802(c) are not per se reasonable), and that the 1994
Amendment to S 2802(c)(4) not only overturned Lugar's
result, but also fatally undermined its reasoning. We
disagree.

In Lugar, the franchisor, Texaco, had been leasing its gas
station premises from a third party owner. Texaco in turn
entered into a series of subleases with plaintiff Howard
Lugar, its franchisee. The underlying lease granted Texaco
an option to renew and an option to purchase the property
at its expiration. When the underlying lease expired, Texaco
opted neither to renew it nor purchase the premises from
the third party owner. Texaco then informed Lugar that it
was not renewing his franchise based upon the expiration
of the underlying lease. Lugar asked Texaco to assign its
options to him, so that he could continue his business at
the same location, but Texaco refused and claimed
protection from PMPA liability under S 2802(c)(4), the
underlying lease exception. See Lugar, 755 F.2d at 54.

Lugar sued, alleging that Texaco's reliance on S 2802(c)(4)
was unreasonable because Texaco should at least have
assigned its options to him. In effect, Lugar asked the
Court to make an objective evaluation of the
reasonableness of Texaco's business decision to refuse to
assign him its options to renew the lease and purchase the
property. We held that because Texaco's nonrenewal fit
within S 2802(c)(4), an enumerated relevant event, the Act
precluded us from evaluating the reasonableness of
Texaco's action. See id. at 58.

In Rago, in contrast, the plaintiff had been operating a
service station for eight years under a series of franchise
agreements with the same franchisor. With two years
remaining before the expiration of the then existing
franchise agreement, the franchisor sent Rago a letter
informing him that it intended to terminate his franchise.
The franchisor's stated reasons were that Rago had failed to

19
operate the station for a period of ten consecutive days and
also that he had failed to pay rent and other sums due the
franchisor in a timely manner. See Rago, 741 F.2d at 671.
The franchisor relied on SS 2802(c)(8) and (9)(A) to avoid
PMPA liability.6 Although the franchisee had committed a
literal violation of these provisions, we held that S 2802(c)
was not a per se termination rule and proceeded to analyze
whether the circumstances surrounding the Rago's failures
made it reasonable for the franchisor to terminate his
franchise. See id. at 674.

Contrary to the Patels' reading of Lugar and Rago, we
perceive no conflict between the two opinions. As the panel
in Lugar made clear, there is a patent difference between
S 2802(c)(4), which deals with nonrenewal based upon a
franchisor business judgment, and SS 2802(c)(8) and (9)(A),
which concern nonrenewals based upon franchisee
misconduct. Specifically, because (c)(8) and (9)(A) deal with
"failures" by franchisees to do certain things (e.g., pay
money in a timely manner and operate the service station
for ten consecutive days), they therefore necessarily
implicate S 2801(13), which defines the term "failure". See
Lugar, 755 F.2d at 58 n.3. Because the term "failure" under
the PMPA does not include "any failure for a cause beyond
the reasonable control of the franchisee," S 2801(13)(B)
_________________________________________________________________

6. Sections 2802(c)(8) and (9) allow the franchisor to terminate or
nonrenew a franchisee for franchisee misconduct. In the context of
S 2802(c), they read:

As used in subsection (b)(2)(C) of this section, the term "an event
which is relevant to the franchise relationship and as a result of
which termination of the franchise or nonrenewal of the franchise
relationship is reasonable" includes events such as --

* * *

(8) failure by the franchisee to pay to the franchisor in a timely
manner when due all sums to which the franchisor is legally
entitled;
(9) failure by the franchisee to operate the marketing premises for
--

(A) 7 consecutive days, or
(B) such lesser period which under the facts and circumstances
constitutes an unreasonable period of time; . . .

20
(emphasis supplied), the Rago panel was undoubtedly
correct to question whether there were any reasonable
excuses justifying Rago's failures to keep his station open
and pay his rent on time. Similarly, because S 2802(c)(4)
justifies nonrenewal on the basis of the expiration of an
underlying lease, not a franchisee "failure", the Lugar
panel's refusal to engage in a reasonableness inquiry is
equally understandable.

Nor are we convinced by the Patels' argument that the
1994 Amendment to S 2802(c)(4), which disturbed our
result in Lugar, constitutes a legislative repeal of its
rationale. Under the amendment, franchisors must now
offer to assign to their franchisees all options to extend
underlying leases as well as any options to purchase the
marketing premises, when certain conditions are met. See
S 2802(c)(4)(B) (as amended 1994).7 While Sun concedes
that the amendment overrules Lugar's result, it submits
that Lugar's reasoning remains intact. If anything, Sun
contends, because the amendment only narrowly revised
S 2802(c)(4), and did not specifically require courts to
evaluate the objective reasonableness of franchisor
decisions not to renew franchises based upon the
expiration of underlying leases, Congress implicitly
approved Lugar's reasoning and simply clarified the
circumstances when the expiration of an underlying lease is
statutorily reasonable. While this question is difficult,
because we find nothing in the text of the amendments or
in the accompanying legislative history to the contrary, see
H.R. Rep. No. 737, 103d Cong., 2d Sess. (1994), reprinted
in 1994 U.S.C.C.A.N. 2779; S. Rep. No. 387, 103d Cong.,
2d Sess. (1994), available at 1994 WL 534750; 140 Cong.
Rec. H10,575-76 (daily ed. Oct. 3, 1994); 140 Cong. Rec.
H10,735 (daily ed. Oct. 4, 1994); 140 Cong. Rec. S14,236-
37 (daily ed. Oct. 5, 1994), we believe Sun's
characterization of Congress's intent to be more plausible,
and we reject the Patels' attempts to graft a reasonableness
test onto S 2802(c)(4) in direct conflict with our existing
precedent. Therefore, we find that the 1994 Amendment to
S 2802(c)(4) did not disturb our holding in Lugar that there
is no objective reasonableness test under that section.
_________________________________________________________________

7. Because of its length, we do not rescribe that amendment here.

21
b.

Our analysis of S 2802(c)(4) is not yet complete, however,
because Sun contends that not only can there be no
objective reasonableness inquiry into business decisions
made pursuant to this section, but also that there can be
no judicial inquiry whatever. The Patels, in contrast, urge
that, based upon our decision in Slatky, we must consider
whether Sun created the leaseback with Lancaster
subjectively "in good faith and in the normal course of
business."

In Slatky, the franchisee had leased his gas station from
Amoco for several years. After Slatky's sales had declined,
Amoco decided not to renew his franchise on the ground
that renewal would be uneconomical. To avoid PMPA
liability, Amoco based its nonrenewal on
S 2802(b)(3)(D)(i)(IV), which allows nonrenewal when
"renewal of the franchise relationship is likely to be
uneconomical to the franchisor despite any reasonable
changes or reasonable additions to the provisions of the
franchise which may be acceptable to the franchisee." This
provision, like the sale of the marketing premises provision,
requires the franchisor to make a bona fide offer to sell the
premises to the franchisee. See S 2802(b)(3)(D)(iii)(I).

In an attempt to satisfy this requirement, Amoco offered
to sell the property to Slatky at what Slatky claimed was an
unreasonable price, one significantly higher than the
property's fair market value. See Slatky, 830 F.2d at 480.
Amoco contended that to qualify as a "bona fide offer", it
need only have made a subjectively sincere offer in good
faith. Slatky countered that the offer must have been
objectively reasonable. As the provision had no explicit
standard, we conducted an independent inquiry into the
bona fide offer requirement and, utilizing the logic
discussed below, determined that an objective
reasonableness standard applied.

We reasoned as follows. Since the PMPA is a remedial
statute, enforcement of its provisions demands at least a
minimal level of judicial involvement. With the enactment of
the statute, Congress outlawed all franchisee terminations
and nonrenewals generally, but then created certain

22
exceptions. Congress bifurcated these exceptions into two
broad categories: (1) franchisee misconduct, and (2)
franchisor business judgments. See id. at 481; see also
supra S II.A. The Act generally contemplates an objective
reasonableness inquiry into terminations and nonrenewals
based upon franchisee misconduct, and a subjective "in
good faith and in the normal course of business" inquiry
into franchisor business judgment cases. See id. We
examined provisions which, like the bona fide offer
requirement, did not contain explicit standards for judicial
inquiry and determined that the courts must first
categorize them in order to determine the proper inquiry.
Ultimately, we concluded that since the determination of an
offer price pursuant to the bona fide offer requirement was
not a business determination, but rather a decision made
by the franchisor "only because the statute requires it to do
so," it was more akin to a franchise misconduct provision.
We therefore applied an objective reasonableness standard.
See id.

In assessing the impact of our analysis in Slatky, it is
critical to understand that although we noted (and
enforced) the legislative intent to distinguish between
franchisee misconduct and franchisor business decisions,
our decision was predicated on the fact that both types of
decisions warranted some type of judicial inquiry. Although
Slatky concluded by applying an objective standard to the
provision it considered, the impact of its analytical
framework here is to mandate the application of a
subjective good faith standard to the franchisor's decision
to create a leaseback under S 2802(c)(4). As with the bona
fide offer requirement at issue in Slatky, the underlying
lease provision contains no explicit judicial inquiry
standard. Therefore, we look to the nature of that provision
to determine what standard is appropriate, and conclude
that the decision to create an underlying lease (by selling
the leased marketing premises and entering into leaseback)
is a franchisor marketing decision (not unlike the decisions
to sell the premises or withdraw from the relevant
geographic market area). In contrast with the bonafide
offer requirement, it is not based upon "a right created by
the PMPA," and it is not analogous to a situation where a
franchisee is terminated or nonrenewed for misconduct. See

23
Slatky, 830 F.2d at 481. Therefore, the underlying lease
provision contained in S 2802(c)(4) warrants the more
lenient "in good faith and in the normal course of business"
inquiry, not the objective reasonableness standard that is
reserved for franchisor non-business decisions.

Our conclusion that S 2802(c)(4) requires the franchisor
to act in good faith and in the normal course of business is
buttressed by the legislative history. The Senate Report
states:

Expiration of the underlying lease could occur under a
variety of circumstances including, for example, a
decision by the franchisor not to exercise an option to
renew the underlying lease. However, it is not intended
that termination or nonrenewal should be permitted
based upon the expiration of a lease which does not
evidence the existence of an arms length relationship
between the parties and as a result of the expiration of
which no substantive change in control of the premises
results.

Senate Report at 38, 1978 U.S.C.C.A.N. 896 (emphasis
supplied). This passage illustrates several important points.
First, Congress could not have meant S 2802(c)(4) to be a
per se termination rule because Congress has specifically
pointed out in the Senate Report at least one instance
where the expiration of an underlying lease will not excuse
the franchisor from liability for nonrenewing or terminating
a franchise. Sun's argument that the preceding "snippet" of
legislative history is consistent with a per se termination
rule under S 2802(c)(4) (because it only says that non-arms
length leases are not covered) is unconvincing -- either
S 2802(c)(4) is a per se rule or it is not, and Congress has
told us that it is not.

Moreover, this legislative history seems to posit the kind
of nonrenewal that appears to have occurred in Lugar (and,
indeed in every other S 2802(c)(4) underlying lease case
cited by Sun) -- namely, the expiration of an underlying
lease that predates the inception of the business
relationship between the franchisor and franchisee.8 The
_________________________________________________________________

8. The viability of a limited-in-scope good faith test was not discussed
in
Lugar, and application of one here would arguably be in tension with

24
legislative history does not, however, seem to contemplate
a situation where (as here) the franchisor creates the
"underlying lease" by selling the premises out from under
the franchisee and taking a leaseback. Therefore, while the
language of the statute permits these kinds of leasebacks,
see S II.B.1 supra, given the potential for abuse, unfairness,
and arbitrariness such practices could engender, we believe
that this is exactly the sort of situation in which Congress
sought to protect franchisees from franchisor bad faith. See
Slatky, 830 F.2d at 482 (noting that the PMPA requires a
good faith inquiry into franchisor business decisions to
prevent sham transactions) (citing Senate Report at 37,
U.S.C.C.A.N. at 896).

Accordingly, we hold that, in the narrow circumstance
where a franchisor has created a underlying lease through
a sale-leaseback that takes place after the creation of the
business relationship between the franchisor and
franchisee, a subjective "in good faith and the normal
_________________________________________________________________

some of our language in that opinion, see, e.g., Lugar, 755 F.2d at 58
("It
is of some significance that even where Congress did subject certain
franchisor's decisions to judicial scrutiny, it eschewed a broad
`reasonable business judgments' test," and instead adopted a two-fold in
good faith and in the normal course of business test.). Lugar is
distinguishable, however, because the underlying lease at issue there
differed in an important way from the Patels' lease in that it predated
the
entire business relationship between Lugar and Texaco, rather than just
the then extant franchise term. See Lugar, 755 F.2d at 54. Since Lugar
knew that Texaco was leasing the property from a third party (and also
knew that the lease might expire during his franchise relationship) when
he first decided to contract with Texaco, the Court did not have to
consider the possibility that Texaco might have acted in bad faith in
creating the underlying lease. In contrast, since Sun created the lease
during the franchise relationship here, it is at least conceivable that
Sun
could have done so in a bad faith effort to avoid the bona fide offer
requirement of the sale exception. While the Patels' efforts to show that
Sun acted in bad faith or outside of the ordinary course of business fail
here, see infra, given the right factual predicate, a future plaintiff
might
prevail on this theory. Moreover, while the cited language might be read
to indicate that the Lugar panel believed that S 2802(c)(4) was not one of
the provisions to which Congress meant to apply the two-fold subjective
test, the objective reasonableness issue was the only one before the
Court.

25
course of business" inquiry should be applied under
S 2802(b)(2)(C) and S 2802(c)(4), before the franchisor will be
exempted from liability under the PMPA when its franchisor
challenges the nonrenewal of its lease. If this inquiry is to
have any effect at all, it must include the circumstances
surrounding both the creation of the underlying lease and
its eventual expiration. We can hypothesize several
instances in which franchisor conduct at the time it created
the underlying lease would not satisfy this test and
therefore would not qualify under S 2802(c)(4). Most
obviously, as specifically contemplated in the legislative
history, a franchisor who failed to make a bona fide offer to
its franchisee would be liable for damages under the PMPA
if it sold the leased marketing premises and created an
underlying lease as part of a sham transaction that was not
at arms length. Also, an inference of bad faith could be
drawn by the fact finder if the franchisor executed a sale
with a very short-term leaseback (on the order of a few
months) and then attempted to terminate the franchisee
without liability based on that extremely short underlying
lease. Or, a court could find bad faith if the franchisor used
the sale-leaseback gambit to terminate one franchise, only
to enter into a new agreement with a different franchisee.
Finally, an inference of bad faith might properly be drawn
if the fact finder concluded that the franchisor intended to
terminate the business relationship when it sold the
premises, but that it took a leaseback (of any duration)
simply to avoid the bona fide offer requirement.

4.

The Patels have alleged neither a sham transaction nor a
suspiciously short leaseback, and Sun has not entered into
a new franchise agreement to market motor fuel at the
Patels' old franchise location with different franchisees. In
fact, the only evidence the Patels put forth that might
support a claim of bad faith is Lancaster general partner
Bruce Robinson's testimony that Sun intended to terminate
their franchise in 1987 at the time of the sale. The district
court, however, found that this was insufficient evidence of
bad faith to create a triable issue of fact. See Patel VI, 948
F. Supp. at 475-76 & 477 n.6 ("No evidence has been

26
shown that Sun acted out of any bad faith desire to defeat
the Patel's rights under the PMPA."). Given that Sun leased
the premises to the Patels for over six years after selling it
to Lancaster, this slender reed would not seem to be
enough to satisfy the Patels' burden opposing summary
judgment had we been presented with this issue in the first
instance. See Anderson, 477 U.S. at 248-49 (noting that the
non-moving party creates a genuine issue of material fact
only by providing sufficient evidence to allow a reasonable
jury to return a verdict in his favor).

Moreover, as we have already noted, a previous panel of
this Court has already definitively ruled on the question of
Sun's bad faith, and we are bound by its decision as law of
the case. In Patel V, the panel denied a motion by the
Patels for a preliminary injunction based upon S 2805(e)(1),
which "bars an injunction that would require a franchisor
to continue a franchise in a location which the franchisor,
in good faith and in the normal course of business, has
decided to sell." 63 F.3d at 252. By grounding its
affirmance in S 2805(e)(1), the prior panel a fortiori also
concluded that the transaction was made in good faith and
in the normal course of business. See id. at 253 & n.8. This
determination by an earlier panel constitutes the law of the
case, and we are barred from reconsidering it. See Atlantic
Coast Demolition & Recycling, Inc. v. Board of Chosen
Freeholders of Atlantic County, 112 F.3d 652, 663 (3d Cir.
1997) (citations omitted).9

C.

The Patels make one final argument that merits our
analysis. They contend that the prior panel, while rejecting
their request for injunctive relief, also decided the merits of
the damage claim in their favor. The Patels base this
contention on the next to the last paragraph in Section
_________________________________________________________________

9. There are three traditional exceptions to this doctrine, including
situations in which: (1) new evidence is available; (2) a supervening new
law has been announced; or (3) the earlier decision was clearly
erroneous and would create manifest injustice. See Public Interest
Research Group of New Jersey, Inc. v. Magnesium Elektron, Inc., 123
F.3d 111, 116-17 (3d Cir. 1997) (citations omitted). None of these apply.

27
III(B) of Patel V. See 63 F.3d at 253. There, the majority
stated:

Clearly, one cannot help but feel some sympathy for
the Patels. At the time of their initial attempt to obtain
injunctive relief, they were sent away and told to seek
such relief when their franchise was not renewed. Now,
having returned to court after the occurrence of the
nonrenewal, they are told that they are not eligible for
injunctive relief. The Patels still have, however, the
opportunity to present to the district court their
contention that the nonrenewal of their franchise
violates S 2802 because the reason given for
nonrenewal, the expiration of the underlying lease, was
a condition created by the franchisor when it sold the
property without offering the franchisee an opportunity
to purchase it. Even if injunctive relief is no longer
available to the Patels, the PMPA does provide for
awards of damages and fees to a franchisee who is
successful in a civil action against a franchisor. 15
U.S.C. 2805(d) and (e).

Id. In the footnote following this passage, the Patel V
majority continued:

The dissent states that "[t]he majority holds that the
franchisor's obligation to offer to sell to the franchisee
can be avoided simply by postponing the nonrenewal or
termination of the franchise to a time subsequent to
the title closing." Dissent op. at 253; see also id. at 258
("The majority opinion, however, holding that a sale-
without-offer followed by expiration of an underlying
lease makes nonrenewal reasonable, allows franchisors
to completely dispense with the bona fide offer
requirement."). We do not so hold. Instead, we hold
that a franchisor that fails to offer the property to its
franchisee before selling to another is liable to the
franchisee for damages, but may not be enjoined from
the sale, provided the transaction is made in good faith
and in the normal course of business, with the
requisite notice.

Id. at 253 n.8 (emphasis supplied). Although the
highlighted language in the quoted footnote from Patel V

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purports to "hold" that a franchisor that fails to offer its
property to the franchisee before selling "is liable" without
regard to the franchisor's good faith (or even an inquiry into
the objective reasonableness of the nonrenewal)-- in other
words that there is a "sale-leaseback offer requirement"
implicit in the PMPA which nullifies the lease-expiration
defense set forth in S 2802(c)(4) -- we conclude that that
statement is dictum, and we decline to follow it.10

The issue before the Court in Patel V was "whether
injunctive relief is still an available remedy for[the Patels]
against [Sun]." 63 F.3d at 249. To that end, the Court
determined that S 2805(e)(1) barred the preliminary
injunction the Patels sought because Sun had acted in
good faith and in the ordinary course of business. See id.
at 252. Nothing in Patel V's footnote eight was integral to
our holding there; in fact, the footnote itself appears to
have been drafted in response to criticism from the dissent
about issues that were not directly before us. A statement
such as this is dictum. See Sarnoff v. American Home Prods.
Corp., 798 F.2d 1075, 1084 (7th Cir. 1986) (defining dictum
as "a statement in a judicial opinion that could have been
deleted without seriously impairing the analytical
foundations of the holding -- that, being peripheral, may
not have received the full and careful attention of the court
that uttered it").11 Based upon these circumstances,
combined with our observation that the majority in Patel V
engaged in no analysis of the Patels' novel claim for
damages under S 2802 (in contrast with its detailed
discussion of the availability of injunctive relief), we do not
regard the highlighted language in footnote eight of Patel V
as controlling.
_________________________________________________________________

10. We note that Judge Scirica, who was a member of that panel, joins
in this opinion.

11. As dictum, there are many reasons why we should not give it weight
here: (1) it may not have been as fully considered as it would have been
if it were essential to the outcome; (2) sloughing it off in a new opinion
will not affect the analytic structure of the original opinion; and (3)
the
dictum may lack refinement because it was not honed through the fires
of an adversary presentation. See United States v. Crawley, 837 F.2d
291, 292-93 (7th Cir. 1988).

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III.

In conclusion, we find that Sun's decision to create an
underlying lease through a sale-leaseback that took place
after the creation of the business relationship was subject
to an "in good faith and the normal course of business"
inquiry under SS 2802(b)(2)(C) and 2802(c)(4) before it could
be exempted from liability under the PMPA. We also
conclude that Sun has already satisfied that test because
the Patels have adduced insufficient evidence of bad faith.
The judgment of the district court will therefore be affirmed.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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