Esso Standard Oil Co. v. Monroig-Zayas

          United States Court of Appeals
                       For the First Circuit


No. 05-1254

              ESSO STANDARD OIL COMPANY (PUERTO RICO),

                        Plaintiff, Appellee,

                                 v.

                        JOSÉ H. MONROIG-ZAYAS
                   D/B/A MONROIG SERVICE STATION,

                       Defendant, Appellant.



          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF PUERTO RICO

        [Hon. Salvador E. Casellas, U.S. District Judge]


                               Before

                        Boudin, Chief Judge,
                Torruella and Lipez, Circuit Judges.



     Víctor P. Miranda-Corrada, for appellant.
     Angel E. Rotger-Sabat, with whom Maymí, Rivera & Rotger,
P.S.C. was on brief, for appellee.



                           April 12, 2006
            TORRUELLA, Circuit Judge. This appeal concerns a dispute

under the Petroleum Marketing Practices Act ("PMPA").             15 U.S.C.

§§ 2801 et seq.        The PMPA "was enacted by Congress in 1978 to

protect    gasoline    franchisees    from   arbitrary   or   discriminatory

termination or nonrenewal of their franchises."          Esso Standard Oil

Co. v. Dep't of Consumer Affairs, 793 F.2d 431, 432 (1st Cir.

1986).     "Congress noted that the disparity of bargaining power

existing between franchisors and franchisees sometimes resulted in

franchise agreements that amounted to contracts of adhesion."              Id.

            Plaintiff    Esso     Standard   Oil   Company    (Puerto    Rico)

("Esso") had a franchise agreement with defendant José H. Monroig-

Zayas ("Monroig").      Esso and Monroig could not agree to the terms

of a renewal agreement, and Esso sought a declaratory judgment from

the district court that it had satisfied the requirements of the

PMPA.     In turn, Monroig asked for a preliminary injunction under

the PMPA to maintain the franchise relationship.               The district

court denied Monroig's request for a preliminary injunction, and

Monroig appeals.      We affirm.

                                I.   Background

            Beginning in January 1996, Monroig ran an Esso gas

station    as   a   franchisee.      Under   a   three-year   contract    from

January 1, 2001 to January 1, 2004, Monroig paid monthly rent of

$3,831.    On July 11, 2003, Esso sent Monroig a contract for a new

three-year lease that would begin on January 1, 2004.            Under this


                                      -2-
contract, the rent increased by about five percent for each of the

first two years (to $4,035 and $4,235) and did not further increase

the third year.         Other modifications included the removal of a

radiator repair shop from the premises and a prohibition against

assignment or sublease of the premises. Monroig disputed the terms

of the renewal.       On September 30, 2003, Esso sent Monroig a notice

of nonrenewal based on the parties' failure to agree to the terms

of the renewal.

               For the purpose of continuing negotiations, Esso granted

five   short-term      extensions    to    the        prior   contract.      The   last

extension expired on June 30, 2004, and since the parties had not

come to an agreement, Esso stopped delivering gasoline the next

day.

                         II.   Notice Under the PMPA

               Under the PMPA, the franchisor must provide adequate

notice    to    the   franchisee    of    the    nonrenewal      of   the    franchise

agreement.      The general rule is that notice must be given at least

90 days before the nonrenewal takes effect.                    15 U.S.C. § 2804(a)

(2).     An exception to this general rule allows the franchisor to

provide notice on the earliest, reasonably practicable date where

the circumstances make a 90-day notice unreasonable.                        Id. § 2804

(b)(1).         The   district     court        did     not   address     the   notice

requirements, stating that Monroig did not "allege that . . . the

notice was somehow defective."             Because our review of the record


                                          -3-
indicates that Monroig did indeed press this point below, we now

address the issue.

          Other    aspects    of   the    PMPA    must   be   considered    in

conjunction with the notice requirements.                The PMPA offers a

preliminary   injunction     standard     to    franchisees   that   is    more

forgiving than the common law standard, see id. § 2805(b)(2), but

in order to take advantage of this more forgiving standard, the

franchisee's request must be timely, see id. § 2805(b)(4).                 The

timeliness of the franchisee's request for a preliminary injunction

depends on the notice it received.             If a franchisee receives at

least 90 days notice, then it has 90 days from the date of its

receipt of the notice to file a preliminary injunction motion. Id.

§ 2805(b)(4)(A).     If a franchisee receives less than a 90-day

notice, then it has 30 days from the date of the nonrenewal to file

a preliminary injunction motion.         Id. § 2805(b)(4)(C).

          The existing franchise agreement between Esso and Monroig

was due to expire on January 1, 2004, and Esso sent Monroig a

notice of nonrenewal 90 days before this date.                 Absent other

circumstances, this notice would clearly have been sufficient under

§ 2804(a)(2).   Esso argues that it complied with the PMPA and that

Monroig was required to seek a preliminary injunction by January 1,

2004.   Monroig argues that the notice was essentially revoked by

Esso because the parties continued to negotiate for six more

months, until June 30, 2004.       Further, Monroig contends that the


                                    -4-
statute    should    not   be   construed   to    require    him    to   seek   a

preliminary injunction while in the midst of negotiating a renewal.

            We think that the circumstances of this case justify the

application of the alternative notice requirements of § 2804(b)(1).

In the absence of any extensions to the original contract, Esso had

complied with the PMPA's notice requirements.              This notice is not

revoked by the parties' mutual agreement to extend the original

contract for the purpose of continuing negotiations.               Monroig knew

very well that the failure to come to an agreement on the terms of

the renewal meant an end to the franchise relationship.                  Monroig

did not know, however, the definitive date of the nonrenewal until

the contract negotiations permanently ceased.               The PMPA requires

the franchisor to include in its notice "the date on which . . .

nonrenewal takes effect."          Id. § 2804(c)(3)(B).            Under these

circumstances, we find that Esso gave notice to Monroig of the

definitive    date    of   nonrenewal      on    the   earliest,    reasonably

practicable date.      See id. § 2804(b)(1).

            We believe that this outcome supports the policy concerns

underlying the PMPA.        A franchisor who initially satisfies the

notice requirements of § 2804(a)(2) and then continues negotiations

with a franchisee is not penalized for its efforts to reach a

compromise agreement. In addition, a franchisee is not required to

file   a   preliminary     injunction   motion     while    negotiations     are




                                     -5-
ongoing, which would not be conducive to fostering an agreement

between the parties.     See id. § 2805(b)(4)(C).

               III.    Preliminary Injunction Standard

          We   now    address   the   proper   standard   for   determining

whether the preliminary injunction should be granted.            Esso urges

the common-law standard, see Bl(a)ck Tea Soc'y v. City of Boston,

378 F.3d 8, 11 (1st Cir. 2004), and Monroig urges the standard

outlined in the PMPA, see 15 U.S.C. § 2805(b)(2).                 The PMPA

authorizes a standard for granting preliminary injunctions that is

more forgiving than the common law standard, but in order to

benefit from this standard, the franchisee must be timely in its

request for a preliminary injunction.          See id. § 2805(b)(4).    The

PMPA does not specify what a district court should do if the

franchisee is tardy in its request.             To determine the proper

standard, we must determine whether Monroig was timely and, if not,

what the proper course of action should be.

          A.   Timeliness

          Given our discussion of the notice requirements, above,

we have no problem finding that Monroig did not timely seek a

preliminary injunction. Pursuant to our determination that Esso

gave notice to Monroig on the earliest, reasonably practicable date

under § 2804(b)(1), Monroig had 30 days from the nonrenewal to

timely request a preliminary injunction.            Id. § 2805(b)(4)(C).

Monroig requested a preliminary injunction on September 9, 2004,


                                      -6-
which was more than 30 days after the nonrenewal date of June 30,

2004.

            B.    Standard for an Untimely Request

            The    PMPA    does     not   provide   much    guidance    to   courts

considering an untimely request for a preliminary injunction.                   The

PMPA merely states that "the court need not exercise its equity

powers    to     compel    continuation     or    renewal    of   the   franchise

relationship if such action was [not timely] commenced."                        Id.

§ 2805(b)(4).      No circuit court has yet addressed this issue.              The

district court below noted that other district courts have taken

three different approaches when the franchisee is tardy in seeking

equitable relief: (1) "outright dismissal of the franchisee's claim

for equitable relief"; (2) reliance "in part upon the franchisee's

failure to timely commence an action in denying equitable relief";

and (3) "adjudge the request under the common law standard."                   See

Esso Std. Oil Co. (P.R.) v. Monroig Zayas, 352 F. Supp. 2d 165, 171

(D.P.R. 2005).       The district court found the third option "to be

the better reasoned approach" and applied the common-law standard.

Id.     We agree with the district court that this is the proper

approach.

            In     the    absence    of   the    more   forgiving      preliminary

injunction standard described in the PMPA, courts would apply the

common-law standard, which does not include any specific time

limitations.      Congress created the PMPA to rectify "the disparity


                                          -7-
of bargaining power existing between franchisors and franchisees."

Dep't of Consumer Affairs, 793 F.2d at 432.                  By creating a more

forgiving preliminary injunction standard in the PMPA, Congress

gave more power to franchisees.                We do not think that Congress

intended to give with one hand and take away with the other.

Applying    the    common-law       standard        to   untimely   requests    for

injunctions therefore comports well with the underlying purpose of

the PMPA.

                       IV.       Preliminary Injunction

            We now apply the common-law standard.                   We weigh four

factors in determining whether a preliminary injunction should be

granted:

            (1) the likelihood of success on the merits;
            (2) the potential for irreparable harm [to the
            movant] if the injunction is denied; (3) the
            balance of relevant impositions, i.e., the
            hardship to the nonmovant if enjoined as
            contrasted with the hardship to the movant if
            no injunction issues; and (4) the effect (if
            any) of the court's ruling on the public
            interest.

Bl(a)ck    Tea    Soc'y,   378    F.3d   at    11    (internal   quotation     marks

omitted).    The party seeking the preliminary injunction bears the

burden of establishing that these four factors weigh in its favor.

Nieves-Márquez v. Puerto Rico, 353 F.3d 108, 120 (1st Cir. 2003).

"The sine qua non of this four-part inquiry is likelihood of

success on the merits: if the moving party cannot demonstrate that

he is likely to succeed in his quest, the remaining factors become


                                         -8-
matters of idle curiosity."            New Comm Wireless Servs., Inc. v.

SprintCom, Inc., 287 F.3d 1, 9 (1st Cir. 2002).             The district court

denied the preliminary injunction, and we review for abuse of

discretion.     Id.

            The district court addressed only the first factor,

finding that Monroig had not shown a substantial likelihood of

success    on   the    merits.    We   agree   with   the    district   court's

determination and find it unnecessary to address the remaining

factors.    To this end, we now address the likelihood of success on

the merits.

            The PMPA lists several grounds under which a franchisor

can choose not to renew a franchise agreement.              One such ground is

the "failure of the franchisor and the franchisee to agree to

changes or additions to the provisions of the franchise."                    15

U.S.C. § 2802(b)(3)(A). In negotiating any changes or additions to

the franchise agreement, the franchisor must have acted (1) "in

good faith and in the normal course of business" and (2) not for

the   purpose     of    "preventing     the    renewal   of    the   franchise

relationship."        Id.   Monroig's only argument is that Esso acted in

bad faith during the negotiations.1

            The requirement that a franchisor act "in good faith and

in the normal course of business" is not a stringent one.               The test


1
    Monroig's passing reference in his brief to the second
requirement is not sufficiently developed to preserve the argument
for appeal.

                                       -9-
is whether the "franchisor had acted in subjective good faith in

requesting the changes, and not whether the demanded changes were

the result of reasonable business judgments."    Dep't of Consumer

Affairs, 793 F.2d at 432 (internal quotation marks omitted).

Congress sought to "provide adequate protection of franchisees from

arbitrary or discriminatory termination or nonrenewal, yet avoid

judicial scrutiny of the business judgement itself."   Id.   We have

found that the "good faith requirement requires merely that a

franchisor not act with evil motive or discriminate selectively

against franchisees."    Id. (internal quotation marks and brackets

omitted).

            Monroig has not borne his burden to show that Esso did

not act in good faith.     Monroig speculates that Esso might have

violated Puerto Rico regulations that limit the amount of rent that

may be charged to gasoline filling stations.       Monroig further

faults Esso's failure to show that it had complied with these

regulations. However, it is Monroig who bears the burden of proof.

He could have discovered the necessary information to ascertain

whether Esso complied with the regulations but did not do so.    He

cannot now use such speculation to establish a lack of good faith.2




2
   We do not make any statement as to whether compliance with the
Puerto Rico regulations is relevant to whether Esso acted in good
faith.

                                -10-
              Monroig also points to an apparent clerical error by Esso

that was revealed during the preliminary injunction hearing.                He

characterizes this error as manipulation of data and argues that it

is evidence of bad faith.          Given that the error was in Monroig's

favor and resulted in a lower rent than what he should have been

charged, we do not find this error relevant.              Monroig also faults

Esso for not producing the testimony of the person who discovered

the error, but as the district court noted, Monroig made no attempt

to call this person as a witness.

              Finally, Monroig urges that Esso's bargaining tactics

showed an absence of good faith.           He notes that at one point in the

negotiations "Esso took its interest in a rent increase off the

table"   only    to   bring   it    up    again   "four   months   later   when

significant progress had been made in the negotiations and an

agreement was imminent."           Such bargaining does not rise to the

level of an "evil motive" and not even remotely indicative of bad

faith.   In    contrast, the rent increases proposed by Esso were five

percent for each of the first two years and zero percent for the

final year.      In light of the fact that courts have upheld rent

increases of 100 to 300 percent, see Dep't of Consumer Affairs, 793

F.2d at 432, Esso's modest request suggests that it negotiated in

good faith.

              Monroig also argues that the district court committed

error in applying the common-law standard without giving notice to


                                         -11-
the parties of its intent to do so.   Having only argued the PMPA

standard, Monroig claims he was denied the opportunity to fully

argue his case before the district court.   We find this assertion

meritless for three reasons. First, under either standard, Monroig

was required to show some level of success on the merits.3   Thus,

his arguments going to the merits would have been the same under

either standard. Second, even if we had applied the PMPA standard,

we would still have denied the injunction, because Monroig has

utterly failed to present any evidence of bad faith on the part of

Esso. Finally, Monroig had the opportunity to argue the common-law

standard on appeal, and he has not explained how he was prevented

from presenting any relevant evidence before the district court.

          Affirmed.




3
     Under the PMPA standard, Monroig was required to show
"sufficiently serious questions going to the merits," 15 U.S.C.
§ 2805(b)(2), while under the common law standard, he was required
to show his likelihood of success on the merits.

                              -12-