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King Service Inc. v. Gulf Oil Corp.

decided: December 2, 1987.

THE KING SERVICE, INC., PLAINTIFF-APPELLANT,
v.
GULF OIL CORPORATION AND GULF OIL COMPANY-U.S., A DIVISION OF GULF OIL CORPORATION, DEFENDANTS-APPELLEES



Appeal by The King Service, Inc., from judgment of the United States District Court for the Northern District of New York, Con G. Cholakis, J., dismissing, on motion by Gulf Oil Corporation and Gulf Oil Company-U.S. for summary judgment, King's claim that Gulf wrongfully terminated King's three-year franchise contract in mid-term in violation of the Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801 et seq. Affirmed.

Feinberg, Chief Judge, Newman and Winter, Circuit Judges.

Author: Feinberg

FEINBERG, Chief Judge:

The King Service, Inc. ("King") appeals from a judgment of the United States District Court for the Northern District of New York, Con. G. Cholakis, J., dismissing, on a motion by Gulf Oil Corporation and Gulf Oil Company-U.S., a division of Gulf Oil Corporation (collectively, "Gulf"), for summary judgment, King's claim that Gulf wrongfully terminated King's three-year franchise contract in mid-term in violation of the Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801 et seq. (the "PMPA"). For the reasons indicated below, we affirm the judgment of the district court.

Background

In March 1981, King purchased the assets, including 14 service stations, of Mintzer Petroleum Corp., a Gulf gasoline and diesel fuel jobber operating in several counties in upstate New York. The purchase was conditioned upon King's obtaining a franchise contract with Gulf of at least one-year duration. Concurrently with the closing of the Mintzer sale, King entered into a standard Gulf jobber contract for a three-year term commencing March 15, 1981. King alleges that at the signing of the jobber contract Gulf's representatives told King that Gulf "looked forward to a very long and profitable relationship with King."

In late 1981, however, Gulf suffered financial setbacks as a result of the deregulation of the gasoline industry, and Gulf determined that a reorganization of its marketing strategy was necessary. As part of its reorganization strategy, on December 1, 1982, Gulf announced that it planned to withdraw from the upstate New York marketing region. On January 10, 1983, Gulf sent King formal notification pursuant to section 102(b)(2)(E) of the PMPA, 15 U.S.C. § 2802(b)(2)(E), that, due to Gulf's intended withdrawal from upstate New York, King's jobber contract would be terminated effective July 15, 1983. Gulf sent similar notifications to other gasoline dealers and jobbers in the region and to the Governor of New York, as required by the PMPA. 15 U.S.C. § 2804-(b)(2)(B).

In June 1984, King commenced this action in the Supreme Court of the State of New York; Gulf thereafter removed it to the United States District Court for the Northern District of New York. King's initial complaint set forth a breach of contract claim for premature termination of the jobber contract and a fraud claim alleging that Gulf induced King to enter the jobber contract by false representations that it would fulfill King's gasoline requirements for the length of the contract and for an extensive length of time thereafter. Gulf denied the fraud allegations and asserted an affirmative defense to the contract claim that under section 102(b)(2)(E) of the PMPA a franchisor is entitled to terminate its franchise contracts if the franchisor decides "in good faith and in the normal course of business" to withdraw from a marketing region "based upon the occurrence of changes in relevant facts and circumstances after [the date the franchise was entered into]." In April 1986, Gulf consented to the addition to the case of King's claim under the PMPA.

After discovery was completed, Gulf moved to dismiss the case pursuant to Rule 37 of the Federal Rules of Civil Procedure for King's alleged failure to answer discovery requests and, in the alternative, for summary judgment. Gulf submitted affidavits from several of its executives in support of its claim that, following the execution of the jobber contract with King, Gulf's business became much less profitable due to an unexpectedly large drop in demand for gasoline, a simultaneous increase in price competition and a sharp increase in refining and marketing costs. According to Gulf, these severe economic reverses prompted Gulf to withdraw from upstate New York and to initiate other measures in an effort to contract its business. In opposition to the motion for summary judgment, King primarily argued that under the PMPA Gulf could not terminate a franchise contract merely because it was uneconomical, claiming that the PMPA only permits non-renewal of a franchise contract under such circumstances. See 15 U.S.C. § 2802(b)(3)(D). King also argued that there was a factual dispute as to (1) whether Gulf's decision to withdraw from upstate New York had been made prior to March 1981, when the franchise contract was entered into, and (2) whether there were any post-contract changes in relevant facts and circumstances since Gulf studies pre-dating the contract showed that the upstate New York region was one of Gulf's least profitable marketing areas.

In a ruling from the bench, Judge Cholakis granted Gulf's motion for summary judgment on King's PMPA claim, based upon a determination that there was no genuine issue as to whether Gulf's decision to withdraw from upstate New York was an "economic decision" and "that the decision was made on circumstances which occurred subsequent to the King contract." In response to King's argument that the PMPA does not permit franchise termination based upon economic considerations, the court stated:

The Court can think of no more compelling business reason for withdrawing from any market area that would be more cogent or more compelling than failure to produce that degree of profit which the company thought was proper under the circumstances of its operation.

The court granted Gulf summary judgment with respect to the fraud claim, without deciding whether the claim was preempted by the PMPA, concluding that King made no viable showing that Gulf's decision to withdraw from upstate New York had been made at the time the jobber contract was signed. The court concluded, as was conceded by the parties, that the contract claim was preempted by the PMPA. The court did not rule on Gulf's motion pursuant to Rule 37.

King appeals only from that portion of the order of the district court that granted Gulf summary judgment with respect ...


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