Amicus Curiae Brief — Lingle v. Chevron USA Inc.

\ Supreme Court. US.

FILED

DEC 3 - 2004

OFFICEOFTHECLERK |

63)

No. 04-163

IN THE

Supreme Court of the United States

LINDA LINGLE, GOVERNOR OF THE STATE OF HAWAII,

and MARK J. BENNETT, ATTORNEY GENERAL

OF THE STATE OF HAWAII,

Petitioners,

Vv.

CHEVRON USA, INC.,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF FOR THE SERVICE STATION DEALERS

OF AMERICA AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

PETER H. GUNST

Counsel of Record

CARRIE J. WILLIAMS

ASTRACHAN GUNST & THOMAS, P.C.

217 East Redwood Street

21" Floor

Baltimore, Maryland 21202

(410) 783-3542

Attorneys for Amicus Curiae

——————

ii

TABLE OF AUTHORITIES

Cases: Page

Abrams Shell v. Shell Oil Co., 343 F.3d 482

(Sida Clie. BOGS) ..ccecccccrrcrcccscesscosesssonsescsnsoscsososcnsseses 8

Ackley v. Gulf Oil Corp., 726 F. Supp. 353

(D. Conn.), aff'd, 889 F.2d 1280 (2d Cir. 1989) .8

Allapattah Services, Inc. v. Exxon Corp.,

61 F. Supp.2d 1308 (S.D. Fla. 1999),

aff'd, 333 F.3d 1248 (11th Cir. 2003) ..........00000 6,7

Brown v. Magness Co., 617 F. Supp. 571

(B.D. Teen. 2196S) ..cccccccrrccrcsesscsnssecessess socssonnenenesonsins 8

Chevron USA, Inc. v. Bronster, 363 F.3d 846

(Da Cle. BODE) ..ccccccorecsccsecrsecsessessosescnsescssoncseoseses 2

Chevron U.S.A., Inc. v. Cayetano, 198 F.

Supp.2d 1182 (D. Haw. 2002) ........scsesceeeeeneneees 1, 3,9, 12

Dersch Energies, Inc. v. Shell Oil Co.,

314 F.3d 846 (7th Cir. 2002).........:ssccesceeeeeeeeeeee 8

Duff v. Marathon Petroleum Co., 863 F. Supp.

622 (N.D. Ill. 1994), aff'd, 51 F.3d 741

(Tela Cle. 1995) ..ccscocesseccceccsessccssossonssescosossssssossosssossesss 8

Exxon Corp. v. Governor of Maryland,

437 US. 117 (19 TB) ncccccccccccccscescsssescsscensssccssonsssoosssons 11,12

ili

Table of Authorities Continued

Mathis v. Exxon Corp., 302 | .3d 448

Tee 5, 6,7

Meyer v. Amerada Hess Corp., 541 F. Supp.

a 8

Shell Oil Co. v. HRN, Inc., 144 S.W.3d 429

I 7

Statutes:

i i ececcetnecsecnencnennsnsncnen passim

ALA. CODE § 8-22-1 ef Seq. (2004) ......ccccccccecceseeeeees ll

CONN. GEN. STAT. ANN. § 14-344a (West 2004)...... 10

DEL. CODE ANN. tit. 6, § 2905 (2004) ..0....cccccceeee. 10

D.C. ST. § 36-302.02 (West 2001) .0.......ccccccceceseseeees 10

PLA. STAT. ANN. § 526.304 (West 2004)... 1]

HAW. REV. STAT. § 486 H-10 o00.........cccccccseceeeseceeeeees 12

Act 257, Stat. § 486 H-10.4 (1997) .00.......ccccccccccesesens 1,12

MD. CODE ANN., Bus. REG. § 10-311 (2004)........... 10

Mo. ANN. STAT. § 416.615 (West 2004) .................. 1]

NEV. REV. STAT. ANN. § 597.440 (West 2004) ........ 10

iv

Table of Authorities Continued

N.C. GEN. STAT. § 75-82 (2004) ........-cccceeceerenereernenes 11

UTAH CODE ANN. § 13-16-4 (2001) ........-..ccccceeeeeeeees

Va. CODE ANN. § 59.1-21.16:2 (West 2004)............

Miscellaneous:

Senate Report No. 731, 95th Cong.,

And Sess., 17 (1978) ........cecceereerseerseeneensneesnennnnenes

Senate Report No. 102-450 (1992)............:-eceseeeeeeeees

UCC § 2-305 ......c.ececceccsscersnsserenrennssnsensssnssnecsnnsensennens

I

INTERESTS OF AMICUS CURIAE*

The Service Station Dealers of America (“SSDA”) is

a national nonprofit trade association which represents the

interests of independent service station dealers located

throughout the United States. SSDA was formed in 1948,

and represents 20 state and regional affiliates, which in turn

represent over 15,000 independent dealers in over 25 states.

These independent dealers have a vital interest in supporting

legislation such as Act 257, Haw. Rev. Stat. § 486 H-10.4

(1997), which is intended to provide long-term benefits to

the citizens of Hawaii by ensuring that the State’s retail

market is preserved from the oligopoly that has already

seized control of the State’s wholesale market for gasoline.

The constitutional arguments for reversing the lower

courts’ ruling have been fully laid out in Appellant’s brief

and will not be repeated here. SSDA will address only the

lower courts’ assumptions that there is no reason to believe

that oil companies would attempt constructive eviction by

chargirg high rents to their lessee-dealers and that, in any

event, the Petroleum Marketing Practices Act (PMPA), 15

U.S.C. §§ 2801-2806, “already prevents an oil company

from raising rents for the purpose of driving dealers out of

business and converting the premises to company-operated

stations.” Chevron U.SA., Inc. v. Cayetano, 198 F. Supp.2d

1182, 1193 (D.Haw. 2002). See also Chevron USA, Inc. v.

' In compliance with Rule 37.6 of this Court, amicus curiae, the Service

Station Dealers of America, states that no counsel for any party authored

this brief in whole or in part, and that no party or entity other than this

amicus Curiae, its members or its counsel made a monetary contribution

to the preparation or submission of this brief.

2

Bronster, 363 F.3d 846, 856 (9th Cir. 2004). SSDA

submits that these assumptions are insupportable.

Major oil companies like Chevron enjoy enormous

leverage over lessee-dealers such as those in Hawaii because

they are the dealers’ landlords, licenso 4. and a

suppliers. This provides them with the ability to y

their dealers' economic viability. The Senate Report

accompanying the passage of the PMPA expressed concern

with this problem of supplier dominance that is peculiar to

the petroleum industry:

The franchise relationship in the petroleum

industry is unusual, in fact perhaps unique,

in that the franchisor commonly not only

grants a trademark license but also controls,

and leases to the franchisee, the real estate

premises used by the franchisee. In addition

the franchisor almost always is the primary,

even exclusive, supplier of the franchisee’s

principal sale item: motor fuel.

S.Rep. No. 731, 95th Cong., 2nd Sess., 17 (1978).

Typically, ; teal sink ionifi

not be arbitrarily terminated or non-renewed. Their

“reasonable expectations” in that regard were also noted in

the PMPA Senate Report:

will be a continuing one. This expectation

by the franchisee, in particular, is often the

3

result of, and fostered by, statements and

actions of the franchisor. As a result, non-

renewal of a motor fuel franchise

relationship at the expiration of its term can

be almost as punitive as termination of the

franchise during its term. The reasonable

expectations of the franchisee, rather than

any definitive contract rights, are destroyed.

Id. at 18.

independent service station dealers play in maintaining

interbrand and intrabrand competition in what otherwise

would be an oligopolistic market, such as Hawaii. It found

that “[fjewer lessee-dealer stations in the market means that

retail prices will increase.” 198 F. Supp.2d at 1192. The

In the first place, fewer lessee-dealers means

greater concentration at the retail level,

competition. In the second place, the fewer

lessee-dealers there are, the easier it is for

wholesale gasoline suppliers to engage in

r ton fon Itimately to

Id. This significant finding of fact was not challengec by the

court of appeals.

that oil companies will not attempt to use high rents to

eliminate independent lessee-dealers and that, in any event,

4

the dealers are protected from constructive eviction by the

PMPA are unfounded, then the legislature had a reasonable

basis for protecting independent dealers from constructive

eviction as a means of preventing the upward impact on

retail prices that the district court found would otherwise

occur as the result of diminished intrabrand and interbrand

competition.

SSDA believes itself qualified to comment upon the

lower courts’ assumptions based upon its extensive

knowledge of nationwide “onditions in the retail gasoline

market. In fact, what has been occurring throughout the

retail gasoline market over the past twenty years, coupled

with the failure of the PMPA effectively to address the issue

ef constructive eviction, directly contradicts these

assumptions.

That major oil companies have, in fact, too often

targeted their own dealers for extinction has been recognized

by congressional report. Senate Report No. 102-450 (1992)

@ ae = ey ml wr abuse of their pricing power to

evict lessee-dealers in order to convert their stations to

company-operation. The report observed:

Oil companies need not engage in an overt

“retail below wholesale” inversion in order

to drive their dealers and distributors out of

business. Instead, they simply raise the

dealers’ costs through increased rent, credit

card charges, forced 24-hour operation, and

the imposition of other costs of doi.g

business that render the superior marketing

efficiency of independent dealers ani

distributors meaningless.

Id. at 5.

Describing the intentions of one major oil company

to decimate its own dealers, as detailed in its own Strategic

Planning Unit document, the Senate Report recounted

ARCO’s plans for the future of its “dealer apparatus”:

The “dealer apparatus” would have their

costs raised by the implementation of

“economic rents” which would raise rents by

a factor of 300 to 400 percent. This increase

would have two primary effects -- it would

make the company indifferent, to a degree,

to the sales of motor fuel by the dealers, and

it would result in hundreds of deaiers being

forced out and replaced by company-

operated stations. ARCO then planned to

“keep prices low until the politic resistance

fades,” and after that time, a “period of

lasting accepting profitability would occur.”

Id. at 6. Summarizing the unhealthy market trend that it

perceived, the Senate Report concluded, “Any market in

which the most efficient marketers are being driven out of

business is not a healthy, competitive market.” Jd. at 4.

Two recent federal decisions found that Exxon had

abused its pricing power methodically to drive its own

lessee-dealers out of business. In Mathis v. Exxon Corp., 302

F.3d 448, 459 (Sth Cir. 2002), the Fifth Circuit found that

Exxon’s Houston and Corpus Christi, Texas dealers had

presented “ample evidence” to document Exxon’s use of its

pricing power to replace independent dealers with company-

operations in Houston, and with jobber-supplied locations in

Corpus Christi. The court said:

6

Although Exxon decided to move to CORS

{company-operated locations] in Houston

and jobbers in Corpus Christi, this decision

was not communicated to its franchisees.

Because of profits from their other sales,

CORS could, and did, sell gas for less than

the franchise dealers paid to Exxon for their

gas. And the jobbers delivered Exxon gas to

their dealers for less than Exxon franchisees

were required to pay for their delivered gas,

but Exxon prohibited its franchisees from

buying at this lower price from the jobbers.

The loss of competitive position and profit

to plaintiff franchisees was inevitable and

foreseeable to Exxon. Although Exxon

witnesses denied receiving complaints, its

dealers testified that they had complained

often and for years, without success, until

the very eve of trial.

Id.

In Allapattah Services, Inc. v. Exxon Corp., 61 F.

Supp.2d 1308, 1313 (S.D. Fla. 1999), aff'd, 333 F.3d 1248

(11th Cir. 2003), the district court py ae — for

summary judgment directed against a claim asse ya

poms A class of Exxon lessee-dealers that Exxon had

evicted numerous of its dealers “by secretly dividing its

dealers into ‘keepers’ and a

recognizing that its pricing practices were driving the ‘non-

keepers’ out of business.” Ultimately, the jury found for the

dealer class after reviewing Exxon’s own internal

documentation, which confirmed its intent to price many of

its own dealers out of business.

7

Significantly, in Mathis and Allapattah Exxon’s

design to destroy its own lessee-dealers was not challenged

under the PMPA but under Uniform Commercial Code § 2-

305, which subjects the sale of goods pursuant to open-price-

term contracts (such as dealer supplier agreements) to a

standard of commercial reasonableness. That provision is

not applicable, however, to excessive rent demands made by

oil companies on a non-negotiable basis at the time of lease

renewal, with the intent and/or effect of making it impossible

for the lessee-dealer to continue to operate his or her station.

Recent decisions, unfortunately, have weakened the

ability of independent dealers even to utilize U.C.C. § 2-305

as a defense to their suppliers’ efforts to convert their

stations to company-operation. Rejecting the Fifth Circuit’s

prediction in Mathis concerning its interpretation of state

law, the Supreme Court of Texas held in Shell Oil Co. v..

HRN, Inc., 144 S.W.3d 429, 435 (Tex. 2004), that an oil

company’s subjective intent to drive its dealers out of

business and convert their locations to company operation is

irrelevant for nurposes of U.C.C. § 2-305, so long as its

prices remain in the range of prices charged by other refiners

in the marketplace. In increasingly oligopolistic markets,

like Hawaii, :his restrictive interpretation of §2-305 affords

the dealer little if any protection against abusive pricing

schemes intended to convert his or her station to company

operation.

It is no accident that PMPA challenges ultimately

were not pursued in Mathis or Allapattah. Contrary to the

assumptions made by the courts below, the PMPA has

proven wholly ineffective in protecting independent dealers

targeted for extinction through non-competitive pricing or

through non-negotiable high rent demands made at the time

of lease renewal. This is so because the pertinent statutory

provision, 15 U.S.C. § 2802(b\(3)(A), only grants relief to a

8

dealer who can prove that his or her supplier's renewal terms

were consciously formulated sw as to frustrate the

continuation of the franchise relationship. As a result, so

long as the oil company is not stupid enough to concede the

true purpose of its pricing or rent demands, the dealer is very

unlikely to secure relief under the PMPA. See, e.g., Duff v.

Marathon Petroleum Co., 863 F. Supp. 622, 628 (N.D. Il.

1994), aff'd, 51 F.3d 741 (7th Cir. 1995) (“Under the PMPA,

Marathon does not need to prove that the rent increases were

reasonable, only that they were made in the ordinary course

of business and not as a pretext for termination of the

franchise.”); Ackley v. Gulf Oil Corp., 726 F. Supp. 353, 368

(D. Conn.), aff'd, 889 F.2d 1280 (2d Cir. 1989) (rent

increases of up to 761% not challengeable because it is not

sufficient that rent formula “operate unreasonably in 2

particular case”); Brown v. Magness Co., 617 F. Supp. 571,

575 (S.D. Tex. 1985) (“The fact that new provisions in a

franchise agreement may make the station unprofitable for

the lessee is not of itself determinative of an improper

purpose, nor does the fact that the new terms are presented

on a take-it-or-leave-it basis constitute lack of good faith.”)

(internal citations omitted); Meyer v. Amerada Hess Corp.,

541 F. Supp. 321, 330 (D. NJ. 1982) (upholding rental

increase of over 300%).

Loading the dice further against dealers seeking to

challenge exorbitant rent demands presented to them on a

non-negotiable basis by their oil company landlords, two

circuits have recently held that dealers cannot sign leases

“under protest” and commence PMPA litigation, but must

risk non-rescindable notice of termination in order to mount

a court challenge. Abrams Shell v. Shell Oil Co., 343 F.3d

482 (Sth Cir. 2003); Dersch Energies, Inc. v. Shell Oil Co.,

314 F.3d 846 (7th Cir. 2002). This means that if the dealer is

unable to unmask the oil company’s hidden intent, he or she

is out of business.

nee ae ee

oa 6 hoa ee

Ce ate OP eee a

oa. ai moe.

Further undermining the willingness or ability of

independent dealers to mount a PMPA challenge is the .

virtually universal practice of oil companies of inserting in

their form franchise agreements prevailing party attorneys-

fees provisions or one-sided provisions requiring the dealer

to pay the oil company’s attorneys fees if his or her

challenge is unsuccessful. To the dealer alone such attorneys

fees are ruinous.

The net result of all this is that, in the real world,

attempts by independent dealers to use the PMPA to

challenge their suppliers’ unreasonable take-it-or-leave-it

rent proposals are rarely even attempted much less

successful, which is totally inconsistent with the lower

court’s erroneous assumption that the PMPA “prevents an oil

company from raising rent for the purpose of driving dealers

out of business and converting the premises to company-

operated stations.” Chevron U.S.A,, 198 F. Supp.2d at 1193.

In the real world, that simply is not so.

Unfortunately, SSDA lacks the resources and ability

to document the extent through which the ranks of

independent dealers have been thinned by the oil companies’

exorbitant non-negotiable rent demands and predatory

pricing policies. Based upon its observation of the industry,

however, SSDA submits that the impact has been very

substantial. Typical of the extensive anecdotal evidence that

it has received is the recent report from its New England

Shell has raised rent so much in

Massachusetts and New Hampshire that the

dealer population has been reduced by about

40% in the past three years. There is only

one dealer left on Cape Cod, a few years ago

10

there were dozens. Dealers exhausted their

working capital, then resorted to loans and

equity loans. Most eventually lost their

businesses, some had buyers, but still went

bankrupt because of the lengthy,

cumbersome, subjective approval process

[required by Shell to obtain its consent to

assignment].

Exxon is similar, many dealers got fed up

and turned in the keys. All along intending

to sell the business as a substantial part of

their retirement savings.

Given the PMPA’s failure to address effectively the

issues of constructive termination and economic non-

renewal, a number of states have implemented measures to

protect independent service station dealers from extinction.

Most notable are restrictions on refiner-operated service

stations. By restricting the ability of major oil companies to

operate service stations themselves, such laws eliminate the

oil companies' motive for driving independent dealers out of

business through high rent demands or other pricing

schemes. At least five jurisdictions impose such restrictions

on refiners’ ability to convert independent service stations to

company operation. See CONN. GEN. STAT. ANN. § 14-344a

(West 2004); DEL. CODE ANN. tit. 6, § 2905 (2004); D.C. ST.

§ 36-302.02 (West 2001); Mp. CODE ANN., Bus. REG. § 10-

311 (2004); VA. CODE ANN. § 59.1-21.16:2 (West 2004). In

addition, Nevada requires any refiner operating more than

thirty service stations in the state to lease one station to an

independent dealer for every two directly owned service

stations. See NEV. REV. STAT. ANN. § 597.440 (West 2004).

Other states, such as Alabama, Missouri, Florida,

Utah and North Carolina, have passed legislation restricting

11

oil companies from competing unfairly with independent

dealers through company-operated stations. See ALA. CODE §

8-22-1 et seq. (2004); Mo. ANN. STAT. § 416.615 (West

2004); FLA. STAT. ANN. § 526.304 (West 2004); UTAH CODE

ANN. § 13-16-4 (2001); N.C. GEN. STAT. § 75-82 (2004).

These statutes attempt to restrict the oil companies from

pricing their dealers out of business by unfairly favoring

their company-operated locations.

Any doubt about these states’ ability to enact

legislation intended to promote competition in the petroleum

market to the ultimate benefit of the motoring public should

have been laid to rest by this Court’s opinion in Exxon Corp.

v. Governor of Maryland, 437 U.S. 117 (1978). In

upholding the constitutionality of the Maryland divorcement

statute, which precluded oil companies from displacing

independent dealers with company-operated stations, this

Court stated:

The evidence presented by the refiners may

cast some doubt on the wisdom of the

Statute, but it is, by now, absolutely clear

that the Due Process Clause does not

empower the judiciary “to sit as a ‘super

legislature to weigh the wisdom of

legislation’ .. .” Ferguson v. Skrupa, 372

U.S. 726, 731 (citation omitted)... .

Regardless of the ultimate economic

efficacy of the statute, we have no hesitancy

in concluding that it bears a reasonable

relation to the State’s legitimate purpose in

controlling the gasoline retail market, and

we therefore reject appellants’ due process

claim.

Id. at 124-25.

12

Simultaneous with the enactment of Act 257 at issue

here, Hawaii repealed Hawaii Rev. Stat. § 486 H-10, a

divorcement statute that was analogous to the Maryland

provision upheld by this Court in Exxon. Hence, the present

statute represents no more than an alternative method of

addressing the problem previously addressed by the

divorcement statute. Indeed, Act 257 is less burdensome

than its predecessor because it frees major oil companies to

Operate competing company-operated locations. Far from a

renegade measure, the new statute represents a compromise,

allowing oil companies to operate service stations while

simultaneously protecting independent dealers from

outrageous rent demands. In Exxon’s language, “[rjegardless

of the ultimate economic efficacy of the statute,. . .it bears a

reasonable relation to the State’s legitimate purpose in

controlling the gasoline retail market... .” Jd. at 125.

SSDA respectfully submits that due deference should

be shown to Hawaii’s determination that independent dealers

should be preserved from extinction in order to promote

interbrand and intrabrand competition in the retail gasoline

market. This is particularly so because the lower court’s

assumptions that oil companies will not use high rents to

eliminate lessee-dealers and that those dealers are adequately

protected by the PMPA are debatable at best; and, the district

court itself recognized the substantial linkage between

preserving interbrand and intrabrand competition at the retail

level and protecting Hawaii’s citizens against the threat of

oligopolistic price gouging. Chevron U.SA., 198 F.Supp.2d

at 1193. SSDA respectfully submits, therefore, that the lower

courts’ invasion of Hawaii’s legislative province should be

reversed.

December 3, 2004

13

Respectfully submitted,

Peter H. Gunst

Carrie J. Williams

Astrachan Gunst Thomas, P.C.

217 East Redwood Street

21" Floor

Baltimore, Maryland 21202

(410) 783-3542

Attorneys for Amicus Curiae