Petition for Writ of Certiorari — Shell Oil Co. v. Marinello

UPREME COURT, U. 8. Supreme Court, U.

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OCTOBER TERM, 1973 (~~~

IN THE EC 26 19

Supreme Court of the uit States

no. 73> JOO 1

SHELL OIL COMPANY,

‘ Petitioner,

FRANK MARINELLO, d/b/a GARDEN SHELL STATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF NEW JERSEY

WILLIAM SIMON

JOHN BODNER, JR.

MICHAEL W. GRANEY

MICHAEL M. LEvy

Howrey, SIMON, BAKER &

MURCHISON

1730 Pennsylvania Avenue, N.W.

Washington, D. C. 20006

ANDREW S. POoLITo

MICHAEL D. LOPRETE

MATTSON, MADDEN, POLITo &

LOPRETE

Gateway I at Penn Station

Newark, New Jersey 01702

Attorneys for Petitioner

December 24, 1973.

WILSON - EPES PRINTING Co.. INC. - RE 7-6OO02 - WASHINGTON. D. C. 20001

TABLE OF CONTENTS

OPINIONS BELOW ............---------:-::--eesesenereceereneetteree

JURISDICTION _ ......-.-.--------s--s----c-nseeeecesesseensnsneneseecesnsnsnnns

QUESTIONS PRESENTED ...........-----------------------

CONSTITUTIONAL AND STATUTORY PROVI-

SIONS INVOLVED ............---------------- - .

STATEMENT OF THE CASE ............-----------------2---->

New Jersey Franchise Practices Act ............----.-----

The Shell-Marinello Agreements ...........-----------------

REASONS FOR GRANTING THE WRIT .............-.-

POINT 1: THE DECISION BELOW CONSTITUTES

STATE REGULATION IN AN AREA CONSTI-

TUTIONALLY PREEMPTED BY CONGRESS

AND IS IN CONFLICT WITH RIGHTS ESTAB-

LISHED AND PROTECTED BY FEDERAL

TRADEMARK LAW ..........--.------------:--1rrnn

POINT II: THE DECISION BELOW IMPAIRS VAL-

UABLE CONTRACT RIGHTS IN VIOLATION OF

THE CONTRACT CLAUSE OF THE FEDERAL

CONSTITUTION ..........-----------:----c-c-nenseeseeseeetesnreteete

POINT III: THE DECISION BELOW IS REPUG-

NANT TO OTHER PROVISIONS OF THE FED-

ERAL CONSTITUTION ..........-.--------------------ereo

CONCLUSION .......--------0:---0-n-esesersseensesneseneceecerenennnnsennnnnes

APPENDIX

STS

Il

TABLE OF AUTHORITIES

Cases: Page

A. Smith Bowman Distillery, Inc. v. Schenley

Distillers, Inc., 198 F.Supp. 822 (D. Del. 1961) .. 14

Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520

(1959) 22

Blackburn v. Alabama, 354 U.S. 393 (1957) .. aan 23

Burger King of Florida, Inc. v. Hoots, 403 F.2d

Oe i 17

Columbia Ry., Gas & Electric Co. v. South Caro-

en en dokabbiics 20

Consumers Oil Corp. v. Phillips Petroleum Co.,

App. No. 73-1597 (8d Cir., Nov. 12, 1978) ....18, 22, 23

Cross Lake Shooting and Fishing Club v. Louisi-

a Te is I I wrest ccecticcentencecsteesrerrerern 20

E. F. Prichard Co. v. Consumers Brewing Co.,

186 F.2d 512 (6th Cir. 1948), cert. denied, 321

U.S. 763 (1944) 15

Fornaris. v. Ridge Tool Co., 423 F.2d 563 (ist

Cir.), rev’d on other grounds, 400 U.S. 41

(Aire eee RENE A TERRE ek ae a een 18, 19

Franklin National Bank v. New York, 347 U.S.

A SER 16

Gibbons v. Ogden, 9 Wheat. 1 (1824) -................... 14

Globe Liquor Co. v. Four Roses Distillers Co., 281

A.2d 19 (Del. Sup. Ct.), cert. denied, 404 U.S.

i dciaiies 19

Goldblatt v. Hempstead, 369 U.S. 590 (1962) ......... 22

Long Sault Development Co. v. Call, 242 U.S. 272

a 20

McCulloch v. Maryland, 4 Wheat. 316 (1819) ......... 14

Miller-Becker Co. v. P. Ballantine & Sons, Inc.,

9 N.J. Super. 78 (App. Div. 1950) 17

Mister Donut of America, Inc. v. Mr. Donut, Inc.,

418 F.2d 888 (9th Cir. 1969) .............2--.... 14

Pacific Supply Coop. v. Farmers Union Central

Exch., Inc., 318 F.2d 894 (9th Cir. 1963), cert.

denied, 375 U.S. 965 (1964) -................--eeeeeeeeeeeeee 15, 16

Pennslyvania v. Nelson, 350 U.S. 497 (1956) ......... 14

Ill

TABLE OF AUTHORITIES—Continued

Page

Pennsylvaia v. West Virginia, 262 U.S. 563

(1928) ....n-n-n-ce-nscescssesneseensenensensnssesecensnsensnseesesensoseees 22

Pennsylvania Coal Co. v. Mahon, 260 U.S. 393

(1922) .n...na-a-ne-neascnecssnennenenserasensncnasnensnsensanensnssnsncenes 22

Phoenix Hardware Co. v. Paragon Paint & Varn-

ish Co., 122 N.J. Eq. 140 (E. & A. 1987) -.....-.---- 17

South Carolina State Highway Dept. v. Barnwell

Bros., 303 U.S. 177 (1938) ......-....-----------+e1--00 22

Southern Pacific Co. v. Arizona, 325 U.S. 761

(1945) -...-.n.c.c-enscesssecensnsenserenseasesnnseceneneensnsensesensnssoes 22

Superior Motors, Inc. v. Winnebago Industries,

Inc., 359 F.Supp. 773 (D.S.C. 1973) .....-----.--------- 20

Warner Lambert Co. v. Superior Court of Puerto

Rico, No. 0-72-106 (May 9, 1978) .......----------------- 19

United States Constitution:

Article I, Section 8, Clause $ ............---------------- 3, 18, 14

Article I, Section 10 ............-----.-.------+------ 3, 18, 19, 20

Article VI, Clause 2 ...........-..-.----:--------1-- 8, 12, 14, 15

Amendment V_ ......-.------------------------seeerseseeesecseseeeeentee 3,13

Amendment XIV, Section 1 ........-.....----.-:----s-ee--000" 3,13

Statutes:

Dealer’s Contract Law of Puerto Rico (Act No.

75)

10 L.P.R.A. §§ 278 et seq. .....----------+----e-e 18, 19

Delaware Franchise Security Law

6 Del.C. §§ 2551 et seq. .......-.-----.-------eeneeeeeees 19

Judiciary and Judicial Procedure

QB U.S.C. § 1257 (8) .....----------ecececeeeeeeeseesneceneteneess 2

IV

: TABLE OF AUTHORITIES—Continued

; Page

Lanham Trade-Mark Act

15 U.S.C. §§ 1051 et seq. ................ 2, 4-5, 8, 12, 18, 14,

15, 16-17

New Jersey Franchise Practices Act

N.J.S.A. 56:10-1 et seq. ............- 2, 5-6, 7, 9, 11, 12, 18,

17, 20-21, 22, 23

Bill:

New Jersey Assembly Bill 2063 (1971) ............ 6-7

Secondary Authorities:

17 Am. JuR. 2d Contracts §§ 495, 496 (1964).... 17

Cahill, Governor’s Veto Message, Assembly Bill

eee 6-7

GORDON’S MODERN ANNOTATED FORMS OF AGREE-

MENT (rev. 1970) 8

Hale, Unconstitutional Conditions and Constitu-

tional Rights, 35 Co. L. REv. 21 (1935) .......... 22

Note, Unconstitutional Conditions, 73 Harv. L.

REv. 1595 (1960) __... AE SS ae Oe a 22

PERMIT OPAL ENTER LLG II LR PEO OE OA | IG SELLS SELENE RDS TRANS BF GGL CR NSIS

TBR SHRM RS eR

SP EEN G3, BOLLE I BIER

IN THE

Supreme Court of the United States

OCTOBER TERM, 1973

No. 73-

SHELL OIL COMPANY,

Petitioner,

V.

FRANK MARINELLO, d/b/a GARDEN SHELL STATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF NEW JERSEY

Petitioner Shell Oil Company respectfully prays that a

writ of certiorari issue to review the judgment and opin-

ion of the Supreme Court of New Jersey entered in this

proceeding on July 11, 1973, or, in the alternative, that

this proceeding be remanded to the Supreme Court of

New Jersey for further consideration.

OPINIONS BELOW

The opinion of the Supreme Court of New Jersey

(A-1 to A-10) is reported at 63 N.J. 402. The opinion

of the Superior Court of New Jersey (A-12 to A-47)

is reported at 120 N.J. Super. 357.

2

JURISDICTION

The judgment of the Supreme Court of New Jersey was

entered on July 11, 1973, and its further order denying

rehearing (A-11) was entered on August 30, 1973. The

time for filing this petition for a writ of certiorari was

extended to and including December 24, 1973 by order

of Mr. Justice Brennan dated November 19, 1973. This

Court’s jurisdiction is invoked under 28 U.S.C. § 1257

(3).

QUESTIONS PRESENTED

The basic question presented is whether the state court

decision below contravenes paramount provisions of the

Federal Constitution and statutory law. This question

in turn raises three subsidiary questions:

(1) Whether the Lanham Trade-Mark Act (15

U.S.C. §§ 1051 et seg.), which creates substantive

federal rights in trademark owners to the exclusive

use in commerce of registered trademarks and which

was enacted specifically “to protect registered marks

used in such commerce from interference by State,

or territorial legislation,” overrides state law creat-

ing independent rights in third parties to the use of

registered trademarks?

(2) Whether the state court below unconstitu-

tionally impaired valuable contract rights by retro-

actively applying the “good cause” termination re-

quirement of the New Jersey Franchise Practices

Act to preexisting agreements between Shell and

Marinello?

(3) Whether the holding of the state court below

(i.e., that a franchisor cannot terminate real estate

and supply agreements except for good cause) vio-

lated the requirements of due process and placed

unconstitutional conditions and burdens upon sellers

| 8

of trademarked products engaged in interstate com-

merce in New Jersey?

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Constitution of the United States:

Article I, Section 8, Clause 3.

“The Congress shall have Power . . . [to] regulate

Commerce with foreign Nations, and among the sev-

eral States, and with the Indian Tribes... .”

Article I, Section 10.

“No State shall... pass any . . . Law impairing

the Obligation of Contracts... .”

Article VI, Clause 2.

“This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof...

shall be the supreme Law of the Land... any Thing

in the Constitution or Laws of any State to the Con-

trary notwithstanding.”

Amendment V.

“No person shall . . . be deprived of life, liberty,

or property, without due process of law; nor shall

private property be taken for public use, without

just compensation.”

Amendment XIV, Section 1.

“(Nor shall any State deprive any person of life,

liberty, or property, without due process of law... .”

in MATS LEEDS IEEE ELIE NGI ROE MELO. TAT IPB! RRS,

|

Statutes:

Lanham Trade-Mark Act, 15 U.S.C. §§ 1051 et seq.:

15 U.S.C. § 1055.

“Where a registered mark or a mark sought to be

registered is or may be used legitimately by related

companies, such use shall inure to the benefit of the

registrant or applicant for registration, and such use

shall not affect the validity of such mark or of its

registration, provided such mark is not used in such

manner as to deceive the public.”

15 U.S.C. § 1064(a).

“A verified petition to cancel a registration of a

mark, stating the grounds relied upon, may, upon

payment of the prescribed fee, be filed by any person

who believes that he is or will be damaged by the

registration of a mark on the principal register es-

tablished by this chapter, or under the Act of March

3, 1881, or the Act of February 20, 1905 within five

years from the date of the registration of the mark

under this chapter... .”

15 U.S.C. § 1065.

“Except on a ground for which application to can-

cel may be filed at any time under subsections (ec)

and (e) of section 1064 of this title, and except to

the extent, if any, to which the use of a mark regis-

tered on the principal register infringes a valid

right acquired under the law of any State or Terri-

tory by use of a mark or trade name continuing

from a date prior to the date of the publication

under this chapter of such registered mark, the

right of the registrant to use such registered mark

in commerce for the goods or services on or in con-

nection with which such registered mark has been

in continuous use for five consecutive years subse-

quent to the date of such registration and is still in

use in commerce, shall be incontestable .. . .”

°

.

cecssnansnnannasenet ee OC LOED |

15 US.C. § 1127.

“In the construction of this chapter, unless the

contrary is plainly apparent from the context—

“The word ‘commerce’ means all commerce which

may lawfully be regulated by Congress.

“The term ‘related company’ means any person

who legitimately controls or is controlled by the reg-

istrant or applicant for registration in respect to

the nature and quality of the goods or services in

connection with which the mark is used.

“The intent of this chapter is to regulate com-

merce within the control of Congress by making ac-

tionable the deceptive and misleading use of marks

in such commerce; to protect registered marks used

in such commerce from interference by State, or

territorial legislation ... .”

New Jersey Franchise Practices Act, N.J.S.A. 56:10-1

et seq.:

N.J.S.A. 56:10-3(a).

“ ‘Franchise’ means a written arrangement for a

definite or indefinite period, in which a person grants

to another person a license to use a trade name,

trade mark, service mark, or related characteristics,

and in which there is a community of interest in

the marketing of goods or services at wholesale, re-

tail, by lease, agreement, or otherwise.”

N.JS.A. 56:10-5.

“Tt shall be a violation of this act for a franchisor

to terminate, cancel or fail to renew a franchise

without good cause. For the purposes of this act,

good cause for terminating, canceling, or failing to

ne. — .

Seen Se ais . STS Ue

renew a franchise shall be limited to failure by the

franchisee to substantially comply with those re-

quirements imposed upon him by the franchise.”

N.J.S.A. 56:10-8.

“This act shall not apply to a franchise granted

prior to the effective date of this act, provided, how-

ever, that a renewal of a franchise or an amendment

to an existing franchise shall not be excluded from

the application of this act.”

STATEMENT OF THE CASE

New Jersey Franchise Practices Act. In 1971, the

New Jersey Legislature passed Assembly Bill 2063, which

proposed for the first time to regulate in New Jersey the

conduct of parties to franchise agreements including the

conditions of termination. The Bill defined a “franchise”

as any agreement whereby “a person grants to another

person a license to use a trade name, trade mark, service

mark, or related characteristics . . . in the marketing of

goods or services.” The Bill further provided in Section

9 that the Act shall not apply to a franchise for a

“definite period of time” granted prior to the effective

date of the Act. Thus, from the outset, both houses of

the State Legislature intended that the new franchise

legislation should apply only prospectively and not retro-

actively to franchise agreements for a fixed term.

After the passage of Assembly Bill 2063, the Governor

carefully reviewed the new legislation and returned the

Bill, with his specific comments and objections, to the

Legislature for reconsideration. In his conditional veto

message, the Governor pointed out that this was a “far-

reaching bill” which made “substantial changes” in the

preexisting law of New Jersey (Veto Message, December

2, 1971, at 1). In this connection, the Governor referred

first to the provision of the franchise law prohibiting

Roe

;

2 I a LG LD EOE GPL IRD Ee GL OO GSI OEP OENC LE ERI NODE OY RY Ate ee eee . 7

BEEP IT OLLIE LEG ELE I ID LL EL IS OCIS

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the termination of franchise agreements except for “good

cause.” As is evident from the Governor’s message, the

“good cause” termination requirement was regarded as

a key provision of the legislation. In reviewing this

provision, the Governor noted certain ambiguities in it

and recommended “that this language be clarified to

positively state that it shall be a violation of the act for

a franchisor to terminate, cancel or fail to renew a fran-

chise without good cause” (Jd. at 3).

On the question of the retroactive application of the

new law, the Governor stated that, while the Bill provided

that the law shall not apply to a franchise for a “definite

period of time” which was granted prior to its effective

date, this language was ambiguous in that it “infers that

the act would apply to franchises for an ‘indefinite period

of time’ granted prior to the effective date” (Jd. at 4).

The Governor then added:

“Tf such were the case, it would have the effect of

impairing the obligation of existing contracts. This

is prohibited by both the United States and New

Jersey Constitution.” (Jd.)

Accordingly, the Governor recommended “that this lan-

guage be amended so that the act shall not apply to any

existing franchises” (Jd.; emphasis added).

The Legislature, on reconsideration, adopted the Gov-

ernor’s recommendations and specifically amended the

Act to provide that its prohibitions “shall not apply to

a franchise granted prior to the effective date” of the

Act (N.J.S.A. 56:10-8). The Bill was signed into law

by the Governor and became effective on December 21,

1971.

The Shell-Marinello Agreements. In 1969, two years

before the Franchise Practices Act became effective, Shell

Oil Company (“Shell”) renewed its sublease of a service

station in Fort Lee, New Jersey, to Frank Marinello

8 a eee

(“Marinello”) by entering into a three-year written agree-

ment ending May 31, 1972 (N.J. App. 82a-88a).' At

the same time, the parties entered into a written dealer

product agreement for the same period which, among

other things, authorized Marinello to use Shell’s trade-

marks registered under the Lanham Act “to identify and

advertise” the fact that he had Shell’s products for re-

sale (N.J. App. 93a-97a). The dealer product agreement

did not obligate Marinello to purchase any product from

Shell nor did it prohibit him from purchasing and resell-

ing competing products (/d.).

The lease and dealer product agreement with Marinello

were executed on standard contract forms used by Shell

in its business throughout the United States. The termi-

nation provisions in the two agreements are in all ma-

terial respects identical to those found in form books

and traditionally used in every type of business contract

including leases of realty and franchises (see, ¢.9., Gor-

DON’S MODERN ANNOTATED ForMS OF AGREEMENT at 731,

980, 982, 1017 (rev. 1970) ).

At the expiration date of these two agreements, Shell

elected not to renew or enter into new agreements with

Marinello (N.J. App. 89a). Marinello’s own business

records showed that he was not a successful dealer; in

fact, he had been losing money at the service station for

many months before the termination date of the lease and

the dealer product agreement (see record citations, Shell’s

brief below at 7). Shell offered to lease Marinello another

service station more in keeping with his capabilities, but

he rejected this offer, refused to surrender the premises,

and continued to use Shell’s trademark after the termina-

tion of the lease and dealer agreement (Jd. at 17-18).

Marinello brought suit against Shell in the Superior

Court of New Jersey, alleging, among other things, that

1“N.J. App.” refers to Shell’s printed appendix filed with the

New Jersey Supreme Court.

ROL Meh eR Sey ee eee ma —

Sg eee sopangeenotnenna a

EE

9

the nonrenewal of the lease and dealer product agreement

violated the New Jersey Franchise Practices Act (N.J.S.A.

56:10-1 et seqg.). The complaint prayed for declaratory

and other relief including reformation of the two agree-

ments to provide for a lifelong term (N.J. App. la-4a).

The case was then consolidated with a dispossess proceed-

ing which had been brought by Shell (A-19). Deciding

both cases, the Superior Court entered judgment for

Marinello on all claims and reformed both the lease and

the dealer product agreement to provide:

“Shell shall not refuse to renew this agreement so

long as Frank Marinello substantially performs his

obligations to Shell Oil Company under the terms of

the lease and the dealer agreement” (N.J. App. 77a).

Shell appealed to the Appellate Division of the Superior

Court, but before briefs were filed the Supreme Court

of New Jersey sua sponte certified the case to its own

docket (N.J. App. 79a-8la). In a brief opinion, the

Supreme Court affirmed the result reached by the Su-

perior Court, but in doing so changed the rationale of

the decision (A-1-10).

In its opinion, the Supreme Court stated that it was

“unnecessary” to order specific reformation of the lease

and dealer product agreement, since the same end re-

sult could be reached “from consideration of the instru-

ments themselves, the relationship between Shell and

Marinello created thereby, and the public policy of this

State affecting such relationship” (A-4).

The Supreme Court predicated its decision on a holding

that the two agreements (the 3-year lease and the 3-year

dealer product agreement) between Shell and Marinello

constituted a “franchise” arrangement and, therefore,

that the “public policy” of New Jersey required

“that there be read into the existing lease and dealer

agreement, and all future lease and dealer agree-

|

10

ments which may be negotiated in good faith be-

tween the parties, the restriction that Shell not have

the unilateral right to terminate, cancel or fail to

renew the franchise, including the lease, in absence

of a showing that Marinello has failed to substan-

tially perform his obligations under the lease and

dealer agreement, i.e., for good cause... .” (A-9)

In holding that Shell had no legal right to terminate

its sublease or product agreement except for good cause,

the Supreme Court stated that the Franchise Practices

Act did not “directly control” the Shell-Marinello agree-

ments since they antedated the effective date of the

statute, but it ruled that “the provisions of the Act merely

put into statutory form the extant public policy of this

State” (A-8).

In basing its decision on what the Court perceived

to be “the extant public policy’ of New Jersey, the

Supreme Court not only granted Marinello the right to

sublease the service station property and to sell Shell’s

trademarked products for an “indefinite period,” but it

indicated it was leaving undecided the question of whether

these rights were so personal that they would “survive

Marinello’s disability or death” (A-9).

In its opinion, the Supreme Court did not mention

or discuss any of the federal or state constitutional issues

raised by Shell on the appeal. Shell petitioned the Su-

preme Court of New Jersey for a rehearing, pointing

out in particular that by changing the rationale of the

ease and granting Marinello a lifetime (and perhaps

perpetual) right to use Shell’s federal trademarks, the

decision also conflicted with paramount provisions of the

United States Constitution and the federal trademark

law. The Supreme Court, however, denied the petition,

without comment, on August 30, 1973 (A-11).

SSL E ARE IESINEE LR PES OYE IB BREATHLESS SEERA x ne: Pers Wet,

ARS re . ts Tie oS a a 2 ee Pes SrErR ete 2 he, -«)

EASES FEISS SR AY TIES I

REASONS FOR GRANTING THE WRIT

As the basis for its unprecedented holding that an

oil supplier’s service station lease and product agreement

together constituted a franchise terminable only for good

cause, the state court below relied upon its own state-

ment of the general public policy of the State of New

Jersey. In determining what constituted “the extant pub-

lic policy” of New Jersey, the court below considered

the general notion of fairness involved where contracting

parties are in an unequal bargaining position, but then

it looked to the recently enacted Franchise Practices Act.

According to the state court:

“(T]he Act reflects the legislative concern over long-

standing abuses in the franchise relationship, par-

ticularly provisions giving the franchisor the right

to terminate, cancel or fail to renew the franchise.

To that extent the provisions of the Act merely put

into statutory form the extant public policy of this

State.” (A-8; emphasis added)

In basing its decision on its own conception of “the

extant public policy” of the State, the court below over-

looked the significant legislative history of the Franchise

Practices Act and the public pronouncements of the Gov-

ernor which establish that in enacting this new legisla-

tion regulating franchising, the two political branches of

the State government made an explicit determination

that the requirements of the Act (including the ban on

terminations without good cause) should not apply to any

franchise agreements entered into prior to the effective

date of the Act.

Both the Legislature and the Governor of New Jersey,

in considering the Franchise Practices Bill, recognized

that this new legislation would bring about “substantial

changes” in the established law and that it would be un-

fair to apply its provisions to any franchise agreements

entered into prior to the effective date of the statute.

Thus, the Governor wanted the legislation changed spe-

cifically to limit its application to future franchise agree-

ments in the belief that any retroactive application of

the statute would constitute an unconstitutional impair-

ment of the obligation of existing franchise contracts.

On the recommendation of the Governor, the Legislature

amended the originally passed Bill so that it contained

an absolute bar against the retroactive application of the

legislation to all preexisting franchise agreements.

Ignoring this specific State policy as declared by the

Governor and Legislature of New Jersey and embodied

in the Franchise Practices Act, the state court below

applied the “good cause” termination requirements of the

Act to the preexisting lease and dealer product agree-

ments between the parties to this action. In doing so, the

state court not only misconceived the specific public policy

of the State, but it announced a novel principle of law

violative of basic provisions of the Federal Constitution.

Review of the state action below is warranted for three

basic reasons:

First, the decision below, by integrating the service

station lease and the product supply agreement between

Shell and dealer Marinello and denominating the busi-

ness relationship between them as a “franchise,” directly

raises for the first time the question of whether the

State law affecting such a franchise conflicts with the

paramount federal trademark rights of Shell. In Point

I, we show that Congress, in passing the Lanham Trade-

Mark Act of 1946, expressly declared, in accordance with

the Supremacy Clause of the United States Constitution,

that federal law preempts the field of trademark regula-

tion as against any state regulation.

Second, despite the feeble disclaimer to the contrary,

the state court below in substance and effect applied the

TCC ee TT ae te oe ee

“good cause” termination requirement of the Franchise

Practices Act to agreements antedating the passage of

that statute. In Point II, we show that such retroactive

application violates the Impairment of Contract Clause

of the Federal Constitution.

Finally, state law imposing a “good cause” require-

ment for the termination of business agreements between

firms engaged in interstate commerce presents other fed-

eral constitutional infirmities. As discussed in Point III,

the United States Court of Appeals for the Third Circuit,

in an opinion issued last month, concluded that the “good

cause” termination provision of New Jersey law raised

“substantial” federal constitutional questions under the

Commerce and Due Process clauses as well as under the

Unconstitutional Conditions doctrine. Consumers Oil

Corp. v. Phillips Petroleum Co., App. No. 73-1597 (3d

Cir., Nov. 12, 1973).

POINT I.

THE DECISION BELOW CONSTITUTES STATE

REGULATION IN AN AREA CONSTITUTIONALLY

PREEMPTED BY CONGRESS AND IS IN CON-

FLICT WITH RIGHTS ESTABLISHED AND PRO-

TECTED BY FEDERAL TRADEMARK LAW.

In 1946, Congress passed the Lanham Act (15 U.S.C.

§§ 1051 et seg.) to regulate fully the registration and

use of trademarks in interstate and foreign commerce.

In the Act, Congress expressed its intention “to protect

registered marks used in such commerce from interference

by State, or territorial legislation” (15 U.S.C. § 1127).

Congress also stated its intention to exhaust its Con-

stitutional powers in the regulation of trademarks when

it defined “commerce” for the purposes of the Act as

meaning “all commerce which may lawfully be regulated

by Congress” (/d.).

14

“ee _f.7*.2 3 & J es A Sd Sad i

Wherever Congress is granted atuhority under the

Constitution to legislate in an area and it has exercised

its power to the fullest in that area, the states have no

authority to legislate on the same subject matter. Mc-

Culloch v. Maryland, 4 Wheat. 316 (1819) ; Gibbons V.

Ogden, 9 Wheat. 1 (1824) ; Pennsylvania v. Nelson, 350

U.S. 497 (1956). In this instance, where Congress has

manifested its clear intention to use its complete power

under the Commerce Clause to regulate trademarks and

has expressly prohibited any interference by state ac-

tion within that field, the states are thereby preempted

from the field under the Supremacy Clause of the United

States Constitution.

The preemption of the trademark field by Congress

has been recognized most recently in Mister Donut of

America, Inc. v. Mr. Donut, Inc., 418 F.2d 838 (9th Cir.

1969). In that case, the plaintiff tried to defeat a de-

fense to an infringement action provided under Section

33(b) (5) of the Lanham Act (15 U.S.C. § 1115(b) (5)),

interjecting California law to claim trademark rights

broader than those conferred by Congress. The Court

of Appeals held:

“What the effect of this California statutory pro-

vision might be if the Lanham Act had not been

passed by Congress, we need not decide. The Lan-

ham Act has pre-empted the field of trademark law

and controls. It follows that the defense provided

in Sec. 1115(b) (5) of the Act cannot be voided by

state statute.” (Jd. at 844; emphasis added)

Cf. A. Smith Bowman Distillery, Inc. v. Schenley Dis-

tillers, Inc., 198 F.Supp. 822, 825 (D. Del. 1961) (“...

Congress here intended to regulate all it constitutionally

could’).

The decision below, by interfering with Shell’s trade-

mark rights under its dealer agreement with Marinello,

constitutes state action in an area which has been spe-

15

cifically preempted by Congress. Since Congress has

manifested its intention to occupy the field of trademark

regulation, no state court is permitted to regulate trade-

mark owners’ rights or to enlarge the trademark rights

of a licensee.

Apart from federal preemption, the state court holding

below must give way under the Supremacy Clause be-

cause it directly conflicts with rights established and

protected under federal trademark law.

In enacting the Lanham Act, Congress did not merely

adopt or codify existing common law but created “new

substantive rights.” Pacific Supply Coop. V. Farmers

Union Central Exch., Inc., 318 F.2d 894, 905-06 (9th

Cir. 1963), cert. denied, 375 U.S. 965 (1964). A trade-

mark owner who registers his trademark under the Lan-

ham Act is given the exclusive right to the use of his

trademark as well as the right to restrain all others

from using it without his permission (15 U.S.C. §§ 1114

(1), 1115(b)(7)). In consequence, a state is without

authority to create trademark rights in a third party in

derogation of the rights conferred by the Lanham Act.

Yet that is precisely what the court below did when it

granted dealer Marinello a lifetime (and perhaps perpet-

ual) right to use Shell’s trademarks.

It is also settled under federal trademark law, both

before and after the passage of the Lanham Act, that a

trademark registrant can license the use of his trademark

for a definite period of time and the licensee’s right to

continue to use the trademark ends upon the termination

or revocation of the license in accordance with its written

terms. E. F. Prichard Co. v. Consumers Brewing Co.,

136 F.2d 512 (6th Cir. 1943), cert. denied, 321 U.S. 763

(1944) ; cf. Pacific Supply Coop. v. Farmers Union Cen-

tral Exch. Inc., supra, 318 F.2d at 909.

— BALIN RON AAO AIL LD EE OEM ENT PNET

PORK TELE MA MPEP N UTIL EVIE Re

RAD i oe ee 4 re

16

Contrary to the holding below, a licensee of a registered

tradematk is entitled to no greater rights than those

conferred in the licensing agreement. Although courts

have recognized that upon termination of a licensing

agreement a licensee may incur financial loss, this fact

confers no equitable rights in the licensee. Considering

this point, the Court of Appeals for the Ninth Circuit

recently stated:

“Such a termination with its resultant loss of busi-

ness and profit does not create equitable rights in

the licensee upon which recovery for such losses can

be claimed or established; nor does it create any

form of estoppel against the original licensor. . . .”

Pacific Supply Coop. v. Farmers Union Central

Exch., Inc., supra, 318 F.2d at 909.

In this case, Shell’s rights created and protected by

the Lanham Act are defeated and obstructed by the deci-

sion below, for Shell can no longer grant a license of its

trademarks for a stated term without being subject to

a state action for damages and/or injunctive relief. No

state court can interfere with such federally created

rights, even if done in the name of state public policy.

This Court, in Franklin National Bank v. New York, 347

U.S. 373 (1954), stated the principles applicable to con-

flicts between state and federal law as follows:

ere aeaet

“There appears to be a clear conflict between the

law of New York and the law of the Federal Gov-

ernment. We cannot resolve conflicts of authority

by our judgment as to the wisdom or need of either

conflicting policy. The compact between the states

creating the Federal Government resolves them as a

matter of supremacy. However wise or needful New

York’s policy, a matter as to which we express no

judgment, it must give way to the contrary federal

policy.” Id. at 378-79 (footnote omitted).

These principles were discussed in a recent case in-

volving a conflict between state law and the Lanham

17

-@e%* © 28 @ @ “_@e + #8 @w@s

Act. In Burger King of Florida, Inc. v. Hoots, 403 F.2d

904 (7th Cir. 1968), the Court of Appeals pointed out

that even under the federal trademark statutes ante-

dating the Lanham Act, it was held that

“(T]he policy of the Acts, to provide protection of

federally registered marks used in interstate com-

merce, ‘may not be defeated or obstructed by State

law’ and that if state law conflicts with the policy

it ‘must yield to the superior federal law.’ .. .

[F Jederal-registration rendered all questions of use

and protection in interstate commerce questions of

federal law, not state law.” Id. at 907.

In summary, the state court decision below regu-

lates the federally created trademark rights of Shell

and, therefore, must yield to the superior federal law

which preempts this field and overrides inconsistent and

conflicting state action.

POINT II.

THE DECISION BELOW IMPAIRS VALUABLE

CONTRACT RIGHTS IN VIOLATION OF THE

CONTRACT CLAUSE OF THE FEDERAL CON-

STITUTION.

When the Franchise Practices Act was enacted in 1971,

both the Legislature and the Governor recognized that

the Act brought about major changes in established law

and that it would be unfair to apply its provisions to

franchise agreements entered into prior to the effective

date of the statute.? In particular, the Governor in his

2 New Jersey, like other jurisdictions, has always adhered to the

well settled principles of contract law that agreed-upon provisions

for the termination of a contract upon notice will be enforced and

that good cause is not required for termination. Miller-Becker Co. v.

P. Ballantine & Sons, Inc., 9 N.J. Super. 78 (App. Div. 1950);

Phoenix Hardware Co. v. Paragon Paint & Varnish Co., 122 N.J.

Eq. 140 (E. & A. 1937). See generally 17 Am. JuR.2d Contracts

§§ 495, 496 (1964).

ena ees SRM ALY WE ERR MOEN TE

Rah TR y ab aa ol Pi halle aa

“7

18

conditional veto message pointed out that the retroactive

application of the statute would impair the obligation of

existing contracts in violation of both the federal and

state constitutions. The Act was accordingly revised to

make it inapplicable to any pre-enactment franchise

agreements.

The concern expressed by the Governor and the Legis-

lature that the statute should not be applied retroactively

was well founded. In the first case to reach the review-

ing courts on this issue, the Court of Appeals for the

First Circuit in 1970 struck down a similar statute in

Puerto Rico on the ground that it was not constitutionally

permissible to retroactively alter pre-enactment agree-

ments. Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st

Cir.), rev’d on other grounds, 400 U.S. 41 (1970). In

that case, a dealer who had been terminated in accord-

ance with the provisions of a franchise agreement which

provided for termination without cause brought an action

against his supplier under the Puerto Rican Dealer’s

Contract Law, which prohibited dealer terminations

without “just cause.” Since the statute by its terms ap-

plied retroactively, the Court then considered whether

the application of the statute would substantially impair

or change pre-enactment contract rights. In finding that

it would, the Court stated:

“No amount of research by parties or amici has

discovered a case suggesting that to convert a con-

tractual relationship terminable by either party with-

out cause into one which, short of breach by the other

party, can be terminated by one of the parties only

by making substantial payments and without pro-

tection for its economic interests, is not a change of

great magnitude.” Id. at 567-68 (footnote omitted).

On review, this Court, in a per curiam opinion, re-

versed and remanded the proceeding to give the Supreme

Court of Puerto Rico an opportunity to rule authorita-

BLE ROL IE LAR RIDE EDEL LEG LED CIALIS ESLER Na es OE a cxeengl

19

tively on the statute since it was “conceivable that ‘just

cause’ might be judicially confined to a more narrow am-

bit which would avoid all constitutional questions.” For-

naris V. Ridge Tool Co., 400 U.S. 41, 44 (1970).

Subsequently, in another case, the Supreme Court of

Puerto Rico did consider the effect of the application of

the Dealer’s Contract Law to pre-enactment agreements,

and in so doing, it held that the statute impaired pre-

existing contractual rights in violation of the Contract

Clause of the Puerto Rican Constitution, which is vir-

tually the same as the Contract Clause of the Federal

Constitution. Warner Lambert Co. v. Superior Court of

Puerto Rico, No. 0-72-106 (May 9, 1978). Relying main-

ly on decisions of this Court, the Puerto Rican Supreme

Court concluded that the statutory imposition of the “just

cause” termination requirement on preexisting contrac-

tual arrangements substantially modified contractual

rights and “destroyed” the “fundamental right” of a

party “to terminate the contract unilaterally” (Slip Op.

at 22-24).

Since then, two similar state statutes have been re-

viewed and held to be unconstitutional as applied to pre-

enactment agreements. In Globe Liquor Co. v. Four Roses

Distillers Co., 281 A.2d 19 (Del. Sup. Ct.), cert. de-

nied, 404 U.S. 873 (1971), the Delaware Supreme Court

held that the imposition by the Delaware Franchise Se-

curity Law of a termination requirement similar to the

“good cause” requirement was “not a minor change or

infringement permissible under the exercise of the police

power. It is therefore proscribed by the Contract Clause

of the Federal Constitution” (Jd. at 21). And earlier

this year, a United States District Court held that a

South Carolina statute imposing a termination require-

ment of “due cause” for franchise contracts existing

before the statute’s enactment was unconstitutional under

the Contract Clause of both the State and Federal Con-

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20

stitutions. Superior Motors, Inc. v. Winnebago Industries,

Inc., 359 F.Supp. 773 (D.S.C. 1973). As the Court stated:

“(I]t is manifestly clear that this statute, if applied

to the instant contract between the parties, would

impose significant new duties and conditions and take

away previously existing rights. As such, the legis-

lation as applied to this contract would unconsti-

tutionally impair its obligations. .. .” Id. at 779.

Thus, within a brief four-year span, every reviewing

court which has passed on the issue has declared uncon-

stitutional the retroactive application of “good cause”

termination requirements, or their equivalents, to pre-

enactment contracts. Certainly the decision below has

the same constitutional infirmity.

While the New Jersey Supreme Court in its opinion

below stated that it was applying New Jersey public

policy rather than the provisions of the Franchise Prac-

tices Act, that assertion does not comport with what the

court in fact did. And, as this Court has said, in deter-

mining whether a judicial decision applies state legisla-

tion within the meaning of the Contract Clause, “this

court is not limited to the mere consideration of the lan-

guage of the opinion of the state court, but will consider

the substance and effect of the decision, and will for itself

determine what effect, if any, was given by it to the

[challenged statute].” Long Sault Development Co. Vv.

Call, 242 U.S. 272, 277 (1916).

The decision below cannot rest on state public policy.

The specific public policy of New Jersey, as declared by

both its Legislature and Governor, is that the rights and

remedies conferred upon franchisees under the Franchise

3 The Contract Clause applies only to state legislation, but that

requirement is satisfied where the substance and effect of a judicial

decision is to apply a state statute. Columbia Ry., Gas & Electric

Co. v. South Carolina, 261 U.S. 236, 247 (1923) ; Cross Lake Shoot-

ing and Fishing Club v. Louisiana, 224 U.S. 632, 639 (1912).

21

Practices Act shall apply only to franchise agreements

entered into after its effective date. In consequence, the

action of the court below in applying the “good cause”

termination requirement to the pre-enactment lease and

dealer product agreement of Shell and Marinello is in

conflict with the specific public policy of the state and

represents an improper retrospective application of that

provision of the Act.

That the substance and effect of the decision below was

to apply retroactively the provisions of the Franchise

Practices Act is evident from the opinion below. First,

the court integrated the lease and dealer agreement and

denominated them a “franchise” as defined in the Act

(compare A-7-8 with NJS.A. 56:10-3(a)); granted

dealer Marinello a lifetime interest in the sublease and

dealer agreement and imposed the same “good cause”

termination requirement ‘ as contained in the Act (com-

pare A-9 with N.J.S.A. 56:10-5); and finally approved

a decree giving Marinello the same equitable relief sug-

gested in the injunctive provisions of the Act (compare

A-9 with N.J.S.A. 56:10-10).

Although urged on the appeal below, the Supreme

Court of New Jersey failed to consider whether its ac-

tion substantially impaired the contractual rights of Shell.

This constitutional issue, we submit, should be reviewed

by this Court, particularly in light of the uniform rul-

ings of all other reviewing courts that the retroactive

application of the “good cause” termination requirement

unconstitutionally impairs valuable contract rights.

«The court below also defined “good cause” in precisely the same

terms as found in the Act (compare A-9 with N.J.S.A. 56:10-5).

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22

POINT III.

a THE DECISION BELOW IS REPUGNANT TO OTHER

PROVISIONS OF THE FEDERAL CONSTITUTION.

In Consumers Oil Corp. v. Phillips Petroleum Co.,

supra, Judge Hastie, writing for a unanimous court,

identified three “substantial” constitutional issues raised

by the New Jersey Franchise Practices Act. These is-

sues are that the Act imposes an unreasonable burden

on interstate commerce, deprives franchisors of their

property without due process of law, and imposes un-

constitutional conditions upon engaging in commerce in

New Jersey.°

In that case, Consumers Oil Corp. attempted to invoke

the Franchise Practices Act to restrain Phillips from

terminating its supply contract without the “good cause”

required by the Act. The only agreement before the

Court was a contract for the supply of Phillips’ gasoline,

and it was in determining whether under the Act Phillips

could terminate that single agreement as part of a com-

pany decision to discontinue marketing gasoline in New

Jersey that the Court found these constitutional issues

raised.

5In support of its ruling, the Court of Appeals relied upon the

following leading constitutional decisions and authorities (Slip Op.

at 6 n.2):

“Burden on commerce: Compare South Carolina State High-

way Dept. v. Barnwell Bros., 1938, 303 U.S. 177, with, Pennsyl-

vania Vv. West Virginia, 1923, 262 U.S. 563, Southern Pacific

Co. v. Arizona, 1945, 325 U.S. 761, and Bibb v. Navajo Freight

Lines, Inc., 1959, 359 U.S. 520.

“Deprivation of property without due process: Compare,

Pennsylvania Coal Co. v. Mahon, 1922, 260 U.S. 393, with,

Goldblatt v. Hempstead, 1962, 369 U.S. 590.

“Unconstitutional conditions: For discussion of this doctrine

and the cases in which it has been invoked, see Hale, Unconsti-

tutional Conditions and Constitutional Rights, 1935, 35 COoL.

L. REv. 321; Note, Unconstitutional Conditions, 1960, 73 HARV.

L. Rev. 1595.”

PAT EAT ES ATES BIE IGE LEE IE SLES LILA SPIE IO REY ETE

23

The Court of Appeals was quite properly concerned

with the effect of the New Jersey law on interstate com-

merce in that it converted fixed-term marketing arrange-

ments into arrangements terminable only for good cause.

Such a drastic change in the way that most interstate

marketers conduct their business directly presented not

only the question of an undue burden on interstate com-

merce, but also the question of whether franchisors would

be deprived of property without due process of law.

In two senses, the constitutional issues identified by the

Court of Appeals in Consumers Oil are raised with even

greater force in the instant case. Consumers Oil involved

an oil company’s supply agreement renewed after the

enactment of the New Jersey statute, whereas this case

involves two agreements entered into before the enact-

ment of the statute. Moreover, in this case, the court

below did not limit its action to converting the product

supply agreement into a non-terminable agreement except

for good cause, but it did the same thing with respect

to the sublease between Shell and Marinello. In thus

converting a 3-year ieal estate sublease into a lifetime

agreement (and suggesting that the sublessee’s interest

might extend beyond his lifetime), the court below directly

presented the question of whether such a change consti-

tuted a taking of property without compensation and with-

out due process of law.

The Third Circuit in Consumers Oil did not decide

the constitutional issues, but remanded the case with

direction to withhold further action to permit the state

courts to determine in the first instance whether the

New Jersey Franchise Practices Act applied to Phillips’

agreement. Since the court below in this case failed to

consider the constitutional issues raised by Shell on its

appeal and petition for rehearing, this Court may wish

to remand this case to afford the State Supreme Court

an opportunity to pass upon these important constitu-

tional questions, in accordance with the procedure set

forth in Blackburn v. Alabama, 354 U.S. 393 (1957).

24

CONCLUSION

The decision below radically alters the time-honored

and accepted method of conducting interstate marketing

operations in this country. It also raises fundamental

constitutional questions which have not been, but should

be, decided by this Court. Since none of these constitu-

tional questions was discussed by the court below either

on the appeal or the petition for rehearing, this Court

may deem it advisable to remand the case to the New

Jersey Supreme Court for an initial determination of

these issues. In either event, this Court should grant the

petition for a writ of certiorari.

Respectfully submitted,

WILLIAM SIMON

JOHN BODNER, JR.

MICHAEL W. GRANEY

MICHAEL M. LEvy

HOWREY, SIMON, BAKER &

MURCHISON

1730 Pennsylvania Avenue, N.W.

Washington, D. C. 20006

ANDREW S. POLITO

MICHAEL D. LOPRETE

MATTSON, MADDEN, POLITO &

LOPRETE

Gateway I at Penn Station

Newark, New Jersey 01702

Attorneys for Petitioner

Shell Oil Company

December 24, 1973.

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