Mobil Oil Corp. v. Virginia Gasoline Marketers & Automotive Repair Ass'n

34 F.3d 220, 1994 WL 373800

• Court: Court of Appeals for the Fourth Circuit
• Decided: July 19, 1994
• Docket: Nos. 92-2242, 92-2244 and 92-2256
• Status: Published

Opinions

Affirmed in part and reversed in part by published opinion. Senior Judge CHAPMAN wrote the majority opinion, in which Judge HALL joined. Chief Judge ERVIN wrote a dissenting opinion.

OPINION

CHAPMAN, Senior Circuit Judge.

This case addresses the validity of amendments to the Virginia Petroleum Products Franchise Act under the United States and Virginia Constitutions. These amendments, known collectively as S.B. 235, prevent the inclusion of certain terms in agreements between petroleum refiners and their franchisees. Mobil Oil Corporation brought suit against the Attorney General of Virginia seeking a declaratory judgment that S.B. 235 is unconstitutional and an injunction preventing S.B. 235’s enforcement. The Attorney General appeals the district court’s determination that the Petroleum Marketing Practices Act, 15 U.S.C.A. §§ 2801-2806 (West 1982), preempts all but the “rent control” provision of S.B. 235, and that S.B. 235 violates the Virginia Constitution’s prohibition on special laws. Mobil appeals the district court’s grant of summary judgment against Mobil on its claims: (1) that S.B. 235 violates the Contract and Takings Clauses of the United States Constitution, (2) that the Act is preempted by the Lanham Act, and (3) that the “rent control” provision is preempted by the PMPA.

I.

Mobil Oil Corporation is involved in all aspects of the petroleum industry, including exploration, drilling, production, refining, and distribution. Mobil brand petroleum products are marketed to the public through service stations, most of which fall into one of four categories:

1) SALOPS (Salary Operated), which are owned and operated by Mobil and staffed with salaried personnel;

2) OG & L (Owned Station, Ground Lease Station and Leased Station), which are operated by franchisees who lease their stations and equipment from Mobil;

3) N (no lease dealers) operated by independent owners, who purchase Mobil petroleum products under franchise agreements; and

4) Distributor Stations, which are owned and operated by wholesale distributors of Mobil products.

The Petroleum Marketing Practices Act (PMPA) governs the relationships between petroleum refiners and their retail franchisees. The PMPA’s primary purpose is to protect petroleum franchisees from arbitrary or discriminatory terminations and nonre-newals. S.Rep. No. 731, 95th Cong., 2d Sess. 15, reprinted in 1978 U.S.C.C.A.N. 873, 874. This Act also serves two secondary purposes: to provide uniformity in the law governing petroleum franchise termination and nonre-newal, and to allow franchisors flexibility in dealing with franchisee misconduct or changes in market conditions. 1978 U.S.C.C.A.N. at 877. It expressly preempts state law governing termination or nonre-newal which differs from its provisions. 15 U.S.C.A. § 2806(a).

The Virginia Petroleum Products Franchise Act (VPPFA) also regulates the refiner-franchisee relationship. Va.Code Ann. §§ 59.1-21.8 to -21.18(1) (Michie 1992). S.B. 235 became effective as an amendment to the VPPFA in July 1990 and contains:

1) a prohibition on gasoline purchase or sales quotas (the “no quotas” provision) (59.1-21.16:2(0);

2) a prohibition, with an exception not relevant here, on refiner-required hours of operation exceeding sixteen consecutive hours per day or six days per week (the “no minimum hours” provision) (59.1-21.-ll(D);

3) a requirement that rents be “based on commercially fair and reasonable standards” and “uniformly applied to similarly situated dealers of the same refiner in the same geographic area” (the “rent control” provision) (59.1-21.11(6));

4) a requirement that all franchise renewals extend at least three years (the “minimum renewal” provision) (Id.); and

5) a prohibition on refiner limits as to the number of stations a single dealer can operate (the “no maximum stations” provision) (59.1-21.11(4)).

These sections prohibit certain terms contained in Mobil’s standard service station franchise agreements.¹ Mobil claims that when it ceased enforcing the prohibited terms so as to comply with S.B. 235, its sales and the profitability and value of its service station operations in Virginia declined.

Mobil filed suit against Virginia’s Attorney General on June 29, 1990 claiming S.B. 235 was unconstitutional because: 1) it was preempted by the PMPA; 2) it violated the Special Laws provision of the Virginia Constitution; 3) it was preempted by the Lan-ham Act; 4) it violated the Contract Clauses of the United States and Virginia Constitutions; and 5) it violated the Takings Clauses of the United States and Virginia Constitutions. At the close of discovery, the Attorney General moved for summary judgment on all counts, and Mobil moved for summary judgment on its claims that S.B. 235 was preempted by the PMPA and violated Virginia’s special laws prohibition. The district court found that the questions of PMPA preemption and the Special Laws violation were ripe for summary judgment, but that additional evidence on the Lanham Act, Contract Clause and Takings Clause claims would be necessary. The court reserved ruling on the summary judgement motions and heard the testimony of a number of witnesses.

The district court then found that S.B. 235 was not preempted by the Lanham Act, that the Virginia Act did not violate the Contract Clause or the Takings Clause, and that the PMPA did not preempt the “rent control” provision of S.B. 235. The court granted Mobil’s cross motion for summary judgment in part, and found that S.B. 235 violated Virginia’s special laws prohibition and that the PMPA preempted the “no quotas,” “no minimum hours,” “no maximum stations” and “minimum renewal” provisions of the Virginia Act. Both parties appeal.² The Virginia Gasoline Marketers and Automotive Repair Association, the national dealers’ organization and similar groups from other states filed amicus briefs supporting the Attorney General’s position on the issue of PMPA preemption, and we have considered these briefs in reaching our conclusions.

II.

Under the Supremacy Clause of the United States Constitution, federal law may preempt state legislation governing the same subject matter. U.S. Const. art VI, cl. 2.; Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 368, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986). Preemption will occur if Congress has expressly stated its intent to preclude state regulation of the subject. 476 U.S. at 368, 106 S.Ct. at 1898. The PMPA contains the following express preemption clause:

To the extent that any provision of this subchapter applies to the termination (or the furnishing of notification with respect thereto) of any franchise, or to the nonre-newal (or the furnishing of notification with respect thereto) of any franchise relationship, no State or any political subdivision thereof may adopt, enforce, or continue in effect any provision of any law or regulation (including any remedy or penalty applicable to any violation thereof) with respect to termination (or the furnishing of notification with respect thereto) of any such franchise or to the nonrenewal (or the furnishing of notification with respect thereto) of any such franchise relationship unless such provision of such law or regulation is the same as the applicable provision of this subchapter.

15 U.S.C.A. § 2806(a) (West 1992) (emphasis supplied). Thus, any state law “with respect to” termination and nonrenewal is preempted if it is not “the same as” the PMPA’s provisions on termination and nonrenewal. The challenged provisions of S.B. 235 are not “the same as” the PMPA because they prohibit contractual terms the PMPA does not directly address. Nevertheless, the Attorney General contends that S.B. 235 is not preempted because it is not “with respect to” termination and nonrenewal.

The Attorney General argues that the PMPA only preempts state statutes that expressly address termination and non-renewal. He argues that S.B. 235’s prohibition on certain contractual terms addresses “substantive” contract elements and thus is not “with respect to” termination and nonrenewal. Resolution of the preemption issue therefore turns on whether S.B. 235 is properly considered regulation “with respect to” termination or nonrenewal.

In Jimenez v. B.P. Oil, Inc., this court held that a Maryland statute requiring franchisors to make goodwill payments upon franchise termination was preempted by the PMPA in the context of the franchisor’s complete withdrawal from the geographic market. 853 F.2d 268, 272-73 (4th Cir.1988), cert. denied, 490 U.S. 1011, 109 S.Ct. 1654, 104 L.Ed.2d 168 (1989). The Jimenez court rejected the franchisee’s argument that the PMPA preempted only state laws regarding the grounds for termination, and not statutes regarding the effects of termination, and it found that Congress intended to occupy the field of petroleum franchise termination and nonrenewal. Id. at 273.

Like the grounds/effects distinction in Jimenez, the Attorney General’s distinction between regulation of “substantive” contract terms and direct regulation of termination and renewal is invalid on the facts of this case. The challenged provisions impact franchise termination and nonrenewal in two ways, and therefore are “with respect to termination” and “nonrenewal.” First, S.B. 235 narrows the grounds for termination available to franchisors operating in Virginia. Under the PMPA, if contractual terms are reasonable and material, a franchisee’s failure to comply with them is legitimate grounds for termination. 15 U.S.C.A. § 2802(b)(2)(A) (West 1982). Unless the terms prohibited by S.B. 235 would in all circumstances be unreasonable and immaterial — a finding we are unwilling to make— S.B. 235 eliminates grounds for termination that would be available under the PMPA. See Darling v. Mobil Oil, 864 F.2d 981, 987 (2d Cir.1989). Second, S.B. 235 provides franchisees with a remedy for termination not “the same as” those set forth in the PMPA. If termination is based on noncomplianee with franchise terms prohibited by S.B. 235, the franchisee may bring a wrongful termination action claiming the termination is illegal under Virginia law. Such a wrongful termination claim would not exist absent S.B. 235, because certain terms and conditions prohibited by S.B. 235 are allowed by the PMPA.

Congress used very broad language to define the PMPA’s preemptive scope. The statute preempts any state law “with respect to” termination or nonrenewal which differs from the PMPA. By denying franchisors grounds for termination that are available under the PMPA and in providing franchisees with a remedy unavailable under the PMPA, S.B. 235 impacts franchise termination and nonrenewal to a degree sufficient to fall within this broad preemption clause.

The Attorney General argues that we should deny preemption, although the plain language of the statute requires it, because preemption would frustrate the PMPA’s primary purpose, which is franchisee protection. “Deciding what competing values will or will not be sacrificed to the achievement of a particular objective is the very essence of legislative choice — and it frustrates rather than effectuates legislative intent simplistically to assume that whatever furthers the statute’s primary objective must be the law.” Rodriguez v. United States, 480 U.S. 522, 526, 107 S.Ct. 1391, 1393, 94 L.Ed.2d 533 (1987) (per curiam) (emphasis in original). The broad scope of the PMPA’s preemption clause indicates that Congress chose to protect franchisees by the means provided in the federal statute and to preclude supplementary state regulation of termination and nonre-newal as a means of franchisee protection. Most petroleum franchisors do business in a number of states and Congress has provided a law to govern petroleum franchises in all 50 states to ensure uniformity.

The language of the PMPA clearly preempts legislation such as S.B. 235. “The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’ ” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)). Finding S.B. 235 preempted by the PMPA adheres to the language of the statute and is consistent with Congressional intent as it furthers two of the PMPA’s goals, uniformity and franchisor flexibility. We therefore affirm the district court’s determination that S.B. 235’s provisions regarding no quotas, no minimum hours, minimum renewals and no maximum stations are preempted by the PMPA. Unlike the district court, we see no reason to conclude differently regarding the “rent control” provision.

The district court found that the PMPA did not preempt the “rent control” provision, because this provision, unlike the other provisions of the Virginia Act, regulates the substance of franchising agreements and does not implicate termination or nonrenewal.

The PMPA provides that grounds for non-renewal of a petroleum franchise include:

[t]he failure of the franchisor and the franchisee to agree to changes or additions to the provisions of the franchise, if (i) such changes or additions are the result of determinations made by the franchisor in good faith and in the normal course of business; and (ii) such failure is not the result of the franchisor’s insistence upon such changes or additions for the purpose of preventing the renewal of the franchise relationship.

15 U.S.C.A. § 2802(b)(3)(A) (West 1982). Under this section, if the franchisor and franchisee are unable to agree on rent, the franchisor may refuse to renew provided he acts “in good faith and in the normal course of business” and not “for the purpose of preventing the renewal.” However, under S.B. 235, even if the franchisor complies with the PMPA, a franchisee may contest a nonrenewal on the ground that rent demanded is not “based on commercially fair and reasonable standards” and “uniformly applied to similarly situated dealers of the same refiner in the same geographic area.” The “rent control” provision of S.B. 235 is “with respect to” nonrenewal because it gives franchisees grounds to challenge nonrenewals that are valid under PMPA. See Esso Standard Oil Co. v. Department of Consumer Affairs, 793 F.2d 431, 434 (1st Cir.1986) (PMPA would preempt “any law that gave a franchisee a cause of action to contest a termination, when that termination would otherwise be valid under the PMPA”). We reverse the district court’s decision that the PMPA does not preempt S.B. 235’s “rent control” provision.

III.

The Lanham Act states that it is intended to “protect registered marks used in [interstate] commerce from interference by State, or territorial legislation.” 15 U.S.C.A. § 1127 (West Supp.1994). Mobil argues that this language expressly preempts any state law that erodes the quality control necessary for a mark owner to protect his trademark image. Even if we assume that § 1127 is an expression of intent to preclude state law, rather than merely a general statement of purpose,³ protection of “registered marks” does not encompass a statute such as S.B. 235 which does not govern the appearance of, the ownership of, or the right to use franchisors’ registered marks.

Although the Lanham Act does not expressly preempt S.B. 235, it may do so by implication. Federal law may preclude state law that is inconsistent with or frustrates the objectives of the federal law. See Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. at 368, 106 S.Ct. at 1898. The Lanham Act gives a mark owner the right to control the quality of goods associated with his mark. Shell Oil Co. v. Commercial Petroleum, Inc., 928 F.2d 104, 107 (4th Cir.1991). Mobil contends that the “no maximum stations,” “no quotas,” and “no minimum hours” provisions of the Virginia Act are inconsistent with its right of quality control, because they prevent Mobil’s effective regulation of the quality of goods and services sold in Mobil gas stations. We disagree.

The “no minimum hours” provision does not adversely affect the quality of services provided by Mobil service stations. Twenty-four-hour service is not an integral component of the Mobil service station product or of Mobil’s trademark image, because Mobil does not apply the 24 hour operation requirement consistently, and the inability to require 24-hour operation does not detract from its trademark image.

The “no maximum stations” provision does not have a significant negative impact on Mobil’s quality control efforts. This provision does not alter the franchisee’s obligations to uphold Mobil’s standards as set forth in the franchise agreement regarding business operations, customer service, and maintenance of the station premises. In addition, since Mobil hires salaried employees to operate some of its stations and is apparently satisfied with the quality of services provided by those stations, it is difficult to understand why a franchisee should not be able to hire equally qualified persons to operate franchisee stations.

Similarly, the “no quotas” provision does not prevent Mobil from maintaining the quality of its products and services. While Mobil cannot require that franchisees purchase a minimum amount of gasoline for resale, all gasoline sold under the Mobil mark must comply with Mobil’s quality standards, and only Mobil brand gasoline may be sold through Mobil equipment. The dealer remains obligated under the franchise agreement to use “good-faith and best efforts to maximize the sale of Mobil brand fuel,” to “maintain an inventory of Mobil brand motor fuel ... sufficient to serve customers during all business hours,” to “exercise the highest degree of care and diligence in the handling, storage and sale of all products delivered to the marketing premises, and protect the quality of those products.” The fact that a franchisee may not sell as much product as Mobil would desire does not adversely affect Mobil’s trademark image, particularly when the product that is sold is supplied by Mobil, and the franchisee is in compliance with the other terms of the agreement.

A presumption against preemption arises when Congress does not state its intent. Abbot v. American Cyanamid Co., 844 F.2d 1108, 1112 (4th Cir.), cert. denied, 488 U.S. 908, 109 S.Ct. 260, 102 L.Ed.2d 248 (1988). Consistent with this presumption and with our finding that S.B. 235 does not conflict with the Lanham Act’s objectives, we find that the Lanham Act does not impliedly preempt the provisions of S.B. 235.

IV.

It is well established that courts should refrain from addressing constitutional questions unless it is necessary to do so. Jean v. Nelson, 472 U.S. 846, 854, 105 S.Ct. 2992, 2996-97, 86 L.Ed.2d 664 (1985); Ashwander v. TVA, 297 U.S. 288, 347, 56 S.Ct. 466, 483, 80 L.Ed. 688 (1936) (Brandeis, J., concurring). As we have already decided that S.B. 235 is invalid because it is preempted by the PMPA, we decline to address Mobil’s arguments that S.B. 235 violates the Takings and Contract Clauses of the United States Constitution. For the same reason, we do not reach the issue of whether S.B. 235 violates the Special Laws prohibition of the Virginia Constitution.

V.

For the reasons stated in this opinion, the decision of the district court is affirmed in part and reversed in part.

AFFIRMED IN PART AND REVERSED IN PART.

1 . Because S.B. 235 governs only franchise agreements, Mobil’s relationships with SALOPs and distributor stations are not affected.

2 . Although the district judge heard testimony on some issues, he did not make any findings of fact that have been contested and all parties have addressed this appeal as being from summary judgment. We have reviewed the district court's action under the summary judgment standard.

3 . This is uncertain since the Lanham Act contains another provision which more specifically preempts state law:

No State or other jurisdiction of the United States or any political subdivision or any agency thereof may require alteration of a registered mark, or require that additional trademarks, service marks, trade names, or corporate names that may be associated with or incorporated into the registered mark be displayed in the mark in a manner differing from the display of such additional trademarks, service marks, trade names, or corporate names contemplated by the registered mark as exhibited in the certificate of registration issued by the United States Patent and Trademark Office.

15 U.S.C.A. § 1121 (West Supp.1994). This provision does not invalidate S.B. 235 because S.B. 235 does not affect the appearance of Mobil's mark as displayed by licensed users.