Antitrust Law Daily Gas station franchisor unreasonably tried to coerce station purchaser into franchise
Friday, August 11, 2017

Gas station franchisor unreasonably tried to coerce station purchaser into franchise

By Peter Reap, J.D., LL.M.

A California state trial court’s ruling that Westco Petroleum Distributors, a petroleum products distributor and franchisor of "76" branded gasoline stations, breached the franchise agreement associated with a station that it had franchised to a dealer (A&A) by unreasonably attempting to coerce a purchaser of the station, West Covina, into signing a franchise agreement for the station was supported by substantial evidence and affirmed, according to a California appellate court. Further, the trial court’s findings that the franchisor breached the agreement by failing to respond to requests by the existing franchisee to sell the station to West Covina; and failing to give notice before stopping gasoline deliveries to the station after it was purchased by West Covina, were similarly supported by substantial evidence. In addition, a liquidated damages provision in the franchise agreement for the station was void and unenforceable under California law, and, although not a signatory to the franchise agreement, West Covina was properly awarded attorney fees against Westco pursuant to both California law and the agreement’s attorney fee provision (Westco Petroleum Distributors, Inc. v. Huntington Beach Industrial, August 10, 2017, Chavez, V.).

Franchised dealer A&A sold its station to West Covina without first obtaining, after multiple attempts to secure it, the required written consent from the franchisor Westco. Soon after the transfer, disputes developed between all of these parties over payment for gasoline deliveries. The franchisor eventually stopped all gasoline deliveries at the station and filed suit against A7A and West Covina. The trial court found in favor of the franchisor on certain contract claims for failures to pay for gasoline, but ruled against the franchisor on several additional claims. The franchisor appealed.

Unreasonable failure to consent to sale of station. Substantial evidence supported the trial court’s finding that the franchisor unreasonably failed to respond to A&A’s assignment request. The record showed that A&A notified Westco of the pending sale of the gas station to West Covina and asked Westco to send the documents necessary to assign the franchise to West Covina. Westco’s failure to act on the application caused A&A and West Covina to remove assignment of the franchise as a contingency to the close of the gas station sale, which occurred on August 9, 2012, the court determined. Westco’s representative later conceded that Westco had disregarded West Covina’s application because it did not take the application seriously.

Westco argued on appeal that Business and Professions Code section 21148 allowed it 45 days in which to respond to A&A’s request to assign the franchise, that only 23 days had elapsed between submission of the application and the closing date of the gas station sale, and that a 23-day delay was not unreasonable as a matter of law. The statute provides that "a franchisor may not withhold its consent to the sale, transfer, or assignment of the franchise by the franchisee to another person unless the franchisor demonstrates in writing to the franchisee within 45 days of receiving the application."

The franchisor did not raise this statutory argument in the trial court below and therefore forfeited the right to do so for the first time on appeal, the court held. Even if the argument were not forfeited, Westco failed to demonstrate any error. The evidence showed that Westco never responded to West Covina’s application and disregarded it altogether. There was no evidence that Westco made any effort to investigate West Covina’s qualifications or financial resources.

Coercion. Westco refused to make further gasoline deliveries to the station unless West Covina signed a 64-page franchise agreement it presented for the first time at the first meeting between the franchisor and West Covina. Westco refused West Covina’s request for additional time to review the agreement and its offer to pay in advance for any gasoline deliveries made before the agreement was signed. Westco also threatened to sue West Covina and to put it out of business unless it signed the agreement then and there.

Substantial evidence supported the trial court’s finding that Westco unreasonably demanded that West Covina sign a franchise agreement under duress and without the opportunity to review the agreement, the appellate court ruled. The trial court did not err by concluding that Westco’s conduct was a material breach of the franchise agreement that excused further performance by the affected parties.

Failure to deliver gasoline. The franchise agreement specified that "WESTCO agrees to provide DEALER thirty (30) days’ notice before stopping delivery of" gasoline, except in the event of the dealer’s material breach, in which case 5 days’ notice would suffice. Westco provided no notice to A&A or West Covina before stopping gasoline deliveries to the station. Thus, substantial evidence supported the trial court’s finding that Westco breached the foregoing provision.

Liquidated damages provision. A California statute, Civil Code section 1671 provides that "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." The trial court found, and the evidence showed, that the liquidated damages provision was void and unenforceable as a contract of adhesion because it was prepared by Westco as part of a form contract, none of the defendants were represented by counsel, and no bargaining had taken place between the parties, the appellate court decided. Westco made no showing that proof of actual damages would have been impossible or overly costly.

Attorney fees. An award of contractual attorney fees is governed by Civil Code section 1717. In addition, the franchise agreement contained an attorney fee provision awarding fees to the prevailing party.

Westco contended that the trial court erred in granting attorney fees in the amount of $61,565 to West Covina because it was not a party to the franchise agreement, no contract claims were asserted against it, and even if some of the causes of action were deemed to be claims on the contract, the fee award should have been apportioned between the contract and non-contract claims. The appellate court disagreed.

That the West Covina defendants were not signatories to the franchise agreement did not preclude them from recovering their attorney fees as prevailing parties. Civil Code section 1717 was enacted to prevent oppressive use of one-sided attorney fees provisions. It also should be interpreted to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorney fees should he prevail in enforcing the contractual obligation against the defendant, the appellate court noted.

The franchisor’s claim that it asserted only non-contract causes of action against the West Covina defendants was contradicted by the allegations of its complaint. It brought contract claims against West Covina for goods sold and delivered, and also sought to recover against West Covina under the liquidated damages provision. West Covina successfully defended against these claims and was accordingly entitled to recover its attorney fees under Civil Code section 1717. Westco’s argument was also unavailing because the attorney fees provision in the franchise agreement covered non-contract claims. Finally, Westco did not request apportionment of attorney fees in the trial court below and accordingly forfeited the right to do so for the first time on appeal.

The case is Nos. B264846 c/w B269393.

Attorneys: Avedis Nalbandian (Law Offices of Avedis Nalbandian) for Westco Petroleum Distributors, Inc. Thomas J. Stolp (Rogers, MacLeith & Stolp, LLP) for Huntington Beach Industrial and Huntington Beach Petroleum, LLC. Thomas J. Weiss and Shawn Zaman (Law Offices of Thomas J. Weiss) for West Covina Gas & Market, Inc., Shahram Bakhtiari, and Mehraban Forughi.

Companies: Westco Petroleum Distributors, Inc.; Huntington Beach Industrial; Huntington Beach Petroleum, LLC; West Covina Gas & Market, Inc.

MainStory: TopStory FranchisingDistribution CaliforniaNews

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