Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.Y.: Petroleum franchisor did not violate PMPA by declining option to extend ground lease, (Oct 20, 2015)

By Edward L. Puzzo, J.D.

A petroleum franchisor did not violate the Petroleum Marketing Practices Act (PMPA) by refusing to exercise its option to extend its ground lease, causing the termination of its franchise agreement with its sub-lessee, the franchisee, the federal district court in Central Islip, New York has ruled. The franchisor did not violate the PMPA because it had offered to assign its rights in the lease to the franchisee. The landlord’s refusal to consent to the assignment did not make the franchisor liable under the statute (Amphora Oil & Gas Corp. v. Cumberland Farms, Inc., October 19, 2015, Spatt, A.).

Background. In 2001, a gasoline service station in Brentwood, New York was leased by landlord Joseph Zanghi to Tosco Refining, now known as ConocoPhillips, which later assigned the lease to Cumberland Gulf. In 2003, Cumberland Gulf sublet the property to plaintiff Amphora Oil & Gas. In December 2014, Cumberland Gulf notified the landlord Zanghi that, despite its contractual option to extend its lease for four additional five-year periods, it would not be renewing the lease when it expired on December 31, 2015. Later in December 2014, Cumberland Gulf sent a termination notice notifying sub-lessee Amphora that, due to its non-renewal of the property lease, the franchise relationship between Cumberland Gulf and Amphora would end on September 9, 2015. Cumberland Gulf also notified Amphora that it was willing to assign its rights in the lease to Amphora if Amphora would sign by July 31, 2015 an unconditional release of Cumberland Gulf for all liability arising under the lease post-assignment. During the late-2014 to early-2015 time period, the landlord sold the property to 750 Motor Parkway Realty. In July 2015, Parkway Realty expressed its unwillingness to consent to Amphora’s assumption of the lease from Cumberland Gulf.

Amphora brought this action, seeking a preliminary injunction preventing Cumberland Gulf from terminating or failing to renew the Master Lease, sublease, and related franchise agreements. Amphora further alleged that Parkway Realty had wrongfully entered into a new lease in September 2014 with another party, Bolla Operating, without first giving Cumberland Gulf an opportunity to exercise its preferential right to a new lease granted to it under the Master Lease. Amphora sought to compel Parkway Realty to recognize Cumberland Gulf’s preferential rights over the lease and to recognize Amphora as the rightful tenant.

PMPA. In recognition of the power imbalance between petroleum refiners and franchisors and their franchisees, the court explained, the federal Petroleum Marketing Practices Act established certain requirements for termination or nonrenewal of a franchise.

The PMPA created a right of action for franchisees, providing that a preliminary injunction may be granted if the franchisee shows that the franchise has been terminated, that there exists sufficiently serious questions going to the merits to make such questions a fair ground for litigation, and the hardships imposed by preliminary injunctive relief on the franchisor were outweighed by the hardships imposed on the franchisee if such relief were not granted. 15 USC Sec. 2805(b)(2).

Here, it was uncontested that the franchise relationship between Cumberland Gulf and Amphora was terminated by Cumberland Gulf on September 9, 2015. As to the next step, evaluating success on the merits, the PMPA requires only a reasonable chance of success on the merits, less stringent than the Rule 65 standard of a strong or reasonable likelihood of success. After evaluating the evidence, the court concluded that Amphora did not have a reasonable chance of success on the merits.

The PMPA provides that the expiration of an underlying ground lease may provide a basis for a franchisor’s decision to terminate or not renew a franchise relationship as long as, within 90 days of giving notice of such decision, the franchisor offers to assign to the franchisee any option to extend the underlying lease or option to purchase the premises. Thus, the franchisor’s obligation is limited to offering to assign the option. There sub-lessee/franchisee had no absolute right under the PMPA to assume options held by the lessee/franchisor under the Master Lease. The court ruled that Cumberland Gulf met its requirement, and was under no legal obligation to offer to assign the option without also receiving an unconditional release of future liability.

That Amphora could not obtain such a release from the landlord did not form the basis for a PMPA violation, either on the part of Cumberland Gulf for not obtaining the release of liability, nor on the part of landlord Parkway Realty, which did not consent to the release, the court ruled. Cumberland Gulf chose not to exercise its option to extend the lease, and Parkway Realty declined to consent to the assignment of the lease from Cumberland Gulf to Amphora, a much smaller company. Absent evidence to the contrary, both actions reflected the parties’ legitimate business interests and did not violate the PMPA. Thus, there were no sufficiently serious questions going to the merits that warranted imposition of a preliminary injunction.

The case is Civil Action No. 2:15-cv-04638-ADS-AYS.

Attorneys: Alexander M. Amanatides (Amanatides Kochisarli PLLC) for Amphora Oil & Gas Corp. Vaughan Finn (Shipman & Goodwin LLP) for Cumberland Farms, Inc. and Gulf Oil Limited Partnership. Kenneth L. Robinson (Robinson & Associates, P.C.) for 750 Motor Parkway Realty LLC.

Companies: Amphora Oil & Gas Corp.; Cumberland Farms, Inc.; Gulf Oil Limited Partnership; 750 Motor Parkway Realty LLC

Cases: FranchisingDistribution NewYorkNews