Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDNY: Failure to Purchase Gasoline, Pay Rent, Operate 24-Hours Per Day Justified Termination of Franchise, (Feb 4, 2013)

By John W. Arden, J.D., LLM.

Gasoline franchisees’ failure to purchase gasoline, pay rent, and operate a service station 24-hours per day, seven days per week breached their franchise agreement and constituted good cause for termination under the federal Petroleum Marketing Practices Act, the federal district court in Central Islip, New York, has ruled (Gulf Oil Limited Partnership v. Semerci, January 30, 2013, Feuerstein, S.).

The court issued a preliminary injunction, declaring that the franchisor was entitled to terminate the franchise relationship and requiring the franchisees to vacate franchise premises, return all of the franchisor’s property and fixtures, and remove their personal property.

In July 2010, Halis Semerci, Haluk Semerci, and their related corporations entered a retail motor fuel outlet lease, a dealer contract of sale, and a number of collected contracts (collectively, “the franchise agreements”) with gasoline franchisor Gulf Oil. The agreements required the franchisees to maintain adequate supplies of Gulf’s petroleum products, make monthly rental payments, and operate the premises as a retail motor fuel outlet 24 hours each day, for seven days a week.

The supply agreement provided that Gulf Oil could terminate the agreement, after written notice, for dispensing any motor fuel other than the franchisor’s and for failure to pay any amount that is due. The lease permitted termination for failure to comply with any provision that is reasonable and of material significance to the relationship, including failure to pay rent in a timely manner, or for failure to operate for seven days per week.

It was undisputed that the Semercis failed to purchase gasoline from Gulf, pay rent, or otherwise comply with their obligations under the franchise agreements, according to the court. Gulf sent written notices of termination on May 9, 2012 and August 17, 2012, but the franchisees refused to vacate and continued to operate the service station.

On September 21, 2012, Gulf filed a complaint for a declaration that it was entitled to terminate the franchise relationship, to immediately gain custody and control of the premises and for a preliminary injunction requiring franchisees to vacate the premises, return the franchisor’s equipment and fixtures, and remove their personal property from the premises.

On October 29, 2012, Gulf moved for a default judgment, since the franchisees had not filed an answer or otherwise appeared. At a hearing on November 26, 2012, the individual franchisees appeared pro se and requested an extension of time to file answers. The court extended the time until January 9, 2013. On January 3, the franchisees moved for the appointment of pro bono counsel. The court denied the motion and scheduled a hearing for January 22, 2013. On that date, the court granted Gulf Oil’s motion for a preliminary injunction requiring the franchisees to leave the franchise premises by 5 p.m. on January 31, 2013.

Standard for Injunctive Relief

In order to obtain a preliminary injunction in the Second Circuit, a plaintiff must demonstrate (a) that irreparable harm is likely in the absence of an injunction; (b) either (i) likelihood of success on the merits or (ii) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly towards the party requesting the preliminary relief; and (c) the public interest weighing in favor of granting the injunction.

Likelihood of success. In this case, Gulf Oil established a likelihood of success on the merits of its claims pursuant to the Petroleum Marketing Practices Act (PMPA). The Act prohibits a franchisor from terminating any franchise prior to the conclusion of its term except for a statutorily enumerated reason and after providing written notice.

As is relevant here, the statute permits a franchisor to terminate a franchise based on a (A) a failure by the franchise to comply with any provision of the franchise that is both reasonable and of material significance to the franchise relationship; (B) a failure by the franchisee to exert good faith efforts to carry out the provisions of the franchsie, if the franchisee was notified in writing of such failure and given a reasonable opportunity to exert good faith efforts to carry out the provisions; and (C) the occurrence of an event relevant to the franchise relationship as a result of which termination is reasonable. 15 U.S.C. §2802(b)(2).

Gulf Oil established its compliance with the notice provision of the PMPA, the court found. Moreover, the franchisees’ failure to make any effort to comply with the requirement to operate the service station for 24 hours each day and for 25 consecutive days justified the termination of the franchise agreement, the court held.

Irreparable injury. The franchisor demonstrated that it would be irreparably harmed absent a grant of preliminary injunctive relief. An unauthorized interference with a real property interest constitutes irreparable harm as a matter of law, the court ruled. The interruption of the availability of the premises could negatively affect the franchisor’s good will, the loss of which constitutes irreparable harm.

Public interest. The public interest would not be disserved by the granting of a preliminary injunction in this case. To the contrary, the public interest is best served by enforcement of the PMPA and by the assurance that valid contracts will be enforced, in the court’s view. The continued possession by a lessee of a property after the lease has been validly terminated is contrary to the public interest, even more so when the premises include underground storage tanks that require strict testing, record keeping, and sampling.

The case is No. CV-12-4731 (SJF)(WDW).

Attorneys: Paul D. Sanson (Shipman & Goodwin LLP) for Gulf Oil Limited Partnership

Companies: Gulf Oil Limited Partnership

Cases: FranchisingDistribution NewYorkNews