Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. Ga.: Oil company entitled to reimbursement of incentive payments made to distributor, (Sep 16, 2014)

By Edward L. Puzzo, J.D.

An oil company was entitled to partial reimbursement of incentive payments it had made to a distributor for renovations to a gas station after the latter debranded the gas station prematurely, the federal district court in Valdosta, Georgia has ruled (Phillips 66 Company v. Gish Oil Company, September 10, 2014, Lawson, H.).

Gish Oil was a wholesale distributor (marketer) of gasoline and petroleum products to retail gas station owner/operators (dealers). Gish obtained its products for resale from branded oil companies such as Phillips Petroleum.

New Construction Incentive Program. In 1998, Gish entered into a New Construction Incentive Program (NCIP) agreement with Phillips. Under this agreement, Gish agreed to use its own funds to make extensive improvements to one of the Phillips-branded dealers it supplied, the Baytree Convenience Store. As an incentive for undertaking the costs of improving that store, Phillips agreed to rebate a portion of its monthly gas sales to Gish for 36 months. The agreement further stated that if, during the ten-year period after the first incentive payment, the store was no longer branded Phillips, or the Branded Marketer Sales Contract between the parties was terminated, then Gish would have to refund the incentive payments to Phillips. Under the sliding scale for refunds contained in the agreement, Gist would have to reimburse 75% of the incentive payments it received if the triggering event occurred in the eighth or ninth year of the agreement.

Branded marketer agreement. Separate from the NCIP agreement, Phillips entered into a branded marketer agreement in 2004 stating that, beginning in 2006, Gish was required to purchase a total of five million gallons of gasoline per year from Phillips for six dealer locations.

Gish’s annual sales remained below the minimum threshold required under the branded marketer agreement, and it did not want to participate in a separate program offered by Phillips, which would delay the minimum sales requirement for six years if Gish remodeled their stations by the end of 2007. Gish therefore removed the Phillips branding from the Baytree store in October 2007.

Reimbursement sought. Phillips had paid over $162,000 in incentive payments to Gish under the NCIP. Gish’s removal of Phillips branding from the Baytree store occurred in the ninth year the store had been in the NCIP program. After filing suit against Gish seeking the return of 75%, or over $121,000, of the incentive payments it had paid, Phillips moved for summary judgment. In response, Gish alleged that it should not have to reimburse Phillips for the incentive payments and that it was entitled to summary judgment.

Breach of contract. Gish argued that the NCIP agreement was not valid as a contract due to lack of consideration, but the court found that Gish’s consideration had been the improvements to the Baytree store, and Phillips’ consideration was the rebate payments it made to Gish, so a valid contract existed. Further, Phillips had performed its duties under the contract by making the rebate payments, whereas Gish had breached its duties under the contract by refusing to reimburse 75% of the rebates after debranding the Baytree store in the ninth year of the agreement.

Liquidated damages or penalty. Gish claimed it was entitled to summary judgment because the repayment provision of the NCIP agreement imposed a penalty in the guise of liquidated damages and thus was unenforceable. Gist alleged that Phillips used the possibility of having to repay the incentive rebates to dissuade Gish from debranding the Baytree store.

The court noted that the agreement did not prohibit Gish from removing the Phillips brand from the Baytree store; it only specified a reimbursement percentage if it did. Further, the agreement called for reimbursement to be triggered if certain conditions transpired, such as debranding or the termination of the separate branded marketer agreement, even if it were Phillips’ actions that triggered one of the conditions. Thus, this provision was neither a liquidated damages clause nor a penalty; it merely required repayment of incentive rebates if certain conditions transpired.

Superseding agreement. Gish also claimed that it was entitled to summary judgment because the 1998 NCIP agreement had been superseded by the 2004 branded marketer agreement. The court noted that the 2004 agreement specifically superseded all prior branded marketer agreements between the parties. But the NCIP contract was not a branded marketer agreement, the court noted, so it was not expressly superseded. In addition, the two agreements dealt with different issues: the branded marketer agreement dealt with quantities of gasoline which were required to be purchased, while the NCIP agreement dealt with incentives for updating one store. Therefore, the court ruled, the 2004 branded marketer agreement could in no sense be viewed as superseding the NCIP agreement.

Accordingly, the court ruled that summary judgment for Gish on the basis that the reimbursement requirement was an unenforceable penalty, or that the NCIP agreement had been superseded, was not warranted. Instead, the court ruled, Phillips was entitled to summary judgment on its claim for reimbursement of incentive payments.

The case is Civil Action No. 7:13-CV-63 (HL).

Attorneys: Darin L. Brooks (Beirne, Maynard & Parsons, LLP) for Phillips 66 Company. Steven M. Mills (Mills & Hoopes, LLC) for Gish Oil Company.

Companies: Phillips 66 Company; Gish Oil Company.

Cases: FranchisingDistribution GeorgiaNews