Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. N.Y.: Terminated gasoline franchisee ordered to vacate after sale of premises, (Mar 12, 2014)

By John W. Arden, J.D., LL.M.

The federal district court in New York City ordered a terminated franchisee to vacate and surrender leased franchised premises, return all property belonging to the franchisor, and remove all personal property after the franchisor sold premises to a third party (Scarsdale Central Service Inc. v. Cumberland Farms, Inc., March 7, 2014, Roman, N.).

In granting the franchisor’s motion for a preliminary injunction, the court held that the franchisor was likely to prevail on its counterclaims brought under the Petroleum Marketing Practices Act (PMPA) and the Lanham Act, the franchisee’s continued occupation would cause irreparable harm to the franchisor, and the balance of hardships and public interest weighed in the franchisor’s favor.

Scarsdale Central Service was a franchisee of Gulf Oil, a subsidiary of Cumberland Farms, Inc., operating a service station in Scarsdale, New York. Its predecessor had entered into franchise and lease agreements that were scheduled to expire on November 30, 2013.

On June 19, 2013, third parties David Ross and Richard Becker made an unsolicited offer to purchase the franchise premises from Cumberland Farms. The parties started negotiations. On June 26, 2013, Cumberland informed Scarsdale Central Services that it was divesting ownership of the premises and was granting Scarsdale 30 days to submit an offer to purchase the property. Cumberland stated that it was not obligated to accept Scarsdale’s offer, but that Scarsdale retained a right of first refusal under the Petroleum Marketing Practice Act.

On July 25, 2013, Scarsdale submitted an offer of $800,000 to buy the premises, a figure equal to the appraisal value of the premises upon which the rent was based. Cumberland responded that it had accepted Ross and Becker’s offer of $1.3 million, with a down payment of $750,000. Upon receipt of that letter, Scarsdale had 45 days in which to exercise its right of first refusal. If the offer of first refusal were not exercised, Scarsdale would be “terminated and nonrenewed effective December 9, 2013,” according to a letter from Gulf, which included a summary of the PMPA.

Scarsdale filed suit in New York state court on October 11, 2013, claiming that Cumberland and Gulf were conspiring with another franchisee to divest Scarsdale of its franchise, in violation of the PMPA. Soon thereafter, Gulf acknowledged Scarsdale’s desire to exercise its right of first refusal and said that the franchisee would receive the same contract as the third party, except that the down payment would be reduced to $130,000 to account for the franchisee’s financial condition. An agreement under those terms—also including a mutual termination of the franchise agreement—was delivered to Scarsdale on October 28, 2013. Having not heard from Scarsdale, Cumberland contacted Scarsdale’s counsel, noting that a failure to respond would be deemed a refusal to proceed with the purchase of the premises.

On December 9, 2013, the date of nonrenewal of the franchise, Cumberland and Gulf Oil removed this action to federal court, after not hearing from Scarsdale or its counsel. They moved for a preliminary injunction against Scarsdale, which had continued to occupy the premises without paying rent, purchased gasoline from an unknown vendor, and continued to use the Gulf trademarks.

Preliminary Injunction

To obtain a preliminary injunction in the Second Circuit, the requesting party must demonstrate: (1) irreparable harm and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions on the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting relief. Where the moving party demonstrates a likelihood of success on the merits, the balance of hardships must tip in its favor, but not decidedly so.

Likelihood of success on merits. Cumberland and Gulf argued that they were likely to succeed on the merits of their counterclaims under the PMPA because they (1) determined to sell the premises in the normal course of business; (2) offered Scarsdale the right of first refusal and gave it 45 days to exercise the right; and (3) provided 109 days’ notice of nonrenewal, giving the date nonrenewal would take effect and providing the summary statement of the PMPA.

Scarsdale contended that Cumberland did not act in good faith because it made multiple oral representations that the franchise would be renewed before deciding otherwise. It also asserted that the terms of the sale agreement Cumberland offered were materially different from those offered to the third parties because (1) the financing provision was different and (2) the contract with the third parties did not include the mutual termination agreement.

The court noted that the financing provision was more favorable to Scarsdale, with the down payment lowered from $750,000 to $130,000, and that all other provisions were the same. “Since Cumberland sought to divest itself of the Premises, it also sought to divest itself of the franchise relationship with Plaintiff, thus requiring Plaintiff to execute the Mutual Termination agreement.” Accordingly, the court found that Cumberland and Gulf were likely to succeed on their PMPA claim.

They also were likely to succeed on the merits of their Lanham Act counterclaim, which alleged trademark infringement based on Scarsdale’s post-termination use of the Gulf Oil marks. To succeed on a trademark infringement claim, a party must demonstrate that (1) its trademark was entitled to protection and (2) use of the mark was likely to cause consumer confusion as to the origin or sponsorship of the goods. As to the first element, Cumberland and Gulf provided trademark registration documents from the U.S. Patent and Trademark Office. As to the second element, continued use of a franchisor’s trademark after the end of a franchise agreement is likely to cause confusion.

Irreparable harm. Unauthorized interference with real and intellectual property has been held to constitute irreparable harm as a matter of law, the court observed. Scarsdale asserted irreparable harm from the deprivations of its interest in the premises, its ability to make productive use of the premises, and its right to control potentially hazardous conditions in light of recent overfilling of underground tanks. The court held that Scarsdale’s continuing occupation of the premises after refusing to enter the sales contract impeded Cumberland’s and Gulf’s ability to make productive use of their property and its continued use of Gulf’s trademarks, while purchasing gasoline from an unknown source caused irreparable injury to Cumberland’s trademarks.

Balance of hardships. Although Scarsdale will undoubtedly suffer harm if the preliminary injunction were granted, Cumberland and Gulf faced irreparable harm from the status quo. The harm suffered by Scarsdale stemmed from its own wrongful conduct in passing off its product as those of Gulf’s, in the court’s view. Thus, the balance of hardships tipped in favor of Cumberland and Gulf.

Public interest. The public interest factor weighed in favor of Cumberland and Gulf as well, since the continued possession of property after valid termination of a lease is contrary to the public interest, the court found. Allowing the continued use of the Gulf trademarks without permission was contrary to both the letter of the law and the public interest, the court said.

The case is No. 13-cv-8730 (NSR).

Attorneys: Eric Richardson Sharp (Galgano & Associates) for Scarsdale Central Service Inc. Timothy G. Griffin (Law Offices of Timothy G. Griffin) for Cumberland Farms, Inc. and Gulf Oil Limited Partnership.

Companies: Scarsdale Central Service Inc.; Cumberland Farms, Inc.; Gulf Oil Limited Partnership

Cases: FranchisingDistribution NewYorkNews