
USCA1 Opinion

	




          October 26, 1995      [NOT FOR PUBLICATION]                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                                                                      ____________________        No. 95-1314                                  SHELL OIL COMPANY,                                Plaintiff, Appellant,                                          v.                                K.E.M. SERVICE, INC.,                                 Defendant, Appellee.                                                                                      ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF RHODE ISLAND                    [Hon. Francis J. Boyle, Senior District Judge]                                            _____________________                                                                                      ____________________                                Cyr, Boudin and Lynch,                                   Circuit Judges.                                   ______________                                                                                      ____________________             George A. Nachtigall, with whom Mark A. Pogue, Marc A. Crisafulli             ____________________            _____________  __________________        and Edwards & Angell were on brief for appellant.            ________________             Paul J. Pisano, with  whom Paul J. Pisano Law  Associates, Albert             ______________             ______________________________  ______        R. Romano and Romano, Spinella & Hayes were on brief for appellee.        _________     ________________________                                                                                      ____________________                                                                                      ____________________                    Per Curiam.   Shell  Oil Company ("Shell")  sued, under                    Per Curiam.                    ___ ______          the  Petroleum Marketing Practices Act, 15 U.S.C.    2801 et seq.                                                                    __ ____          ("PMPA"),  to terminate  its franchise  agreement and  lease with          K.E.M. Service,  Inc. ("K.E.M.")  due to alleged  contract viola-          tions.  K.E.M. counterclaimed, and  Shell now appeals a  prelimi-          nary  injunction requiring  it  to continue  selling gasoline  to          K.E.M. pending final adjudication  of Shell's PMPA-based  claims.          See Shell Oil Co. v. K.E.M. Serv., Inc., No. 95-001B (D.R.I. Feb.          ___ _____________    __________________          16, 1995).   As the record  does not enable a  determination that          the district  court manifestly  abused its discretion  in finding          that  "there exist  sufficiently serious  questions going  to the          merits [of  Shell's claims and  K.E.M.'s defenses]  to make  such          questions a fair  ground for litigation," 15 U.S.C.   2805(b)(A),          we affirm.                    We state  the material facts  briefly.  K.E.M.  and its          president/owner,  John Gorter,  operate a  Shell retail  gasoline          station in East Greenwich, Rhode Island.  Their current five-year          franchise and lease agreement (hereinafter:  "Agreement") expires          in 1998.   According to K.E.M., Shell decided in  1993 to install          another  franchisee  on  the  leased premises,  and  when  Gorter          declined  a buy-out offer, Shell initiated  a bad-faith effort to          oust  K.E.M. prematurely from its  franchise/lease.  To this end,          Shell  audited and cited  K.E.M. for  violations of  Rhode Island          environmental regulations, specifically for its failure to keep a          written record of daily gasoline inventory reconciliations on the          leased premises.  Further,  Shell abruptly altered its longstand-                                          2          ing  policy of delivering "short  loads"    i.e.,  less than full          tank-truck  loads  of gasoline     to  K.E.M.   Since  K.E.M. has          limited underground  storage-tank capacity, it was  forced to buy          and  sell non-Shell gasoline in short loads, or else cease opera-                    ___          tion.                    Shell contends that its alleged bad faith is irrelevant          under  the  PMPA, given  that  K.E.M. admittedly  engaged  in the          "willful adulteration, mislabeling or  misbranding of motor fuels          or other  trademark violations."   15  U.S.C.    2802(c)(10); see                                                                        ___          Agreement Art. 18.1(c)(10) (same).  Shell also argues that, in at          least  two respects, K.E.M. "knowing[ly] fail[ed] . . . to comply          with .  .  . State  .  . .  [environmental]  laws or  regulations          relevant to the operation of the marketing premises," 15 U.S.C.            2802(c)(11); Agreement  Art. 18.1(c)(11) (same).  First, although          K.E.M.  kept gasoline  inventory  figures and  performed a  daily          inventory reconciliation, it failed to record the final amount of          any  differential in its written records.  See Rhode Island Dep't                                                     ___          of Envtl.  Management  Regulation DEM-DWM-UST04-93,     13.00  et                                                                         __          seq.  (1993).  Second, K.E.M.'s records were in the possession of          ____          its  accountant, rather than at the service station.  Shell cites          case law to the effect that a franchisor's unilateral termination          of a franchise is conclusively presumed "reasonable," as a matter          of law and regardless whether the motives for the termination are          unfairly coercive  or sinister,  if the franchisee  has committed          any of the twelve acts enumerated in PMPA   2805(c).   See, e.g.,          ___                                                    ___  ____          Russo v. Texaco, 808 F.2d 221, 225 (2d Cir. 1986).           _____    ______                                          3                    K.E.M. counters  that PMPA    2802(c)  contemplates two          types of equitable exceptions to  the presumption prescribed in            2805(c).   First, any purported PMPA  recordkeeping violation was          merely  "technical," since  K.E.M.  substantially  complied  with          Rhode Island environmental regulations.  Second, Shell  pressured          K.E.M.  into violating  the PMPA  ban on gasoline  misbranding by          preying on  its hand-to-mouth  fiscal condition when  it abruptly          changed its  longstanding course of dealing  regarding deliveries          of "short loads."   K.E.M. contends that it faced  an irresoluble          dilemma:   either buy non-Shell gasoline for resale, or cease its          retail operation for  more than seven days,  thereby committing a          separate violation  constituting an independent  ground for fran-          chise termination.  See 15 U.S.C.   2802(c)(9).                                ___                    An appellant challenging a preliminary  injunction must          bear  the  "heavy  burden" of  showing  that  the  district court          committed a mistake  of law  or a manifest  abuse of  discretion.          Gately  v. Commonwealth  of Mass.,  2 F.3d  1221, 1225  (1st Cir.          ______     ______________________          1993), cert.  denied, 114  S. Ct.  1832 (1994); see  28 U.S.C.                    _____  ______                            ___          1292(a)(1).   Due  deference must be  accorded the  ruling below,          since the district court is "steeped in the nuances of a case and          mindful of the  texture and scent of the evidence."  K-Mart Corp.                                                               ____________          v. Oriental Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989).             ____________________                    Under the  PMPA, preliminary injunctive relief  is more          readily available to franchisees than was the case at common law.          See, e.g., Narragansett Indian  Tribe v. Guilbert, 934 F.3d  4, 5          ___  ____  __________________________    ________          (1st Cir. 1991) (describing  four-part, common law standard); but                                                                        ___                                          4          cf.  Nassau Boulevard Shell Serv. Station, Inc. v. Shell Oil Co.,          ___  __________________________________________    _____________          875 F.2d 359,  364 (2d  Cir. 1989) (noting  that PMPA  franchisor                                                                 __________          must  meet  traditional, four-part  test for  preliminary injunc-          tion).   Because  the PMPA  is a remedial  statute, see  infra, a                                                              ___  _____          franchisee  need not demonstrate  a likelihood of  success on the          __________          merits, but  merely that the franchisor  terminated the franchise          and that "there exist sufficiently serious questions going to the                                ____________ _______ _________          merits to make such  questions a fair ground for  litigation." 15                                           ____ ______ ___  __________          U.S.C.   2805(b)(1)(A) (emphasis  added).  See, e.g., Doebereiner                                                     ___  ____  ___________          v. Sohio Oil Co., 880 F.2d 329, 332 (11th Cir. 1989), modified on             _____________                                      ________ __          other grounds, 893  F.2d 1275  (1990); Sun  Ref. &  Mktg. Co.  v.          _____ _______                          ______________________          Rago, 741 F.2d 670, 673 (3d Cir. 1984).1          ____                    Based  on a careful evaluation  of the record below, we          cannot  conclude  that  the  district court  either  committed  a          mistake of law or  abused its discretion in ruling  that K.E.M.'s          proposed defenses were "sufficiently serious" to constitute "fair          ground[s] for  litigation."  Contrary to  Shell's contention, the          question whether the PMPA  admits of "equitable" exceptions which          would excuse a franchisee's noncompliance with state  environmen-          tal regulations or its gasoline  misbranding are matters of first          impression in this circuit,  upon which we express no  opinion at                                        ____________________               1PMPA   2805(b)(2)(B) does require  the court to balance the          relative hardships to the parties in granting or denying prelimi-          nary  injunctive relief.  Shell does not challenge this aspect of          the district court ruling.  See Shell Oil Co., No.  95-001B, slip                                      ___ _____________          op. at 15 (D.R.I. Feb. 16, 1995).                                           5          this juncture.2                      Proper  resolution of  these  important  matters     if          necessary    requires a more thorough exposition of the course of          dealing between  the  parties during  their  nine-year  franchise          relationship.   For  example,  section 2805(c)(11)  proscribes  a          franchisee's "knowing failure" to comply with state law.  Section                                _______          2801(13),  however,   defines "failure"  to exclude  "any failure                                                      _______          which is only technical or unimportant to the franchise relation-                        _________          ship."   15 U.S.C.    2801(13)(A).  Although  Shell contends that          K.E.M.'s violation  was not  "technical," it adduced  no evidence          that  it had  ever threatened  to terminate  or terminated  other          franchisees for comparable regulatory noncompliance, nor that the          State  of Rhode Island had ever cited  or fined a service station          owner for these types of violations. See S. Rep. No. 95-731, 95th                                               ___          Cong.,  2d Sess.  15,  reprinted in  1978  U.S.C.C.A.N. 873,  874                                 _________ __          (noting that Congress designed the PMPA  with the general purpose                                        ____________________               2Our decision in Desfosses v. Wallace Energy, Inc., 836 F.2d                                _________    ____________________          22 (1st  Cir. 1987), deals with PMPA   2802(c)(4), and not with            2802(c)(10) or (11).  Although we there referred in general terms          to  the "conclusive  presumption  of  reasonableness" theory  set          forth in Russo, supra,  Desfosses had not defended on  the ground                   _____  _____                 ___          that  the franchisor had based its termination or nonrenewal on a          purely "technical"  violation of state  law, nor  that the  fran-          chisor's  own conduct  had coerced  Desfosses into  violating the          PMPA.  Indeed,   2802(c)(4) does not pertain to violative acts of                                                                         __          the  franchisee, but  to  acts entirely  within the  franchisor's          ___  __________                          ______ ___  ____________          control.  15 U.S.C.    2802(c)(4)  (providing for  termination or          _______          nonrenewal upon  the "loss  of  the franchisor's  right to  grant          possession of the leased marketing premises through expiration of          an underlying  lease, if  . .  . the  franchisee was  notified in                                                                ________          writing,  prior to  the  commencement of  the  term of  the  then          existing franchise . . . of the duration of the  underlying lease          . . . .").  Desfosses simply claimed that Wallace had not provid-          ed him with the requisite notice.  Desfosses, 836 F.2d at 26.                                    ______   _________                                          6          to protect "franchisees from  arbitrary and discriminatory termi-                                        _________          nations or  non-renewals of their franchises")  (emphasis added).          At this juncture, we conclude that K.E.M.'s alleged lapses are at          least arguably de  minimis.   Since K.E.M. does  possess the  raw                         __  _______                                    ___          gasoline  inventory data    in  written form     with which State          ________  _________ ____          auditors could  test its daily inventory  reconciliations, we can          discern no manifest  abuse of  discretion in  the district  court          ruling  that  the  "technicality"  of this  asserted  ground  for          termination presented  K.E.M. with  a colorable defense,  i.e., a          "fair  ground for litigation."   See Shell Oil  Co., No. 95-001B,                                           ___ ______________          slip op. at 13 (D.R.I. Feb. 16, 1995).                    Similarly, "Congress  enacted PMPA to  avert the detri-          mental effects  on the  nationwide  gasoline distribution  system          caused by  the  unequal bargaining  power  enjoyed by  large  oil          conglomerates  over  their  service-station franchisees."    Four                                                                       ____          Corners Serv. Station, Inc. v. Mobil  Oil Corp., 51 F.3d 306, 310          ___________________________    ________________          (1st  Cir. 1995). See Desfosses v. Wallace Energy, Inc., 836 F.2d                            ___ _________    ____________________          22, 25  (1st Cir.  1987)  (noting that  PMPA  "'must be  given  a          liberal construction  consistent with its  overriding purpose  to          protect franchisees'") (citing  Brach v. Amoco Oil  Co., 677 F.2d                                          _____    ______________          1213, 1221  (7th Cir. 1982)).   It also left "'to  the courts the          task of resorting to traditional principles of equity to maximize          attainment of  the  competing statutory  objectives  consistently          with . . . the purposes of the [PMPA].'"  Shell Oil Co. v. K.E.M.                                                    _____________    ______          Serv., Inc., No. 95-001B, slip  op. at 11 (D.R.I. Feb. 16,  1995)          ___________          (quoting  S. Rep. No.  95-731).  Accordingly,  were discovery and                                          7          trial to disclose that Shell knowingly took inequitable advantage          of K.E.M.'s  precarious market  position and  inferior bargaining          position, the question  whether Congress contemplated "equitable"          exceptions  to section 2802(c)(10)'s "willful misbranding" prohi-          bition would be presented on a fully developed factual record.                     Finally, equitable  relief from section  2802(10) might          be  considered more  appropriate  were K.E.M.  to demonstrate  at          trial that Shell had breached the Agreement first, leaving K.E.M.          with the  Hobson's choice of  buying non-Shell gasoline  or going          out of business. The Agreement expressly provides that Shell  has          no contractual obligation to deliver "short loads" to K.E.M.  See                                                                        ___          Agreement Art. 9.1.   On  the other hand,  Shell abruptly  ceased          providing K.E.M with  "short loads" after  a nine-year course  of                                              _____          dealing.   Course  of  dealing may  be  competent evidence  of  a          subsequent modification of a  written contract.  See, e.g.,  R.I.                                                           ___  ____          Gen. Laws    6A-1-205, 6A-2-202.  Although the Agreement contains          a provision barring nonwritten modifications,  see Agreement Art.                                                         ___          26, the PMPA specifically  provides that franchise agreements may          be written  or oral.  See  15 U.S.C.   2801(10),  2801(1)(A), (B)                      __ ____   ___          (defining "franchise"  as "contract");  see also Royer  v. Royer,                                                  ___ ____ _____     _____          501  A.2d  739, 741  (R.I. 1985)  ("[A]  written contract  may be          modified by subsequent oral agreement of the parties," even where          contract expressly requires written modification only.); J. Koury                                                                   ________          Steel Erectors, Inc. v. San-Vel Concrete Corp., 387 A.2d 694, 697          ____________________    ______________________          (R.I.  1979) (describing  implied-in-fact contracts  arising from          course of dealing).                                            8                    What  is  more  important,  the  PMPA's  definition  of          "contract"  expressly  provides  that,  "[f]or  supply  purposes,          delivery  levels during the same month of the previous year shall          be  prima facie evidence of an agreement to deliver such levels."          15 U.S.C.   2801(10).  If the "short load" delivery levels became          part of  a  modified  Shell-K.E.M.  franchise  contract,  Shell's          abrupt  change of course might  constitute a breach  of the fran-          chise agreement.   Thus  viewed, K.E.M.'s "equitable"  defense to          section  2802(c)(10) might  be considered  at least  "colorable,"          since K.E.M. might make a plausible argument that Congress  could          not have intended  to permit franchisors to  resort to conclusive          presumptions  of  "reasonableness"  under section  2802(c)  where          their own breach of the franchise agreement afforded the means of                                                                   _____          securing a per se right of termination.                      ___ __                    Given  the prominent  equitable mandate  in the  PMPA's          legislative  history, as  well  as the  nebulous and  undeveloped          factual  record,  we  cannot  conclude that  the  district  court          manifestly  abused  its  discretion  in  deciding  that  "serious          questions going  to the  merits  [of Shell's  claim and  K.E.M.'s          defenses  offer] . .  . fair ground  for litigation."   Nor do we          presume  to  determine the  relative  merits,  either of  Shell's          claims or K.E.M.'s defenses.                     The preliminary injunction is  affirmed and the case is                    ___ ___________ __________ __  ________ ___ ___ ____ __          remanded to the district court for further proceedings.          ________ __ ___ ________ _____ ___ _______ ___________                                          9
