Tuesday, October 2, 2012

To Be or Not to Be . . . A Franchisee (An unconventional pop-culture tragedy)

Evans Group, Inc. v. Foti and Foti Fuels, Inc., 2012 VT 77

[Act 1-Prologue]

To be, or not to be, a Franchisee, that is the question: Whether sub-distributor twas authorized to use refiner’s trademark in the pursuit of outrageous fortune, or to simply carry fuel across the Green Mountains until the Distributor said “no more.”  Ay, tis when the heart-ache began.  That franchise, though devoutly wished, twas perhaps just a dream, or, in the King’s Court, an Oppressor’s wrong, and that is what must give us pause.

The scene is fair Vermont.  Two wholesale fuel distributors, both with well-established reputations and long-standing customers, penned a lucrative distributing agreement on the back of a napkin.  The proposed deal went a little something like this: Appellee/distributor would sell fuel to Appellant/sub-distributor at a slight mark-up, which would then be re-sold to sub-distributor’s customer. 

Distributor had a pre-existing relationship with a major oil refiner.  Sub-distributor (also known in this instance as the middle-man), had a pre-existing relationship with a convenience store that sold gasoline at its pumps.  Sub-distributor’s convenience store customer agreed to change its sign to refiner’s brand name to reflect that it was buying gasoline exclusively from distributor’s refiner.  The parties’ napkin agreement provided that sub-distributor would pick up fuel directly from the refinery and deliver it to the convenience store.  Sub-distributor charged the fuel it picked up from the refinery to distributor’s charge account, but then reimbursed distributor.  Distributor directly received the credit card payments for the fuel that was purchased at the pump, but subsequently credited them to sub-distributor, who then credited the convenience store.  The convenience store paid over cash payments for the fuel that was purchased to sub-distributor, who then credited distributor.   Phew!

[Quick intermission]

Let’s take a moment here.  After all, this is an Elizabethan tragedy, which can sometimes be difficult to understand.  Perhaps a 1970’s commercial can provide a Cliff Notes© version of events.  Basically, the two principals from each corporation ran into each other one day and the distributor exclaimed “hey, you put your chocolate in my peanut butter.” The sub-distributor replied “you put your peanut butter on my chocolate.” Sound familiar?  Except here, the collision and resulting concoction occurred by choice, rather than happenstance.  Even so, much like America’s favorite peanut butter cup, it really didn’t matter who put what where; the combination of the two was better than each ingredient solo.  In dollars and cents, the arrangement resulted in a payment to distributor by sub-distributor of $10,000 to $35,000 every ten days or so.  That’s a lot of peanut butter cups!!!!

But alas, as tis often the case with these types of formal napkin contracts, the deal went south.  Actually, in this case, it was one of the original contracting parties that literally went south—or southwest, to be more precise—and like all good tragedies, the protagonist fell from prosperity to misery.  

            [Act II, Scene I- The Jobbers Unite]

Roughly six years passed without incident.  The two distributors were as happy as they could be, but as blissful (and profitable) as it all seemed to be, there was darkness looming. 

[Enter second owner of sub-distributor]

About six years into the relationship with distributor, sub-distributor sold its affiliated trucking company to one of its employees.  At the same time, the employee assumed management of sub-distributor’s wholesale fuel business.  Sub-distributor’s original principal then retired to Arizona.

Initially, the management agreement between the original principal and employee, much like the relationship between sub-distributor and distributor, was uneventful.  About four years into the arrangement, however, the retired principal and employee had a disagreement.

[Enter Donald Trump playing himself].  

You know what’s coming, right?  Of course, sub-distributor fired its apprentice and resumed the management of the fuel company.

[Exeunt Donald Trump and second owner].

[Scene II- Arizona, A Different Time Zone]

Not long after sub-distributor’s retired principal came out of retirement, sub-distributor’s once-happy relationship with distributor soured.  Sub-distributor failed to make timely payments to distributor.  Remember all those peanut butter cups?  Well, when you are used to getting 10,000 to 35,000 peanut butter cups every ten days or so, you notice when the supply stops. 

Sub-distributor’s relationship with its own long-standing customer, the convenience store, also deteriorated.  It appears that the once-dependable principal, still living in Arizona and no doubt, well-sunned, was not able to effectively run the company from out of state.  In one incident (and there were others), sub-distributor’s lackadaisical management caused the convenience store to run out of fuel for a portion of the day.

[Re-enter Donald Trump]. 

Dissatisfied, the convenience store began buying its fuel directly from the distributor.

[Exeunt Donald Trump].

Shortly thereafter, distributor notified sub-distributor that it was terminating the napkin agreement.  Of course, more than ten years later, the napkin was nowhere to be found.

[Enter Jim Nabors as Gomer Pyle].  

Well, “sur-prise, sur-prise, sur-prise.”

[Exeunt stage left Gomer Pyle]

Distributor also informed sub-distributor that it owed distributor $68,864 for fuel that was charged to distributor’s account, but never reimbursed.  When sub-distributor failed to pay the outstanding balance, in either peanut butter cups or cash, distributor sued and sub-distributor counter-claimed, alleging that distributor was prohibited by the federal Petroleum Marketing Practices Act (“PMPA”) from unilaterally terminating the parties’ napkin agreement.

[Scene III- Trials and Tribulations]

At trial, sub-distributor claimed that it held a franchise, as that term was defined by the PMPA and, therefore, was entitled to the PMPA’s franchise protections.  Sub-distributor’s argument rested on two seemingly related grounds.  First, sub-distributor claimed that it had a contract to supply fuel for resale under a refiner’s trademark.  Second, sub-distributor claimed that the napkin agreement fell within the statute’s franchise protection because the statute defines “franchise” to include any contract between two distributors in which one distributor—authorized by the refiner that supplies its fuel—permits another distributor to use the refiner’s trademark in connection with the re-sale of fuel.  Thus, according to sub-distributor, it was a franchisee authorized to use refiner’s trademark and, under the PMPA, distributor was required to provide sub-distributor both with a statutory basis for its termination and at least 90 days prior notice, neither of which was done.

[Re-enter Gomer Pyle]. 

Shame, shame, shame!

[Exeunt Gomer Pyle].

The trial court was not persuaded.  It decisively found that sub-distributor’s tanker trucks had never displayed the refiner’s trademark and, ultimately, concluded that neither sub-distributor’s wholesale fuel business nor its affiliated tanker company was ever authorized to use the refiner’s trademark.  Consequently, the trial court rejected sub-distributor’s claim that it was entitled to the statute’s franchise protections, and, alas, ruled that sub-distributor’s franchise twas not to be.

[Act III- Fortinbras Arrives and the Rule of Law Reigns Supreme]

On appeal, sub-distributor argues that the trial court erred by focusing solely on its use of the refiner’s trademark, or, more specifically, its lack of use.  It claims, instead, that the relevant inquiry under the PMPA is whether a franchisee is authorized to use the trademark, not whether it actually does.  According to sub-distributor, it was authorized to use refiner’s trademark by virtue of the fact that it exclusively sold refiner’s fuel to its customer.  As such, it is a franchisee under the PMPA, and distributor’s unilateral termination of the parties’ agreement violates the statute.

Unfortunately for sub-distributor, the SCOV (i.e., Fortinbras) agrees with the trial court that sub-distributor’s franchise tis not to be and disposes of its argument rather summarily. Initially, the SCOV sets forth the statutory definition of “franchisee,” and notes that the statute contemplates a typical “refiner to distributor to retailer” authorization chain.  Whether PMPA also covers a sub-distributor—as in the instant case—is not a question that the SCOV addresses. 

Instead, the SCOV dismisses sub-distributor’s claim almost out-of-hand.  The SCOV points out that, under PMPA, sub-distributor must affirmatively establish that it is a franchisee. Here, however, sub-distributor fails to cite persuasive authority for its claim that merely re-selling refiner’s fuel to its customer, operating under the refiner’s brand, demonstrates that it was a franchisee with authority over refiner’s trademark.  More damning, the trial court expressly rejected this claim, and since the SCOV concludes that the trial court’s findings are supported by the record, the SCOV will not reweigh the evidence.

In essence, while sub-distributor’s testimony does accurately reflect its version of events, the SCOV simply cannot conclude that the trial court’s findings are wholly unsupported by the evidence, and therefore, decides that sub-distributor’s franchise simply tis not to be.  It is, thus, not entitled to PMPA’s protections.  

[The stage goes dark and a single light shines down stage, front and center. Re-enter Gomer Pyle, looking disheveled and somewhat depressed].


[Exeunt stage right Gomer Pyle]. 

Well, at least that’s what Justice Robinson thinks!

[Curtain Call- I Want My Money Back]

Despite the majority’s rather terse dismissal of sub-distributor’s claim, Justice Robinson writes a lengthy dissent.  According to the dissent, the only reasonable conclusion, based on the record, is that sub-distributor tis a franchisee.

The dissent points out that prior to distributor taking over the supply of fuel to sub-distributor’s customer, distributor had no direct contact with the convenience store.  Since a franchise, under PMPA, must involve a direct contract between parties, distributor cannot be a franchisor under the statute.  Thus, unless the convenience store was simply acting as a retail outlet for the refiner without authority to do so—a suggestion the dissent raises, but not the parties—its authority has to be conferred by someone.  Moreover, any authority to act has to come from a direct contract with a party who can permit the convenience store’s use of the refiner’s trademark.

Here, it is undisputed that distributor never had any direct contact or contract with sub-distributor’s customers prior to distributor’s unilateral termination of the napkin agreement.  As such, while the dissent concedes that the convenience store’s authority to use the refiner’s trademark must originate from distributor, it cannot overlook the unequivocal evidence that the only way to confer that same authority is directly through sub-distributor to its customer. Otherwise, there is a gap in the authorization chain that cannot be overcome (refiner to distributor to ________  to retailer).

In addition, the dissent notes that the majority’s focus, like the trial court’s, on the fact that sub-distributor did not transport refiner’s fuel in trucks bearing refiner’s trademark, is misplaced.  Instead, the dissent finds that sub-distributor’s role in the supply chain has to be much more than simply hauling fuel.  To illustrate, the dissent reiterates that the only party who could possibly confer authority to use refiner’s trademark on the convenience store is sub-distributor vis-à-vis the parties’ napkin agreement.

Since there is no credible evidence to support the trial court’s conclusion that sub-distributor was not a franchisee, the dissent would reverse the trial court’s judgment and remand the case for further proceedings.


Ay, let us haste to replay it, and call to the noblest of audiences. For sub-distributor, it is a departure of sorrow. For distributor, it is a vantage claimed and a fortune of peanut butter cups.

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