The Franchise Memorandum

The United States District Court for the Northern District of California recently denied a gas station franchisee’s motion for preliminary injunction against a franchisor in a dispute under the Petroleum Marketing Practices Act. Houtan Petroleum, Inc. v. ConocoPhillips Company, U.S. Dist. LEXIS 86869 (N.D. Cal. Nov. 16, 2007).

Houtan had operated a Union 76 gas station as a Conoco franchisee at the same location for 10 years. While Conoco owned the structures, equipment and improvements at the station, it did not own the station property but instead leased it from a third-party. When Houtan and Conoco renewed their franchise agreement, Conoco’s station lease with the third party was set to expire two months thereafter unless Conoco was able to renew the lease. When Conoco was unable to do so, it terminated the franchise agreement.  Shortly after Conoco terminated the franchise agreement, Houtan entered into a lease for the station with the same third party and demanded that Conoco sell Houtan its equipment and improvements on the station property. Houtan rejected Conoco’s offer price, and Conoco attempted to remove its equipment and improvements from the station. Houtan subsequently sued Conoco alleging that Conoco had violated the PMPA in three respects: (1) terminating the franchise agreement without good faith or in the normal course of business; (2) failing to give 90 days notice before terminating the franchise; and (3) failing to make a bona fide offer to sell the equipment and improvements of the station to the franchisee. Houtan also moved to enjoin Conoco from taking any further action to interfere with Houtan’s immediate assumption of control of the station.

The district court denied Houtan’s motion, holding that the parties’ disagreement as to the value of the equipment and improvements was not grounds for a preliminary injunction but was a factual dispute to be resolved by the trier of fact. Moreover, the court found that under the preliminary injunction standard described in the PMPA, there were not sufficiently serious questions going to the merits of Houtan’s claims for wrongful termination to warrant granting a preliminary injunction. Specifically, the court found that Houtan and Conoco renewed their franchise agreement with the express understanding that it would be terminated if Conoco was unable to renew the station lease, and Houtan was on notice of this fact well in advance of the 90-day notice required by the PMPA.