Case Report – November 2021

BP Prods. N. Am. Inc. v. Grand Petroleum, Inc. et al. 2021 U.S. Dist. LEXIS 198440, 4:20-cv-0901-YGR (N.D. Cal. Oct. 14, 2021)

The District Court denied in part and granted in part cross-motions for summary judgment. This case note focuses on claims and defense each side raised under the California Franchise Investment Law (“CFIL”).

Procedural Background

The action arises out of the termination of franchise agreements at two gas stations located in Los Altos and Oakland, California. Plaintiff BP Products of North America, Inc., as franchisor (“BP”), and defendant Grand Petroleum Inc., as franchisee (“Grand”), entered into two franchise agreements each for two gas stations – the ampm Mini-Market Agreement, pertaining to the convenience store, and the Contract Dealer Gasoline Agreement (the “Gasoline Agreement”), which agreements collectively are referred to herein as the “Franchise Agreements.”

Subsequent to executing the Franchise Agreements, BP announced a voluntary opt-in program to upgrade existing ARCO trademarks and graphics known as the “Luminate Program.” At some point, participation in the Luminate Program became mandatory.

BP also rolled out a program to spruce up the appearance of the convenience stores called the “MOJO A Program.” Like the Luminate Program, the MOJO A Program at first was voluntary and then became mandatory.

BP terminated Grand’s Franchise Agreements for failure to comply with the Luminate and MOJO A Programs (the “Programs”). Litigation ensued. The court’s ruling on the cross- motions for summary judgment primarily analyzed compliance with the Petroleum Marketing Practices Act and the California Franchise Investment Law (“CFIL”). This case note will only focus on the CFIL portion of the decision.

Analysis

The Court denied as premature Grand’s motion to find that the Programs were material modifications of the Franchise Agreements for which disclosures were not provided as required under the CFIL.

BP was exempt under Corporations Code section 31101 from providing a full FDD for the Gasoline Agreements, but still had to make certain disclosures pursuant to Section 31101(c), which BP did in a document entitled “BP West Coast Products LLC Information Disclosure Pursuant to California Code Section 31101” (“Information Disclosure”).

Section 31101(c) requires, among other things, (1) a statement describing any payments or fees other than franchisee fees that the franchisee is required to pay, and (2) a statement as to whether the franchisee is required, by the terms of the franchise agreement, to purchase goods or services from the franchisor or its designee. (Corps Code § 31101(c)(1)(G) and (I).)

In addition, under Section 31101(c)(2), in the case of a material modification of an existing franchise agreement, the franchisor must disclose “in writing to each franchisee information concerning the specific sections of the franchise agreement proposed to be modified and such additional information as may be required by rule or order of the commissioner.”

Grand argued that the Luminate and MOJO A Programs required franchisees to pay fees and purchase goods and services that violated the express terms of the Information Disclosure and constituted material modifications of the Franchise Agreements for which BP had failed to make the appropriate disclosures in compliance with Section 31101(c)(2) prior to seeking to enforce these material modifications. The court found that a dispute existed as to whether the Programs constituted a material modification of the Franchise Agreements.

BP’s Information Disclosure provided to Grand included the following language:

Franchisee is not required by agreement or by other device or practices to purchase from Franchisor or a designee of Franchisor any services, supplies, products, fixtures or other goods relating to establishment or operation of the franchise business, except for ARCO branded motor vehicle fuels and other ARCO branded petroleum products in accordance with the attached agreements. From time to time, Franchisor may offer Franchisee other services, supplies, products, fixtures or other goods relating to the operation of the franchise business, including, but not limited to, point-of-sale equipment and advertising material, which Franchisee may, but is not, required to purchase from BPWCP or a designee of BPWCP. However, Franchisee may be required to have certain equipment that meets certain specifications, including POS and method of payment equipment, telecommunications equipment, video surveillance equipment, as set forth in the attached agreements. Such equipment may only be available from the manufacturer or may be available to lease from BPWCP.

The court noted that the parties disputed the meaning of this key language, with Grand focusing on the bold language and BP on the underlined language.

Ultimately, the court concluded that “[g]iven the dispute, lack of legal briefing on contract interpretation, and the scant record presented, the Court cannot find as a matter of law that that the programs were either permitted by the franchise agreement or unlawful material modifications. Accordingly, the parties’ motions concerning the CFIL claims and defenses are DENIED.”

In their motion papers, BP had argued that the Information Disclosure is not the same as the Franchise Agreements, and that if any contradictions existed between the two, the Franchise Agreements would control. Grand contended that failure to comply with the terms of the Information Disclosure constituted (among other things) a breach of the Franchise Agreements. While not directly addressing this issue, the court did focus on the language from the Information Disclosure in concluding that genuine disputes of material fact existed, and thus the court appeared to be leaning towards Grand’s view of the interplay between the CFIL and contract law.

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in business disputes.