Unpublished Disposition, 937 F.2d 611 (9th Cir. 1986)

MEMORANDUM^* 

In this wrongful franchise termination action, franchisor-appellant Union Oil of California ("Union Oil") appeals an $825,987 jury verdict for franchisee-appellee John D'Arcy ("D'Arcy") and Penta Jay Corporation ("Penta Jay"). Presenting several grounds, Union Oil challenges the denial of its motion for judgment notwithstanding the verdict ("JNOV"). Further, Union Oil contends the district court abused its discretion in awarding attorney's fees. Because we affirm, we need not consider most of the issues raised by D'Arcy and Penta Jay in their cross-appeal. On the cross-appeal, however, we hold that the district court clerk erroneously reduced the request of D'Arcy and Penta Jay for expert witness fees in their bill of costs.

On the claim for wrongful termination of franchise under the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801 et seq. (1988), Union Oil appeals the denial of its Fed. R. Civ. P. 50(b) motion for JNOV. Specifically, Union Oil contends (a) the section 2804 notice requirements were properly satisfied; and (b) adequate grounds for termination existed under section 2802.

In viewing the evidence in the light most favorable to D'Arcy and drawing all reasonable inferences in his favor, substantial evidence supports the jury verdict that the five-day notice was unreasonable under the circumstances. See, e.g., Los Angeles Memorial Coliseum Comm'n v. Nat'l Football League, 791 F.2d 1356, 1360 (9th Cir. 1986), cert. denied, 484 U.S. 826 (1987). The evidence did not necessarily establish, as Union Oil argues, that D'Arcy had decided to close the station permanently. The Nursing Progress Reports and the testimony of Richard Hinds indicated D'Arcy was uncertain whether he would return to operate the station after his hospitalization. The jury may have decided that the five-day notice was unreasonable because D'Arcy never received the two notices and, further, Union Oil was aware of D'Arcy's hospitalization when it issued the notices. Finally, since Union Oil was aware of D'Arcy's prospective sale to Hinds and was considering Hinds as a proposed transferee of the franchise, the jury may have concluded five days' notice was also unreasonable under the circumstances.

Viewing the evidence in the light most favorable to D'Arcy, the jury could reasonably have found that the closure resulted from causes beyond the reasonable control of D'Arcy and, furthermore, that Union Oil actually contributed to the closure of the station. See 15 U.S.C. § 2801(13) (B) (defining "failure" under the PMPA). Union Oil had a policy of granting rental waivers where surrounding construction hindered the business of the franchisee. D'Arcy made ongoing requests for a waiver from the prime rental as a result of the construction. Union Oil was aware that the road construction activity and presence of heavy equipment adversely impacted the station business. Further, the completed road construction significantly decreased the traffic flow to the station. Certainly these were causes beyond the reasonable control of D'Arcy. Nonetheless, D'Arcy's requests for relief were denied by Union Oil. In contrast, the subsequent dealer, Richard Hinds, received a lower standard rental and also a 75% rental waiver for three months.

This differential and arbitrary treatment was also reflected in the requirement of a $20,000 cash security deposit to permit D'Arcy to purchase gasoline on credit. Before D'Arcy executed the franchise documents, Union Oil told him he was only required to deposit about $5,000 (as $15,000 would be considered from the prior dealer's reserve account). After D'Arcy executed the franchise documents, Union Oil told him he was required to post the full $20,000 security deposit. D'Arcy could not post the $20,000 security deposit and, consequently, had to purchase his gasoline on a cash-in-advance method, which resulted in cash flow problems for the business. Hinds, the subsequent dealer, was required to post only a $10,000 security deposit for gasoline deliveries. This evidence reasonably established that Union Oil's arbitrary conduct contributed to D'Arcy's business woes and closure.

Finally, there was substantial evidence that Union Oil's conduct significantly contributed to D'Arcy's hospitalization for neurotic depression, another cause beyond D'Arcy's reasonable control. Therefore, based upon the evidence presented at trial, the jury could reasonably have concluded that D'Arcy's failure to operate the station for seven consecutive days, within the meaning of the statute, was for causes beyond his reasonable control.

Union Oil challenges the instruction concerning grounds for termination.¹  Instructions are reviewed as a whole to determine whether they are misleading or state the law incorrectly to the prejudice of the objecting party. See, e.g., Coursen v. A.H. Robins Co., Inc., 764 F.2d 1329, 1337 (9th Cir.), amended, 773 F.2d 1049 (1985).

We find no error. The first sentence of the challenged instruction is derived from the statutory definition of "failure," which, as applied here, explicitly excludes any franchisee failure to operate the station "for a cause beyond the reasonable control of the franchisee." See 15 U.S.C. § 2801(13) (B). The second portion of the disputed instruction merely states that this determination is a question for the trier of fact. Cf. Roberts v. Amoco Oil Co., 740 F.2d 602, 608 (8th Cir. 1984) ("cause" issue presented a question of fact on summary judgment).

Union Oil argues the instruction unfairly allows the jury to find PMPA liable even if neither Union Oil nor D'Arcy was the cause of the station closing. This argument, however, discounts the specific congressional definition of the term "failure." See, e.g., Sun Refining & Marketing Co. v. Rago, 741 F.2d 670, 673 (3d Cir. 1984); Roberts, 740 F.2d at 608. If a franchisor could compel a franchisee to remain open for causes beyond the reasonable control of the franchisee, the careful statutory balance in the franchisor-franchisee relationship, which Congress sought to attain, could be upset.

III. Intentional Interference with Economic Relations

Union Oil also challenges the trial court's denial of its JNOV motion on the intentional interference with economic relations claim.

For the first time on appeal, Union Oil argues that the PMPA preempts state claims relating to termination and therefore D'Arcy's exclusive remedy lies under the PMPA.

Ordinarily, we will not review an argument raised for the first time on appeal unless exceptional circumstances warrant its consideration. See, e.g., Villar v. Crowley Maritime Corp., 782 F.2d 1478, 1483 (9th Cir. 1986). Such exceptional circumstances are not present here. This action proceeded to a jury trial without the preemption issue ever being presented to the district court. At this late juncture, we therefore decline to consider this argument for the first time. To do otherwise could allow Union Oil to sandbag the trial court by preserving a separate basis to challenge any unfavorable jury verdict.

IV. Intentional Infliction of Emotional Distress

Union Oil appeals the denial of its JNOV motion on the intentional infliction of emotional distress claim, contending there was no substantial evidence of outrageous conduct. See, e.g., Miller v. Fairchild Indus., Inc., 797 F.2d 727, 736 (9th Cir. 1986) (noting outrageous conduct element under California law). Union Oil argues no outrageous conduct occurred because it "merely pursued its own economic interests and properly asserted its legal rights." Kruse v. Bank of America, 202 Cal. App. 3d 38, 67, 248 Cal. Rptr. 217, 234 (Cal.Ct.App.1988), cert. denied, 488 U.S. 1043 (1989). Further, Union Oil contends the challenged conduct did not rise to an outrageous level.

In viewing the evidence in the light most favorable to D'Arcy and with all inferences drawn in his favor, as required, we conclude there was substantial evidence that Union Oil arbitrarily and maliciously abused its position of power to damage D'Arcy's interest. The evidence indicated that from the beginning of the franchise relationship, Union Oil expressed an intent to terminate D'Arcy's lease by any means possible. After D'Arcy had executed documents for a trial franchise, but before Union Oil's execution, Union Oil reconsidered awarding the franchise to D'Arcy but was advised by in-house counsel it was obligated to honor the trial relationship. A subsequent note to the Union Oil file indicated it would do its "best not to have the one-year lease renewed!" Before the end of the trial franchise, Union Oil issued a written notice of intent not to renew. The notice of nonrenewal was withdrawn, however, because the trial franchise documents were incorrectly drafted and legal counsel advised against the termination. On another occasion, Union Oil retail representative Matthew Banhagel told D'Arcy that one of his responsibilities was to eliminate D'Arcy as a Union dealer. Banhagel also told D'Arcy he was going to make D'Arcy's life miserable.

In acting under the terms of the franchise agreement, substantial evidence indicated that Union Oil singled out D'Arcy, invoking technical violations of the lease that were generally ignored in the relationship with similarly situated franchisees. For example, Union Oil issued numerous notices of lease defaults to D'Arcy for conditions which had existed during the prior franchisee's lease, but which were never previously cited. Further, San Mateo County Union service stations did not receive notices of lease defaults for similar violations for which D'Arcy's station was cited. Union Oil also refused to modify the $20,000 cash deposit requirement and waive the prime rental rate during D'Arcy's franchise, but gave the subsequent dealer Hinds a $10,000 cash deposit requirement and only charged him the lower standard rental rate and even reduced his rent by 75% for three months. This conduct led to a reasonable inference that Union Oil had set out to harass D'Arcy purposely to cause emotional distress.

The jury may also have found the manner in which Union Oil terminated D'Arcy constituted outrageous conduct. The jury could have found the five-day notice violated the PMPA section 2804 notice requirements. At the time the notice issued, Union Oil was aware D'Arcy had been hospitalized for mental problems. As further evidence of outrageous conduct, prior to termination, Union Oil was aware D'Arcy was attempting to sell the franchise to Hinds. Union Oil telephoned Hinds while he was at dealer school to inform him Union Oil had filed an unlawful detainer action on the station. Thus, Union Oil noted, and Hinds understood, if the unlawful detainer action proceeded, Hinds could not buy the franchise held by D'Arcy and Penta Jay. Union Oil suggested Hinds could enter into a trial franchise. Hinds testified that he preferred an assignment of the franchise held by D'Arcy and Penta Jay. Hinds subsequently received the franchise from Union Oil, thereby denying any compensation to D'Arcy and Penta Jay. Union Oil's unlawful detainer action against D'Arcy was served on December 19, 1986, the Sunday before Christmas.

Union Oil contends the district court improperly awarded $70,000 in attorney's fees to D'Arcy as the prevailing party on the PMPA claim, pursuant to 15 U.S.C. § 2805(d) (1) (C). Review is for an abuse of discretion. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983).

Union Oil does not dispute that D'Arcy is a prevailing party under the PMPA. No challenge is made to the hourly rate or number of hours requested by D'Arcy's counsel. Union Oil argues, however, that no proportional allocation was made in the award to account for the non-PMPA claims.

Union Oil's argument raises an issue concerning the relatedness of the claims and parties. See id. at 435; Thorne v. City of El Segundo, 802 F.2d 1131, 1141 (9th Cir. 1986). The district court did not abuse its discretion in applying the Hensley and Thorne standard here. As the district court found, all the claims were based upon a common core of facts and the evidence tended to overlap.

D'Arcy and Penta Jay contend the clerk of the court erroneously reduced their request for expert witness fees in the amount of $1,322.50 to $30, pursuant to Northern District of California Local Rule 265 & App. A, VI. With their request to tax costs, D'Arcy and Penta Jay explicitly asserted that they were entitled to such fees pursuant to PMPA section 2805(d) (1) (C). Generally, the award of costs is reviewed for an abuse of discretion. Alflex Corp. v. Underwriters Laboratories, Inc., 914 F.2d 175, 176 (9th Cir. 1990).

The court clerk acted in accordance with Local Rule 265. Nonetheless, the Local Rules cannot contravene the federal statute. See Fed. R. Civ. P. 54(d) & 83. Accordingly, we remand the question of expert witness fees to the district court to apply the section 2805(d) (1) (C) standard in the first instance.

Because D'Arcy is a prevailing party on appeal, reasonable attorney's fees are granted pursuant to 15 U.S.C. § 2805(d) (1) (C), said fees to be determined by the district court on remand.

AFFIRMED and REMANDED FOR RE-ADJUDICATION OF COSTS.