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The 5th Circuit issued a decision in August that should make anyone who represents a client who sets prices pursuant to an open price term under the Uniform Commercial Code take notice. In Mathis v. Exxon Corp., 2002 WL 1878706(5th Cir. 2002), the court upheld a jury verdict finding that Exxon had breached its obligation of good faith in setting its wholesale gasoline prices pursuant to an open price term — a price for a sale that has not been settled at the time of a sale’s conclusion — to a group of gasoline station franchisees in Texas. Exxon was ordered to pay damages of more than $5.7 million to its franchisees, and another $2.2 million in attorney fees. In 1999, a group of Houston and Corpus Christi gasoline station franchisees of Exxon filed suit against the company, alleging that Exxon had breached UCC � 2-305(2) by setting the wholesale price at which the dealers purchased gasoline from Exxon so high that the dealers could not compete. The dealers alleged that Exxon was attempting to drive them out of business so it could convert their stations into more lucrative company-operated facilities. Section 2-305 of the UCC, which addresses open price terms, provides in subsection (2) that an open price to be set by a buyer or seller must be set in “good faith.” Section 1-201(19) of the UCC describes good faith as “honesty in fact in the conduct or transaction concerned.” Section 2-103 defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Thus, for merchants, such as Exxon, the UCC clearly requires both objective and subjective good faith in setting a price. However, Comment 3 to � 2-305 provides: “Subsection (2), dealing with the situation where the price is to be fixed by one party, rejects the uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. (� 2-103). But in the normal case a “posted price” or a future seller’s or buyer’s “given price,” “price in effect,” “market price,” or the like satisfies the good faith requirement.”(Emphasis added.) Exxon took the position that it had satisfied its good faith requirement by charging the dealers its wholesale price in effect, which was within the range of the wholesale prices of its competitors, and by not discriminating against the dealers. Exxon noted that the primary purpose of � 2-305(2) was to prohibit price discrimination. The drafters of � 2-305(2) were concerned about avoiding fact intensive determinations of what constitutes a reasonable price. “I think it is of tremendous importance to the industry that this section be so put that it is clear that we do not have to establish that we are fixing reasonable prices, because that gets you into the rate of return of profits, whether you are using borrowed money, and all those questions.” Proceedings of Enlarged Editorial Board of American Law Institute at 168-170 (Jan. 28, 1951) (comments of Bernard Broeker, Committee Member). In Mathis,the 5th Circuit rejected Exxon’s argument that it had shown its good faith by charging its dealers a non-discriminatory posted price within the range of its competitors, and concluded that Comment 3 was not designed to supplant the subjective duty of good faith when a posted price was employed. The court further concluded that: “Although price discrimination was the type of aberrant case on the minds of the drafters, price discrimination is merely a subset of what constitutes such an aberrant case. Any lack of subjective, honesty-in-fact good faith is abnormal; price discrimination is only the most obvious way a price-setter acts in bad faith — by treating similarly-situated buyers differently.” With its ruling, the 5th Circuit permitted the Exxon dealers to engage in precisely the type of fact intensive analysis of Exxon’s wholesale prices that the drafters of the UCC had sought to avoid. After rejecting Exxon’s proposed interpretation of Comment 3, the 5th Circuit went on to uphold the jury’s decision that Exxon had acted in bad faith. JURY INFERS BAD FAITH The franchisees submitted no direct evidence that Exxon was setting its prices in bad faith in order to force its franchisees out of business. Instead, the jury apparently inferred that Exxon had set its price in bad faith from the following: That the dealers are “captive buyers” forced to buy all Exxon-branded gasoline directly from Exxon at its “dealer tank wagon” price. But the fact that the dealers are captive buyers — after voluntarily entering into a franchise relationship — does not take this set of facts out of the normal case within the meaning of Comment 3. Wayman v. Amoco Oil Co., 923 F.Supp. 1322, 1349 (D. Kan 1996), affirmed 145 F.3d 1347 (10th Cir. 1998). That Exxon company-operated retail stores on occasion sold gasoline to the public at a lower price than the price to dealers. But that fact is irrelevant. In Havird Oil Co. v. Marathon Oil Co., 149 F.3d 283 (4th Cir. 1998), the court concluded, “While it is true that some of Havird’s competitors [including a subsidiary of Marathon] were selling gasoline at retail for less than Havird could obtain gasoline at wholesale, this does not constitute a breach of contract on the part of Marathon.” That 75 percent of the dealers’ competitors in the Houston area could purchase gasoline at a lower price. But the fact the some (but not all) of the dealer’s competitors could obtain gasoline at a lower price merely demonstrates that Exxon’s prices to dealers were within the range of its competitors. Bad faith requires more than proof that Exxon’s price was above the market price. White & Summers, Uniform Commercial Code � 3-8 n.19 (4th ed. 1995). That a number of the dealers were “unprofitable” or “non-competitive.” But other courts have rejected the notion that the duty of good faith includes a duty to ensure that dealers are competitive or profitable. Ajir v. Exxon Corp., 185 F.3d 865 (9th Cir. 1999)(Table). See also Harvey v. Fearless Farris Wholesale Inc., 589 F.2d 451, 461 (9th Cir. 1979). But see E.S. Bill, Inc., v. Tzucanow, 38 Cal.3d 824 (1985) (trial court erred in excluding evidence in support of theory that franchisor “was required to charge prices that would enable defendants to compete with other stations in the area and earn a reasonable profit”). That Exxon planned over several years to reduce the number of franchisee operated facilities and increase the number of company-operated facilities. But the dealers failed to present any direct evidence that Exxon was manipulating its prices to achieve this goal. See Meyer v. Amerada Hess, 541 F.Supp. 321 (D.N.J. 1982) (evidence that franchisor was decreasing the number of dealer-operated franchises and had increased dealer rent not sufficient to establish franchisor was using rent to drive dealers out of business). The Mathiscourt let stand a jury verdict against Exxon based upon cobbled together evidence that individually has been held not to establish evidence of bad faith. With its ruling, the court called into doubt the legitimacy of a marketing system employed for decades by most major petroleum companies, and increased the likelihood that anyone who employs open price terms will find them subject to judicial scrutiny. While Mathisis binding precedent only in the 5th Circuit, practitioners nationwide should be prepared to confront similar arguments by dealers or franchisees in arguing for lower prices in their open price term contracts. Jamie Peterson is an associate at Steinhart & Falconer ( www.steinhart.com )  who practices commercial, environmental, insurance, intellectual property and antitrust litigation.

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