Mathis v. Exxon Corporation
302 F.3d 448, 48 U.C.C. Rep. Serv. 2d (West) 1, 59 Fed. R. Serv. 3d 1178 (2002)
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Rule of Law:
Under UCC § 2.305, a merchant's duty to set an open price term in 'good faith' requires both objective commercial reasonableness and subjective honesty in fact. A price may violate this duty if set with the subjective bad faith intent to drive the other party out of business, even if the price is objectively comparable to competitors' prices.
Facts:
- Numerous franchisees, including James Mathis, operated Exxon-branded gas stations under franchise agreements with Exxon Corporation.
- The agreements contained an open price term, requiring franchisees to buy Exxon gasoline at 'EXXON’s price in effect at the time of the loading of the delivery vehicle,' also known as the dealer tank wagon (DTW) price.
- In 1994, Exxon prohibited its franchisees from purchasing gasoline from third-party distributors, known as jobbers, who often sold at a lower 'rack price.'
- The DTW price Exxon charged its franchisees was consistently higher than the rack price plus transportation costs available to competitors.
- Internal Exxon documents revealed a corporate strategy to reduce the number of franchisee-operated stations and replace them with more profitable company-owned retail stores (CORS).
- For example, one plan detailed reducing dealer stations in Houston from 95 to 45 while increasing CORS from 83 to 150.
- As a result of the pricing structure, many plaintiff franchisees were unprofitable and were forced to sell gasoline for less than the DTW price they paid to Exxon.
Procedural Posture:
- Fifty-four franchisees, led by James Mathis, sued Exxon Corporation in the U.S. District Court for the Southern District of Texas.
- The initial lawsuit included federal antitrust and Petroleum Marketing Practices Act (PMPA) claims, along with a supplemental state-law breach of contract claim.
- The plaintiffs abandoned their antitrust claims, and the district court granted a judgment as a matter of law for Exxon on the PMPA claims.
- The case proceeded to a jury trial solely on the Texas breach of contract action.
- The jury found in favor of the franchisees and awarded them $5,723,657 in damages.
- The district court denied Exxon's motion for judgment as a matter of law on the contract claim.
- Exxon, as appellant, appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit, with the franchisees as appellees.
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Issue:
Does a merchant violate the good faith requirement of UCC § 2.305 when setting an open price term if, despite the price being within the range of competitors' prices, it is set with the subjective intent to drive the other contracting party out of business?
Opinions:
Majority - Judge Smith
Yes, a merchant violates the good faith requirement if a price is set with the subjective intent to drive the other party out of business. The UCC's good faith standard for merchants consists of two parts: objective commercial reasonableness and subjective 'honesty in fact.' Comment 3 to § 2.305 provides a safe harbor, stating that in a 'normal case,' a 'price in effect' satisfies the good faith requirement. However, a case is not 'normal' if there is evidence of a lack of subjective good faith, such as a predatory motive. The franchisees produced sufficient evidence—including Exxon’s internal documents showing a plan to eliminate franchises in favor of company-owned stores and a pricing structure that made it impossible for franchisees to compete—for a jury to reasonably infer that Exxon set its DTW price with the bad faith intent to drive them out of business. This evidence of improper motive removes the case from the 'normal case' safe harbor and supports the jury's finding of a breach of contract.
Analysis:
This decision clarifies that the 'good faith' obligation for merchants setting open prices under the UCC is not merely a test of objective market comparability. It establishes that a party's subjective motive is a crucial element of the analysis, preventing dominant parties from using facially reasonable pricing as a tool for predatory conduct. The ruling provides a significant protection for franchisees and other dependent parties by allowing them to challenge pricing schemes that, while perhaps defensible on paper, are implemented with the intent to undermine their business. Future litigation in this area will likely focus on the type and amount of evidence required to prove such a subjective bad faith intent and take a case outside the 'normal case' safe harbor.
