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Jobber Bill Memo

Jobber Bill Memo

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07/12/2011

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Committee on Government Operations & the Environment (Chairperson Cheh, Council members Catania, Mike Brown, Thomas and Wells) Chairman Kwame Brown and Councilmembers Evans, Graham, Barry, Orange, Bowser and Alexander John Ray July 9,2011 File No.: 43858-031

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Subject:

Bill 19-299 ("Retail Service Station Amendment Act of 2011") Committee Print

Summary
It is my understanding that Bill 19-299 ("Retail Service Station Amendment Act of 2011") is scheduled for mark-up before the Committee on Government Operations & Environment on July II!h at 10:00 AM. As original introduced, Bill 19-299 was to amend the District's divorcement law to include "jobbers". The Measure has been expanded to include giving "franchisees" a "right of first refusal" when a jobber decides to sell his property and to allow franchisees to purchase motor fuel products from any person not a party to the marketing agreement.

Divorcement Law
It is important to note that should the word "jobber" be inserted into the District divorcement law the District will become the only jurisdiction in the Country with such a law. If such a simple action would save consumers money at the pump and would ensure more and better competition, every state, county, city and village in America would already have enacted a similar measure. The inclusion of jobbers in the divorcement law will not save purchasers of gasoline in the District one penny at the gas pump. It will prevent jobber-operated stations from competing with dealer-operated stations, which is its primary purpose and which gave this measure its birth. I will discuss this in greater details below under Section I. The inclusion of jobbers in the divorcement law will have an injurious impact upon the jobbers' operations and financial status, with no benefits to the public. This act would also force jobber-operated stations to convert to dealer-operated station and it would increase gasoline prices in the District as shown in Attachment A.

Manatt, Phelps & Phillips, LLP 700 12th Street, NW., Suite 1100, Washington, District of Columbia 20005 Telephone: 202.585.6500 Fax: 202.585.6600

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Chairperson Cheh, Councilrnembers Catania, Mike Brown, Thomas and Wells July 9, 2011 Right of First Refusal This provision of Bi1119-299 is unnecessary because federal law already addresses the the issue and provides franchisees with the "right of first refusal" in the situations that, at first blush, the Committee states that it wants to protect. On page 11 and Section B ("Right of First Refusal") of the Draft Committee's Report, the Committee states that "The right of first refusal allows franchisees the opportunity to purchase the franchisor's interest in a station if the franchisor seeks to sell, assign, transfer its interest to third party". (Emphasis added) This limited protection for a franchisee seems to be supported by Section (c) of the proposed bill and found on Page 6. However, the Committee's language in other parts of the Draft Committee Report suggests that the intent of Bill 19-299 is to reach much further. On page 12 of the Draft Committee Report, it states that "Capitol Petroleum has already converted and sold one station on Capitol Hill, which is now the site of condominiums. Mr. Mamo's company has reportedly obtained permits to convert another as well. Protecting the viability of independently operated, neighborhood services stations is a well-established goal of RSS, which the reinstitution of a right of first refusal would help to accomplish".' The Draft Committee Report continues, referencing one of its so-call ed-experts (Robert W. Doyle), and states "[h]e noted that Capitol Petroleum had already sold one station on Capitol Hill and had obtained permits to sell another. He then said that he supported adding a right of first refusal to the legislation to prevent jobbers from sel1ing stations without giving operators the right to buy it ....". If the legislative intent of Bill 19-299 is to stop jobbers from turning their properties into condominiums, retail facilities or office buildings or no use at all, it clearly runs afoul of the Petroleum Marketing Practices Act, 15 U.S.c. § 2801, et seq (,'PMPA") regarding franchise protection. The PMPA, which preempts all state law in the area, permits jobbers and other franchisors to sell service station properties, change their use, or materially alter or add to them, provided the dealer is given a right of first refusal. The PMPA carefully balances the interests of franchisors and franchisees with respect to service station sales and changes of use, a balance that would be altered if D.C. enacted a new law providing new terms and conditions for the application of such rights of first refusal. In short, the law proposed by the Council is unnecessary and disruptive of existing law. The Draft Committee Report states on Page 12 that "Bill 19-299 would clarify that existing law prohibits marketing agreements that preclude the purchase of fuel from any person or entity who is not a party to the marketing agreement". And, in the Section-By-SectionAnalysis of Bill 19-299, on Page 14 of the Draft Committee Report, it states that "Subsection (c) clarifies the meaning of D.C. Code § 36-303.01 (a)(6) to include franchise agreement and branded fuel". On Page 13 of the Draft Committee Report, the legislative intent is further clarified where it is stated that "[a] jobber and station operators indicated that their marketing agreements precluded the purchase of fuel from anyone but that jobber. Consequently, the
1 It is interesting and noteworthy that the gasoline station that Capitol Petroleum Group once owned at 1024 Pennsylvania Avenue, SE was closed down and turned into condominiums (The Butterfield) because the nearby Capitol Hill Residents did not want a gasoline station on the site.

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Chairperson Cheh, Councilmembers Catania, Mike Brown, Thomas and Wells July 9,2011 Committee finds that clarifying language is necessary to underscore the original meaning and purpose of the statue". In the main, franchisors prohibit franchisees from using the underground tanks and all associated equipment to store or dispense products not purchased from the franchisor. Thus, it is not practical for a franchisee to purchase and dispense motor fuel products purchase from another entity. On the other hand, if the intent of Bill 19-299 is to force franchisors to allow franchisees to purchase from another entity even though all property associated with the operation of storing and dispensing motor fuel products is owned by the franchisor, and he is also liable for any environmental hazards resulting from the same, this provision of Bill 19-299 is unconstitutional on its face as a taking of property without just compensation. Consider this fact, Capitol Petroleum Group recently purchased a site at Maryland Avenue and H Street, NE. It incurred considerable legal fees to obtain permits and BZA approval to build the gas station with strong community and political opposition and the cost of building a 21 st century gas stations. Under Chairperson Cheh and the Committee clarification of the law, as soon as Capitol Petroleum Group signed a marketing agreement with a franchisee, he could go and buy motor fuel products from any branded supplier, totally ignoring the millions of dollars that Capitol Petroleum Group has invested in the gas station, and its continued responsibility and liability for any environmental hazards resulting from the storing and dispensing of motor fuel products from the gas station. A law that attempts to legalize such a taking of an individual's property cannot pass legal or constitutional scrutiny. Moreover, the City Council can expect to hear from franchisors in other industries because other franchisees will want the same rights, which would allow a McDonald franchisee to buy its prepared potato chips, burgers, fish and chicken nuggets from whomever he or she chooses. And, the same is true of franchises of Wendy's, Kentucky Fried Chicken, Starbucks and many other franchisors. This broad and expanded clarification of the District's marketing agreement law will be disastrous for the District's economic development plans. 1. Bill 19-299 and Draft Committee Report

The Draft Committee Report states on Page 9: "In contrast to 2007, the weight of the expert testimony supports the passage of jobber divorcement". I question the credentials of all of the so-called experts. They did not submit any studies, any reports or anything that would qualify them as experts on the issue presented by Bill 19-299, as originally proposed, and the issues raised by Chairperson Cheh in her questions during the hearing and the issues presented in the District's Attorney General's support letter for Bill 19-299. I believe a close review of the Hearing will reveal that these so-called experts avoided answering about as many questions as they answered. In 2007, the Draft Committee Report notes that the FTC (a true expert in this area) recommended against including jobbers in divorcement legislation. The FTC's views on BiI119-299 are lacking. Why? Why were the FTC's comments not sought on Bill 19-299 as they were on Bill 17-142 in 2007? I doubt the FTC was asked because the Committee wants to stick

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Chairperson Cheh, Councilmembers Catania, Mike Brown, Thomas and Wells July 9,2011 with its so-cal1ed experts to present testimony that will help to push a poorly conceived legislative measure forward. The Draft Committee Report presents a one-sided view of the Hearing. It ignores the testimony and the data that was presented by those opposing Bill 19-299 and the testimony of citizens who took the time to come an express their opposition to this terrible piece of legislation. In particular, the Draft Committee Reports ignores the compelling testimony and data presented to the Committee that shows six dealers are clearly taking advantage of rising gas prices to charge abhorrent prices at the pump. In questioning by Councilmember Orange, one dealer admitted that he was making a ninety (90) cent profit per gallon, while the national average is sixteen (16) cents per gallon. Unfortunately, the history of the anti-jobber legislation introduced into the City Council appears to be punitive rather than to establish a policy seeking to bring the consuming public lower gas prices and better gas stations. As set forth below and as summarized in Attachment B, beginning with Bill 15-914 in 2004, the anti-jobber legislation appears to be directed at one jobber (Capitol Petroleum Group). And, as shown below, this measure will not reduce gasoline prices by a single penny; rather, it wil1 help to increase gasoline prices. On Page 4 of the Draft Committee Report, it is stated that "[i]n 2004, the Council recognized that jobbers had begun to resemble large oil refiners in the way that they interacted with the retail service station market and passed legislation adding jobbers into the divorcement statute". This statement does not clearly represent what members of the City Council understood themselves to be voting on at the time Bill 15-914 ("Retail Service Station Amendment Act of 2004") was presented to the City Council. I believe this is underscored by the City Council's repeal of this measure including "jobber" in the District's divorcement law by emergency legislation and by an unanimous vote. See Attachment C. In 2004, Capitol Petroleum Group (operating then as DAG Petroleum) opened a Shell gas station at 4900 Connecticut Avenue, NW. Before this Shell station was built on Connecticut Avenue NW, the Exxon/Mobil stations had, in the main, dominated the market in this putt of Northwest and with little competition. It was no accident that in 2004 the word "jobber" was buried in the belly of a measure (Bill 15-914) to continue the moratorium on the conversion of full service stations to "gas -n-gos". After Bill 15-914 was introduced, the word "jobber" was inserted in a measure that City Council had extended nine (9) times without any fanfare. Who would notice one word in a non controversial measure? And, on its face the measure made its way through the City Council as though it changed nothing and simply continued the twentyseven (27) year old moratorium. Even, when then-Chairman Linda Cropp transmitted the measure to the CFO for a fiscal impact statement, she wrote: "The proposed legislation maintains an existing practice in the District

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Chairperson Cheh, Councilmembers Catania, Mike Brown, Thomas and Wells July 9, 2011 of disallowing motor vehicles service stations from converting to retail! grocery or retail [] restaurant service stations other than those that existed prior to April 19, 1977".2 See Attachment D. As we now know, Bill 15-914 did much more than continue the moratorium. If it had become law, it would have turned the operations and the financial status of jobbers upside down. And, when Ms. Ang and I visited other members of the Council, they expressed their surprise that they had voted to include jobber in the divorcement law. At a jobber-operated station, it is not unusual to find two or three small businesses, i.e., one with a contract to operate the repair bay, another with a contract to operate the food mart, and another with a contract to operate the rental car services. Bill 15-914 and Bill 19-299 would force jobbers to terminate their existing contracts with these small business persons and enter into a franchise agreement with a dealer. Thus, jobbers will be forced to change their operational model, try to find refinancing and fight legal battles for being forced to terminate legally binding contracts. The small businesses will close their doors and their employees will lose their jobs because of a law that achieves absolutely nothing, nothing. In a meeting on February 12,2007, with Joe Mamo, Tina Ang, myself and Councilmember Mendelson and his staffer Mike Battle, Mr. Mendelson acknowledged that the jobber amendment to the divorcement law was included at the urging of some dealers and their Association. Jobbers were not informed of this amendment and their input was not sought. Jobbers were unaware that the jobber amendment was included in the gas station conversion moratorium legislation. Two years later, they were informed about the law by the D.C. Department of Energy and that they had a few months to come into compliance. Moreover, Bill 19-299 would require Capitol Petroleum Group and other jobbers to make their jobber-operated gas stations become dealer-operated gas stations. Jobber-operated gas stations prices are consistently lower than dealer-operated gas stations. Bill 19-299 would eliminate this competition, and we believe drives prices up, particularly in parts of Wards 1,4,6 and in Wards 5, 7 and 8 where jobber-operated gas stations are mostly located. One only has to look at the price differential between the dealer-operated Exxon station and the jobberoperated Sunoco station located near each other on Virginia Avenue, NW close to the Watergate complex. The dealer-operated Exxon station's prices are around ninety (90) cents higher than the jobber-operated Sunoeo gas station.

On its face, the above quoted statement shows then-Chairman Cropp was not aware of the full importance of Bill 15·914 and its impact on jobbers because the measure was held out as continuing a long practice of the City Council of extending the moratorium on gas station conversions. Indeed, as introduced, the stated purpose of the measure was "To amend the Retail Service Station Amendment Act of 1976 to make the moratorium on conversions of full services stations to limited services stations permanent and to increase the penalty for violation".
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Chairperson Cheh, Councilmembers Catania, Mike Brown, Thomas and Wells July 9, 2011 II. Right of First Refusal

Unless the Committee is attempting to address something not covered by the PMPA and permitted by federal law. On its face, the right of first refusal provision of Bill 19-299 appears to deal with an issue that the PMPA already addresses. And, Section (c) on page 4 that reads: "(c) This section shall not require a franchisor to continue an existing franchise agreement or to renew a franchise relationship if not otherwise required by federal law". Statements seem to support this conclusion. However, as noted above in the Summary, there is language and examples in the Draft Committee Report that more than suggest that the Committee's intent for the right of first refusal provision is to reach situations where the franchisor decides to use the leased marketing premises for other than the sale or distribution of motor fuel products, to sell the leased marketing premises for a use other than a gas station, to close the gas station use down because it is uneconomical, etc. If this is the legislative intent of Bill 19-299, it will be in violation of federal law and the Constitution of the United States. On Page 12 of the Draft Committee Report, the Committee uses California and New Jersey as examples to support the need and the legality of the right of first refusal. The Committee notes that California has given dealer this right for over twenty years and New Jersey has recently done same. The California law does not grant the right of first refusal where the leased marking premises use changes by the franchisor. In Abrahim & Sons Enterprises v. Equilon Enterprises, LLC, 292 F.3d 950 (2002), the courts state that the California statute is patterned after the PMPA. And, in this case the Court found that the third party company that Shell and Texaco had created was indeed another party and it continued to operate the leased marketing premises as gasoline stations and the appellants should have been allowed to exercise their right of first refusal. The California law also addresses some areas that the PMPA does not address and does not preempt states from acting. See Attachment E. We do not readily see that the Committee is attempting to address an area (s) that federal law does not already address. Like the California law, the New Jersey tracks the federal law. See Attachment F. It does not appear to invade the jobber's rights to do with his property as he sees fit, except where he is selling, assigning, transferring or otherwise dealing with a third party to continue the use of storing and dispensing motor fuel products.

III.

Marketing Agreements

At the outset, we want to point out that the District is the only jurisdiction that has a law on the books like D.C Code §36-303.01 (a)(6), but franchisors have been able to live with it because they have not been forced to allow franchisees to purchase from whoever they want

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I phelps I phillips Catania, Mike Brown, Thomas and Wells

Chairperson Cheh, Councilmembers July 9,2011

where the property associated with the storing and distribution of motor fuel products is owned by the franchisor, and the franchisor also has the responsibility of any environmental hazard associated with the storage and dispensing of motor fuel products. However, as noted above, in Bill 19-299, the Committee's legislative intent appears to be to force the franchisor to allow the franchisee to use the franchisor's property to buy and sell products from any other entity that he so chooses. And, the franchisor must shoulder all the costs arising from the financial environmental risks and liabilities associated with storing and dispensing motor fuel products. This is a taking of property without due compensation, and it will be in violation of the Constitution of the United States. As noted, I am unaware of any other jurisdiction that has a law similar to the District's present law and now the Committee wants to expand this already far reaching law. If the Committee attempts to enact this provision into law, it is sure to attract the attention of franchisors in other industries. They know that their franchises at McDonalds, Wendy's, Kentucky Fried Chicken, etc., will soon be demanding that they be given the same rights. Not only is the Committee pursuing an illegal legislative measure and setting a dangerous precedent, it actions will cause the District to suffer severe economic consequences. Conclusion I ask the Members of the Committee and Members of the Council not to support and not to vote in favor of Bill 19-299. If enacted, the measure would be the only law in the Country that applies the divorcement law to jobbers. The FTC has opined that to applying the divorcement law to jobbers will increase gasoline prices. The law would have an injurious impact on the operations and financial status of jobbers and achieve no public benefits. And, the law would eliminate the competition jobber-operated stations provided against dealer-operated stations by forcing all station to become dealer-operated stations. The right to first refusal provision in Bill 19-299 is already adequately addressed in federal law. Unless the Committee wants to provide the franchisee with something that is not preempted by and/or covered by existing federal law , this provision of Bill 19-299 is not necessary. On the other hand, if the Committee's legislative intent is to extend the right of first refusal into areas preempted by federal law or to void an owners property right, we believe the right to first refusal is constitutionally unsound. Finally, we believe the legislative intent of clarifying the language in the D.C. Code that prohibits marketing agreement from imposing certain conditions on the franchises represents a taking of property without just compensation in violation of the Constitution of the United States because its intended purposes are too far reaching.

200124554.1

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