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Two Brothers Distributing Inc. v. Valero Marketing And Supply Co.

United States District Court, D. Arizona

September 19, 2017

Two Brothers Distributing Incorporated, et al., Plaintiffs,
v.
Valero Marketing and Supply Company, Defendant.

          ORDER

          David G. Campbell United States District Judge.

         Plaintiffs Two Brothers Distributing, Inc. (“Two Brothers”) and ten associated gasoline retailers (the “Station Plaintiffs”) sued Defendant Valero Marketing and Supply Company (“Valero”) asserting various claims. Doc. 29.[1] Valero has filed motions for summary judgment against Two Brothers and the Station Plaintiffs. Docs. 113, 114. The motions are fully briefed, and the Court heard oral argument on September 14, 2017. For the reasons that follow, the Court will grant Valero's motions.

         I. Background.

         Most of the facts in this case are undisputed. Indeed, Two Brothers does not dispute 78 of the 93 paragraphs in Valero's Statement of Facts. See Docs. 115, 136. To ensure that the Court views the evidence in the light most favorable to Plaintiffs when ruling on Valero's motions for summary judgment, this background section is taken from Two Brothers' Statement of Facts. Doc. 136.

         Valero Energy Corporation (“VEC”) is a multinational public company that refines fuel and supplies branded and unbranded fuel to the Maricopa County market. Id. at 3, ¶ 4. Valero is a VEC subsidiary that sells fuel to distributors. Id. at 3, ¶ 5. Before May 1, 2013, VEC had several wholly-owned subsidiaries that sold fuel using either the name “Valero” or “Diamond Shamrock” at approximately 45 retail service stations in Maricopa County. Id. at 3, ¶ 6. Effective May 1, 2013, VEC spun off the wholly-owned stores to an entirely separate company, CST Brands Inc. Id. at 3, ¶ 7. VEC retained 20% of CST Brands' stock, but sold this 20% interest on November 14, 2015. Id. Valero and a subsidiary of CST Brands, CST Marketing and Supply Co. (“CST”), entered into a Master Agreement that became effective on May 1, 2013. Id. at 4, ¶ 8. The Master Agreement required CST to purchase annual minimum amounts of fuel from Valero in excess of one billion gallons. Id. at 4, ¶ 9. This fuel was to be sold at more than 1, 000 CST stations across the country over the 15-year life of the Agreement. Id. Prices under the Master Agreement would be set in relation to daily changes in the U.S. commodities market, with several pricing exceptions that require the use of alternative pricing formulas if certain triggering events occurred. Id. at 5, ¶ 11.

         Before 2007, brothers Saad Saad and Ali Saad had operated fuel stations in Maricopa County, including Arco and Mobil branded stations and several unbranded stations. Id. at 6, ¶ 13. Mobil decided to leave the Phoenix market in 2005, around the time the Saads learned that Valero intended to increase its share of the market. Id. at 30, ¶ 100. The Saads began talks with Valero in 2005 about selling Valero-branded fuel at their existing stations and opening several additional Valero stations. Id. at 31, ¶ 101. When Valero required the Saads to create a company to distribute Valero-branded fuels, the Saads created Two Brothers Distributing, Inc. Id. at 31, ¶¶ 103-04. In 2007, Two Brothers and Valero executed the first Branded Distributor Marketing Agreement (“DMA”), which was effective until 2010. Id. at 7, ¶ 15. The DMA contained an open price term which stated that Two Brothers “shall pay to [Valero] that price specified by [Valero] from time to time.” Id. The DMA allowed Two Brothers to use the Valero trademark and required Two Brothers to purchase certain minimum amounts of fuel. Id. at 8, ¶ 16. The DMA contained an integration clause stating that the DMA superseded any other agreements, representations, or promises not contained in the agreement, and required a signed writing to modify its terms. Id.

         In 2007, Two Brothers and Valero also executed “Brand Conversion Incentive Agreements” that had a duration of ten years. Id. at 11, ¶ 25. These Conversion Agreements provided that Valero would pay upfront costs to brand six of the Station Plaintiffs; that Valero would pay Two Brothers incentive payments of two to four cents per gallon for four years to reward Two Brothers for purchasing 85% of the contracted fuel amount; and a repayment schedule for some of the branding costs and incentive payments. Id. at 12, ¶ 26. Valero eventually reduced the amount of fuel Two Brothers had to purchase to receive the incentive payments and provided Two Brothers with funds for station improvements. Id. at 12, ¶¶ 27, 29.

         Two Brothers first purchased fuel from Valero in June 2007, and almost immediately began complaining that Valero's prices were too high in relation to other suppliers such as Arco and Shell. Id. at 18, ¶ 50. Valero responded with letters explaining that it intended to set its prices so that, on average, Valero's rack price would be competitive with other brands in the market. Id. at 18-19, ¶ 51. Throughout the duration of the DMAs, Valero charged Two Brothers its daily posted rack price minus discounts. Id. at 8, ¶ 39. Two Brothers continued to complain about Valero's prices in 2008, 2009, and 2010, and yet executed three new Conversion Agreements for three additional stations in 2008. Id. at 19-20, ¶¶ 52, 54. In 2010, Two Brothers and Valero entered into another DMA that was identical to the 2007 DMA in all material respects, including the pricing provision and integration clause. Id. at 20, ¶ 58. Two Brothers sought changes to a 2013 DMA, those changes were rejected by Valero, and Two Brothers and Valero ultimately signed materially identical DMAs in 2013 and 2016. Id. at 22-24, ¶¶ 64-66, 69. Two Brothers continues to operate under the 2016 DMA.

         Starting in 2010, all but two of the Station Plaintiffs filed for bankruptcy. Id. at 24, ¶ 70. Several subsequently closed and were sold, but five continue to sell Valero fuel. Id. at 24-25, ¶¶ 71-75.

         The Saad brothers act as officers and directors for Two Brothers and the Station Plaintiffs. They own Two Brothers and, until mid-2011, owned all of the Station Plaintiffs. Id. at 13, ¶¶ 31-32.[2] In 2011, the Saad brothers transferred their shares of the Station Plaintiffs to family members. Id.

         Plaintiffs and Valero have presented contradicting expert opinions concerning the fuel prices Valero charged Two Brothers, CST, and the Valero-owned stores.[3] Valero's expert found that Two Brothers was charged less for fuel than both CST and the Valero-owned stores over the life of the DMAs. Plaintiffs' expert found that Valero charged Two Brothers more for fuel than CST and the Valero-owned stores. The experts criticize each other's methodologies, and Valero has filed a Daubert motion asking the Court to exclude the opinion of Plaintiffs' expert. See Docs. 112, 124, 124-2, 131. For purposes of this order, the Court will assume there is a factual dispute as to whether Two Brothers was charged more for fuel than CST and the Valero-owned stores. Given that assumption, the Court need not decide Valero's Daubert motion in order to resolve the motions for summary judgment.

         II. Legal Standard.

         A party seeking summary judgment “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, shows “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Summary judgment is also appropriate against a party who “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322.

         III. Two Brothers' Claims.

         Two Brothers brings several claims based on Valero's pricing of its fuel in Maricopa County. Two Brothers alleges that Valero induced it to enter into a business relationship by making oral representations about how it would price its fuel, but ultimately did not price its fuel in accordance with those representations. Doc. 136 at 25, 31-33, ¶¶ 76, 108-11. Two Brothers also contends that Valero charged it higher prices than CST in order to favor CST and drive Two Brothers out of the market. Id. at 26, ¶ 78. These higher prices, according to Two Brothers, prevented it from competing with Valero-owned stores, CST stores, or even other similarly-situated brands. Id. at 36, ¶ 132. If Valero had priced its fuel as represented, Two Brothers asserts, Two Brothers would have sold a larger volume of fuel and made higher profits. Id. at 37, ¶¶ 142-43. Two Brothers also alleges that Valero's discriminatory pricing of its fuel violated the Robinson-Patman Act (“RPA”). Doc. 29 at 23, ¶ 107.

         A. Count I - Breach of Contract.

         The DMAs provide that Two Brothers “shall pay to [Valero] that price specified by [Valero] from time to time[.]” Doc. 115-2 at 114, ¶ 4(A). They do not otherwise explain or impose limitations on how Valero will set fuel prices. Because the express language of the DMAs does not require Valero to set its daily rack price in any particular manner, Valero argues, Two Brothers' breach of contract claim must fail. Id. at 11-12; see also Doc. 115-2 at 114, ¶ 4(A).

         Two Brothers does not dispute that the language of the DMAs grants Valero the discretion to set the daily prices Two Brothers pays for fuel, or that the DMAs include no guarantees as to how Valero will set this price. Doc. 134 at 14; Doc. 136 at 7, ¶ 15. Instead, Two Brothers alleges that in 2007 Valero made several oral representations regarding fuel prices under the DMAs. Doc. 29 at 7, ¶ 23; Doc. 136 at 31-33, ¶¶ 108-11. Two Brothers contends that Valero promised, among other things, that it would charge Two Brothers a fuel price in line with discount brand stations and Valero-owned stations so that Two Brothers stations would remain competitive and profitable. Doc. 136 at 31, ¶ 108. Valero denies making such representations, and argues that extrinsic evidence of oral representations is inadmissible to alter the terms of the DMAs. Doc. 113 at 12.

         Because the parties have contracted for the sale of goods (petroleum), the Uniform Commercial Code (“U.C.C.”) applies to their agreement. A.R.S. § 47-2102. Arizona's version of U.C.C. § 2-202 provides:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:
1. By course of performance, course of dealing or usage of trade (§ 47-1303); and
2. By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

         A.R.S. § 47-2202 (emphasis added).[4]

         This statute requires two inquiries. First, did the parties intend the DMAs to be “a final expression of their agreement with respect to such terms as are included therein”? Id. If yes, then the DMAs cannot be contradicted by any prior oral agreements, but may be “explained or supplemented” by “course of performance, ” “course of dealing, ” “usage of trade, ” or evidence of “consistent additional terms.” Id. Second, were the DMAs intended also to be “a complete and exclusive statement of the terms of the agreement”? If yes, then evidence of “consistent additional terms” cannot be considered, and Two Brothers is limited to “course of performance, course of dealing or usage of trade.” Id.

         Two Brothers argues that because the DMAs do not contain any pricing terms beyond designating Valero as the price-setter, the DMAs are “not fully integrated with respect to the[] pricing terms.” Doc. 134 at 12. In language of the Arizona statute, the Court understands Two Brothers to be arguing that the DMAs are not “a final expression” of the parties' agreement with respect to terms included in the DMAs, such as price, and are not “a complete and exclusive statement of the terms of the agreement.” A.R.S. § 47-2202. Thus, Two Brothers contends, evidence of additional non-conflicting price terms must be considered - specifically, the oral representations allegedly made by Valero.

         The Court concludes that the DMAs are “a final expression” of the parties' agreement with respect to terms included in the DMAs, including price terms. Id. Two Brothers argues that the DMAs cannot be final because they include no final price term, but a contract for the sale of goods may have an open price term. In a statutory section titled “[o]pen price term, ” Arizona's U.C.C provides that “[t]he parties if they so intend can conclude a contract for sale even though the price is not settled.” A.R.S. § 47-2305(A). The statute recognizes that such contracts can provide that the sale price will be set by the seller, and states that, in such cases, the seller must set the price in good faith. § 47-2305(B). Thus, the fact that the DMAs provide for fuel prices to be set by Valero does not indicate that the DMAs are not a final expression of the parties' agreement. See T.A.M., Inc. v. Gulf Oil Corp., 553 F.Supp. 499, 509 (E.D. Pa. 1982).

         Indeed, open price terms are a common contract feature in the petroleum industry. As one court has noted, “[o]pen-price-term contracts are commonly used in the gasoline refining and marketing industry due to price volatility.” Shell Oil Co. v. HRN, Inc., 144 S.W.3d 429, 431 (Tex. 2004); see also T.A.M, Inc., 553 F.Supp. at 509 (“Considering the nature of the petroleum market, and the length of time for which the contracts were to run, it appears quite clear that the parties had no options but to operate on an open price basis.”). A respected U.C.C. commentary agrees:

For reasons that are partly historical and partly driven by the modern market for gasoline, sellers of oil and of oil derivatives such as gasoline have traditionally agreed to sell at a “posted price.” In the earliest days of oil production, this was apparently a price on a note nailed to a post in an oil field. More recently, it is the price, disclosed on a Web site, which a gasoline wholesaler offers to retail gas stations. Of course, this is a price to be fixed by the seller under 2-305(2) and so must be fixed in “good faith.”

         1 White, Summers, & Hillman, Uniform Commercial Code § 4:15 (6th ed.).

         The parties agree that such posted prices are used in the Phoenix market. Valero explains that petroleum suppliers such as ExxonMobil, Shell, Chevron, and Valero set daily rack prices with the Oil Price Information Service that are then charged to distributors. Doc. 115 at 2, ¶¶ 1-3. Two Brothers agrees. Doc. 136 at 2, ¶¶ 1-3. Given this well-established practice, the fact that the DMAs contain an open price term does not support a finding that the agreements are incomplete. Rather, this practice explains why a contract for the purchase of petroleum is complete despite an open price term.

         The only other evidence cited by Two Brothers to show that the DMAs are incomplete are the oral representations allegedly made by Valero employees before the first DMA was signed in 2007. But even if the Court assumes for purposes of this order that these alleged oral representations were actually made, paragraph 23 of the DMAs makes clear that they did not become part of the parties' contract:

This Agreement, including the exhibits hereto, constitutes the entire agreement and understanding between [Two Brothers] and [Valero] with respect to the matters covered hereby. There are no representations, stipulations, warranties, agreements or understandings with respect to the subject matter of this Agreement which are not fully expressed herein and which are not superseded hereby. The provisions of this Agreement shall not be reformed, altered, or modified in any way by any practice or course of dealing prior to or during the term of this Agreement, and can only be reformed, altered, or modified by a writing signed by [Two Brothers] and an officer of [Valero] (except as otherwise expressly provided herein). [Two Brothers] specifically acknowledges that [Two Brothers] has not been induced to enter into this Agreement by any representation, stipulation, warranty, agreement, or understanding of any kind other than as expressed herein.

         Doc. 115-2 at 126, ¶ 23.

         This language is clear - the DMAs constitute the entire agreement between the parties. Paragraph 23, which Two Brothers signed on four separate occasions from 2007 to 2016, including after Valero made clear that its price-setting discretion was not limited by any alleged oral representations, states expressly that any other representations, agreements, or understandings are not part of the DMAs. Two Brothers identifies nothing in the DMAs which suggests that Valero's discretion to set prices is limited by terms outside the written agreements. Nor is there anything in the DMAs to suggest that further negotiations were anticipated. Because paragraph 23 makes clear that all terms are fully expressed in the DMAs, the Court concludes that the DMAs are a final expression of the parties' agreement within the meaning of § 47-2202.[5]

         Two Brothers argues that Valero's alleged oral representations may be used to interpret the DMAs even if the DMAs are fully integrated. Doc. 134 at 13. As noted above, § 47-2202 provides that a contract that includes a “final expression” of the parties' agreement may be “explained or supplemented” by course of performance, course of dealing, usage of trade, or evidence of consistent additional terms. But the last category - evidence of consistent additional terms - is not available if the agreement is “a complete and exclusive statement of the terms of the agreement.” A.R.S. § 47-2202(2).

         Given the clear terms of paragraph 23 and the fact that all four of the parties' DMAs include the same language, the Court concludes that the DMAs constitute “a complete and exclusive statement of the terms of the agreement.” Id.; see Shore Line Props., Inc. v. Deer-O-Paints & Chems., Ltd., 538 P.2d 760, 763 (Ariz. 1975) (“whether a writing was intended as a complete and exclusive statement of the terms of a contract is for the court to decide”) (applying earlier version of A.R.S. § 47-2202). As a result, the DMAs may be “explained or supplemented” only by “course of performance, course of dealing or usage of trade.” A.R.S. § 47-2202(1).

         Valero's alleged oral representations do not constitute a course of performance, course of dealing, or usage of trade. “A ‘course of performance' is a sequence of conduct between the parties to a particular transaction that exists if: 1. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and 2. The other party, with knowledge of the nature of the performance and the opportunity for objection to it, accepts the performance or acquiesces in it without objection.” A.R.S. § 47-1303(A). “A ‘course of dealing' is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” § 47-1303(B). “A ‘usage of trade' is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.” § 47-1303(C). Two Brothers does not rely on any of these; it does not contend that limitations were placed on Valero's price-setting discretion by a course of performance in a ...


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