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05/10/90 JOHN RICHARD DEGE v. WILLIAM STACY MILFORD

DISTRICT OF COLUMBIA COURT OF APPEALS


May 10, 1990

JOHN RICHARD DEGE, APPELLANT
v.
WILLIAM STACY MILFORD, APPELLEE

Appeal from the Superior Court of the District of Columbia; Hon. William C. Gardner, Motions Judge; Hon. Steffen W. Graae, Trial Judge

Terry, Steadman and Schwelb, Associate Judges.

The opinion of the court was delivered by: Steadman

This case, involving an issue apparently of nationwide first impression, stems from a dispute over rights in an Exxon gasoline service station franchise. Specifically, the issue is whether a right of first refusal in the franchise agreement is enforceable in light of the free transferability provisions of the District of Columbia Retail Service Station Act of 1976; D.C. Code §§ 10-201 to 242 (1989) ("the RSSA"). We hold that at least in the circumstances presented in this case, it is not.

Since 1978, under a series of franchise agreements, appellant Dege has operated a gasoline service station ("the station") owned by Exxon Company, U.S.A. ("Exxon") at 1545 Wisconsin Avenue in the Georgetown section of the District. Dege and Exxon entered into their most recent three-year agreement in June of 1988; under the agreement, Exxon granted Dege a leasehold interest in the station and agreed to sell to Dege the motor vehicle fuels necessary to operate the station.

The franchise agreement contemplated the possibility that Dege might decide to sell or otherwise transfer his interest in the station to a third party; that eventuality was governed by the terms of two "riders" included among the franchise agreement papers. These riders required Dege to notify Exxon of the terms of any proposed sale and to provide information about the business qualifications of the proposed buyer. Exxon could then either approve or disapprove the proposed sale. Additionally, Exxon reserved an "assignable right of first refusal"; under this provision, instead of either approving or disapproving the proposed buyer, Exxon could purchase Dege's interest "at the same price and on the same terms and conditions as are contained in the offer."

On January 18, 1989, Dege notified Exxon by letter of his intention to sell his franchise rights to Charles R. Shelton, Jr. ("Shelton"), the operator of a Chevron service station across the street from Dege's station. *fn1 Exxon responded by asking Dege to supply information about the terms of the proposed sale and Shelton's business qualifications, as required by the franchise agreement.

In early April, Dege forwarded to Exxon a copy of his contract with Shelton for the sale of the franchise, for which Shelton agreed to pay $150,000. The Dege-Shelton contract, which anticipated closing on April 30, 1989, was conditioned upon Exxon's approval of the transfer.

After receiving the Dege-Shelton contract, Exxon approached appellee Milford, then employed as a manager at another Exxon station in the District, and told him that a service station franchise might be available in Northwest Washington. Milford had long expressed an interest in acquiring his own Exxon franchise. After inviting Milford to its offices to review the Dege-Shelton contract, Exxon assigned to Milford its right of first refusal. On April 27, 1989, Exxon notified Dege by letter of the assignment to Milford. That same day, Milford sent Dege a letter which stated: "As assignee of Exxon's Right of First Refusal, I hereby exercise this Right of First Refusal, and I shall purchase the franchise rights . . . pursuant to the [Dege-Shelton] contract." Milford deposits the $150,000 purchase price into an escrow account pending closing.

On May 3, 1989, Dege, acting through his lawyer, announced that he had "reconsidered" his decision to transfer his franchise to Shelton and would continue to operate the station himself. The letter suggested that as a result of this decision, the right of first refusal Milford sought to exercise was "no longer in force." *fn2 Shortly thereafter, Milford filed suit seeking to enforce his assigned right to purchase the station. After a bench trial, the court entered judgment for Milford and ruled that he was "entitled to specific performance to purchase all of [Dege's] rights and interests" in the station.

II

A

The District of Columbia Council enacted the Retail Service Station Act *fn3 in 1977 in an effort to stem anti-competitive developments in the marketing and distribution of automobile motor fuels. *fn4 The RSSA reflects the Council's belief that the existence of an economically vital group of independently operated service stations would counter these anti-competitive trends. See COMMITTEE REPORT, (supra) note 4, at 19-23. However, the "significant disparity in bargaining power" between oil company distributors and retail dealers, id. at 26, severely threatened the independence and even the viability of the District's independent service stations. This disparity enabled distributors to employ standard-form " Contracts of Adhesion'" and "to dictate the terms of a marketing agreement to their own best advantage while taking unfair advantage of the prospective retail dealers." Id. As a consequence, retail dealers were "generally denied the traditional prerogatives and protections afforded to independent businessmen." Id. Thus, one of the Council's objectives in adopting the RSSA was to rectify the imbalance between independent service station retailers and their franchisors. Specifically, the Council sought "to grant increased legal protection to retail dealers" and "to insure that distributors will treat retail dealers in an equitable manner." Id. at 28.

One of the many ways in which the RSSA enhances the legal and economic status of independent service station retailers is to guarantee them the freedom to transfer their interest in a franchise. *fn5 Thus, D.C. Code § 10-221 provides in pertinent part:

(a) All marketing agreements shall be in writing and shall be subject to the nonwaiverable conditions set forth in this section, whether or not such conditions are expressly set forth in such marketing agreements. . . . No marketing agreement shall:

(5) Prohibit a retail dealer from selling, assigning, or otherwise transferring his marketing agreement or any interest therein to another person;

(9) Contain any provision which requires the retail dealer to assent to any release, assignment, novation, waiver, or estoppel which . . . would negate any rights granted to a retail dealer by this subchapter;

11 ) Contain any term or condition which, directly or indirectly, violates this subchapter.

The only statutorily permitted restriction on the franchisee's right to transfer inter vivos his or her interest in the franchise *fn6 appears in D.C. Code § 10-225. That provision enables the distributor to disapprove a proposed franchise transfer if the distributor, after reviewing information about the prospective transferee's qualifications to operate the franchise, can establish that its refusal to approve the prospective transfer is reasonable. *fn7 Apart from this specific qualified limitation, the RSSA provides to the retailer a readily transferable right in his or her franchise. *fn8 Further, the RSSA prohibits the franchisor from including provisions in the marketing agreement that indirectly violate the terms of the RSSA. D.C. Code § 10-221 (a) (11).

B

Despite the prevalence of legislation affecting gasoline and other franchise agreements, no case is cited to us, and we have found none, dealing with the issue presented to us. We therefore are guided solely by the RSSA itself. Because the RSSA seeks to effectuate broad remedial purposes, its provisions must be liberally construed in favor of the independent retailers. See D.C. Code § 10-241 (provisions of the RSSA "shall be liberally construed in order to effectively carry out the purposes of this chapter"); see also McCree v. McCree, 464 A.2d 922, 928 (D.C. 1983) (courts should liberally construe remedial statutes in order to effectuate the purposes for which they were enacted); Hutchison Bros. Excavation Co. v. District of Columbia, 278 A.2d 318, 321 (D.C. 1971) (same).

In our view, Exxon's right of first refusal in this case effectively functions as a statutorily impermissible restraint on the freedom granted to Dege by D.C. Code § 10-221(a) (5) to transfer his interest in the station "to another person." The right of first refusal here "indirectly" violates the RSSA's transferability provisions. D.C. Code § 10-221(a) (11). As a general matter, a right of first refusal may have some effect on alienability. See C. ROSENFIELD, THE LAW OF FRANCHISING § 119, at 201 (1970) (a right of first refusal in the franchisor "may work a detriment to the franchisee for, like all first refusal options, it makes the outside purchaser wary of negotiating only to find the company will exercise its option"); cf. Annotation, Pre-emptive Rights to Realty as Violation of Rule Against Perpetuities or Rule Concerning Restraints on Alienation, 40 A.L.R.3d 920, 943 (1971) ("by its very nature a pre-emptive right interferes with alienation to some extent"). *fn9 Given the manner in which Dege desired to transfer his interest in the station in this case, however, the right of first refusal has proven particularly intrusive. As demonstrated by his subsequent efforts to rescind the Dege-Shelton agreement, when Dege learned that he could not transfer the station to Shelton, but instead must do so to Milford, he apparently decided that he would prefer not to sell the station at all. *fn10 Milford's exercise of the Exxon right of first refusal would frustrate Dege's freedom to make this choice.

The argument is made that once Dege decided to sell his franchise, it should have been a matter of indifference to him to whom he sold and that any protection as a franchisee under the RSSA should no longer be relevant. The right to transfer granted by the RSSA, however, is given in broad terms; the right encompasses "selling, assigning, or otherwise transferring." D.C. Code § 10-221(a) (5). Thus, for example, no consideration is required; the transfer may be gratuitous, such as to a spouse or child, or it may be undertaken for tax or other reasons. An element of a right of transferability is the right to decide whether and to whom to transfer. The right of first refusal incorporated into the franchise agreement here to a significant extent effectively shifts that right to Exxon, once the franchise holder has decided to transfer to any other person. *fn11 Such a result is, we think, inconsistent with the interrelated provisions of the RSSA governing the transferability of the franchise. *fn12

Our Conclusion that the right of first refusal provision indirectly violates the proscription against prohibitions on a retailer's right to transfer his or her franchise interest is somewhat buttressed by the fact that the riders containing the right of first refusal directly and explicitly replaced earlier provisions in the franchise agreement which flatly prohibited Dege from transferring any part of his interest in the Exxon franchise. Those blanket prohibitions, of course, were rendered void by D.C. Code § 10-221(a) (5).

Under the circumstances of this case, *fn13 and in light of our obligation to construe the RSSA liberally in favor of franchisees, we conclude that the Exxon right of first refusal here "indirectly . . . violates" the proscription against franchise agreement conditions which prevent an independent retailer from "transferring his marketing agreement . . . to another person." D.C. Code § § 10-221(a) (5), (11). *fn14

Accordingly, the order granting Milford specific performance of the right of first refusal is reversed and the dismissal of Dege's counterclaims is affirmed.

So ordered.


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