Another Good Faith Claim Involving Prices Charged to Gas Stations

In a surprising number of cases, gas station owners or franchisees allege that their suppliers violated the UCC’s implied duty of good fait and fair dealing by overcharging them relative to more-favored gas stations. In Windy Cove, Inc. v. Circle K Inc., decided in December, the Ninth Circuit provides a short opinion affirming the District Court’s decision dismissing one such claim. It might provide a useful illustration of how safe harbors work under the UCC’s implied duty of good faith in  § 2-305.

Windy Cove and other plaintiffs own Mobil-branded gas stations in Southern California. They had a fifteen-year deal with Circle K, which provided that Circle K would provide them with gasoline. The “price per gallon to be paid by Purchaser shall be Seller’s price in effect at the time and place of delivery to dealers of the same class and in the same trade area as Purchaser.”  Windy Cove alleged that Circle K violated its duty of good faith under UCC §2-305 because “(1) Circle K relied upon a non-industry-standard pricing formula to determine the prices, and (2) its prices were higher than that of another wholesaler.” However, the prices Circle K charged Windy Cove  were lower than those charged to retailers by at least one refiner.

According to Comment 3 to UCC §2-305, sellers enter a safe harbor if the contract provides that they will charge a publicly-posted “price in effect.” The burden then shifts to buyers to show that the situation is for some reason not the “normal case,” and thus the seller cannot avail itself of the safe harbor. To take it out of the safe harbor, plaintiff must show that the price was either discriminatory or not commercially reasonable. Windy Cove alleged that Circle K’s price was unreasonable because Circle K allegedly used a non-industry standard pricing formula. However, the Ninth Circuit followed the majority of courts, which have found that the method of determining the price is not material to the question of commercial reasonableness.

Moreover, any price “within the range” of its competitors is commercially reasonable. To determine whether Circle K’s prices were within the range, the Court had to determine which suppliers could be included among Circle K’s competitors. Windy Cove contended that only wholesale distributors’ prices should be considered.  Circle K argued that refiners’ prices should also be considered. As Windy Cove’s expert conceded that, in this market, all suppliers are competitors, including refiners, the Court sided with Circle K. There was at least one refiner whose prices were higher that Circle K’s. Because Circle K’s prices were not the highest in the relevant market, they were within the range.