Casserlie v. Shell Oil Co.

Moyer, C.J. I ¶ 1 Appellants’ proposition of law proposes that “[t]he definition of Good Faith under the [Uniform Commercial Code] incorporating an ‘honesty in fact’ component requires a subjective inquiry.” We disagree and affirm the judgment of the court of appeals. II ¶ 2 Appellants, Donald Casserlie and others, are a group of independent Shell lessee-dealers in the greater Cleveland area (collectively, “the dealers”). The appellees in this case are Shell Oil Company, its partners, and its successors (collectively, “Shell”), who at various times between 1995 and the time the complaint was filed sold Shell-branded gasoline to the dealers in the greater Cleveland area. The dealers leased gas stations, including equipment and land, from Shell and operated them as franchisees. The parties’ contracts obligated the dealers to buy gasoline only from Shell at a wholesale price set by Shell at 56 the time of delivery. This type of term in a contract is known as an open-price term. ¶ 3 The price paid by the dealers is referred to as the dealer-tank-wagon (“DTW”) price because it includes the cost of delivery to the stations. Shell charged the dealers a DTW price that was based on market factors including the prices offered by its major competitor, British Petroleum (“BP”), and the street price within areas of Cleveland. In each area of the city, called a price administration district (“PAD”), Shell charged all dealers the same DTW price. ¶ 4 In 1998, Shell, Texaco, and Saudi Aramco formed Equilon Enterprises, L.L.C.; Shell’s agreements with service stations in Cleveland were assigned to Equilon. In November 1999, Equilon and appellee Lyden Company entered into a joint venture called True North Energy, L.L.C. True North became the distributor of Shell-branded gasoline in the Cleveland area, including to the stations operated by the dealers. True North set the DTW price as the wholesale price it had paid Equilon for gasoline plus six or seven cents per gallon. ¶ 5 Shell also sold gasoline to “jobbers,” which were independent companies operating non-Shell-owned gas stations. Jobbers purchased gasoline directly at the oil company’s terminal and paid the “rack” price, which was the cost of purchasing gasoline at the oil company’s terminal and thus did not include delivery costs. ¶ 6 In 1999, the dealers filed suit against Shell, alleging, among other claims, that Shell had engaged in bad faith when it set the DTW price. The dealers alleged that the rack price was often substantially lower than the DTW price. This allowed jobbers, including Lyden Company, to offer wholesale DTW prices that were substantially lower than the DTW price charged to the dealers. The dealers contend that this pricing is unreasonable and is part of a marketing plan proposed by Shell that was designed to drive them out of business. The dealers assert that Shell’s goal was to eliminate them so that Shell could take over operation of the gas stations, thus profiting from all of the sales, including nonfuel sales, at the stations, and not just from wholesale gasoline sales to and rental income from the dealers. ¶ 7 The parties agreed to bifurcate the proceedings and move forward only on the bad-faith claim. On April 13, 2005, the trial court granted summary judgment for Shell. The court found that Shell did not violate R.C. 1302.18, which codifies Uniform Commercial Code (“UCC”) section 2-305 and requires a price to be fixed in good faith, when it set the DTW price and that the dealers had not proven that the price had been set in a commercially unreasonable manner. ¶ 8 The dealers appealed, arguing that bad faith may be shown either by evidence of a party’s intent, a subjective standard, or by evidence of its commer 57 cial unreasonableness, which is an objective standard. The court of appeals affirmed the trial court’s ruling and adopted an objective standard based on Tom-Lin Ents. v. Sunoco, Inc. (R & M) (C.A.6, 2003), 349 F.3d 277. The court determined that the dealers failed to show that Shell’s prices were not commercially reasonable. The cause is before this court upon our acceptance of a discretionary appeal. Ill ¶ 9 As a preliminary matter, we review de novo the granting of summary judgment. Comer v. Risko, 106 Ohio St.3d 185, 2005-Ohio-4559, 833 N.E.2d 712, ¶ 8. ¶ 10 The parties agree that Shell has authority pursuant to the dealer agreements to set the price of gasoline at the time of delivery. They agree that the price must be set subject to R.C. 1302.18, which requires the price to be “reasonable.” R.C. 1302.18(A). Pursuant to R.C. 1302.18(B) (UCC section 2-305(2)), the price must be set “in good faith.” “Good faith” is defined generally as “honesty in fact in the conduct or transaction concerned,” R.C. 1301.01(S), but in the case of a merchant, “ ‘good faith’ * * * means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” R.C. 1302.01(A)(2). It is undisputed that Shell is a “merchant,” as defined in R.C. 1302.01(A)(5). ¶ 11 Shell argues that good faith requires an objective inquiry and is demonstrated when a seller’s price is within the range of its competitors and the seller has not discriminated between similarly situated buyers. Shell also contends that “an inquiry into the seller’s subjective intent is neither permitted nor required.” The dealers argue that good faith requires a subjective inquiry and ask, “[H]ow can an open price, specifically calculated to drive a contractual partner out of business, be a ‘good faith’ price?” ¶ 12 The trial court and court of appeals agreed with Shell, relying on Tom-Lin Ents., 349 F.3d 277. In Tom-Lin, the court confronted an agreement nearly identical to the one between the dealers and Shell and concluded, applying Ohio law, that an inquiry into good faith required “an objective analysis of the merchant-seller’s conduct.” (Emphasis sic and footnote omitted.) Id. at 281-282. Thus, neither the trial court nor the court of appeals considered whether an examination into “good faith” required a subjective inquiry, and neither court engaged in a subjective inquiry. ¶ 13 It is not disputed that the latter half of the definition of good faith, “the observance of reasonable commercial standards of fair dealing in the trade,” requires only an objective analysis. The issue before us is whether there is room for a subjective inquiry within the honesty-in-fact analysis in these circumstances. 58 ¶ 14 The UCC does not define the term “honesty in fact.” It should also be noted that “[c]ourts and commentators have recognized that the meaning of ‘good faith’ is not uniform throughout the [UCC].” Mathis v. Exxon Corp. (C.A.5, 2002), 302 F.3d 448, 456. See also Martin Marietta Corp. v. New Jersey Natl. Bank (C.A.3, 1979), 612 F.2d 745, 751 (noting that good faith is considered subjective in Article 1 but objective in Article 2). Thus, case law defining good faith in other areas of the UCC, such as the Article 1 covenant of good faith and fair dealing, is of somewhat limited value here. Non-UCC cases defining good faith are of even less relevance. ¶ 15 Official Comment 3 to UCC section 2-305 does provide some guidance. That comment provides, in full: ¶ 16 “[UCC section 2-305(2) ], dealing with the situation where the price is to be fixed by one party rejects the uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. (Section 2-103 [R.C. 1302.01]). But in the normal case a ‘posted price’ or a future seller’s or buyer’s ‘given price,’ ‘price in effect,’ ‘market price,’ or the like satisfies the good faith requirement.” ¶ 17 Comment 3 explains that the purpose of R.C. 1302.18(B) is to restrict the price a seller or buyer may set when the contract price has been left open, by requiring the price to be fixed in good faith. The second sentence of the comment does not remove honesty in fact from the definition of good faith in this context, because it uses the nonexclusive term “includes.” The last sentence, however, is not limited to part of the good-faith definition but rather provides a safe harbor where a “posted price” satisfies good faith in its entirety. ¶ 18 A number of cases from other jurisdictions considering open-price terms have relied on the posted-price comment.1 This court has noted in the past that “it is desirable to conform our interpretations of the Uniform Commercial Code to those of our sister states.” Edward A. Kemmler Mem. Found. v. 691/733 E. Dublin-Granville Rd. Co. (1992), 62 Ohio St.3d 494, 499, 584 N.E.2d 695. Relying on the Official Comments to the UCC helps to achieve this uniformity, as does reviewing case law that has previously interpreted particular provisions. ¶ 19 The Supreme Court of Texas addressed the very issue before us here in an essentially identical fact pattern in Shell Oil Co. v. HRN, Inc. (Tex.2004), 144 59 S.W.3d 429. Independent gasoline dealers brought suit against Shell, alleging that the prices were not set in good faith under UCC section 2-305(2) because Shell had set the prices intending to put them out of business. 144 S.W.3d at 431-432. The court held that Shell did not violate its duty of good faith, because the posted price was both commercially reasonable and nondiscriminatory. Id. at 435-436. It noted that “ ‘[i]t is abundantly clear * * * that the chief concern of the UCC Drafting Committee in adopting § 2-305(2) was to prevent discriminatory pricing.’ ” Id. at 434, quoting Wayman, 923 F.Supp. at 1346-1347. A subjective good-faith inquiry “injects uncertainty into the law of contracts and undermines one of the UCC’s primary goals — to ‘promot[e] certainty and predictability in commercial transactions.’ ” Id. at 435, quoting Am. Airlines Emps. Fed. Credit Union v. Martin (Tex.2000), 29 S.W.3d 86, 92, quoting Putnam Rolling Ladder Co., Inc. v. Mfrs. Hanover Trust Co. (1989), 74 N.Y.2d 340, 349, 547 N.Y.S.2d 611, 546 N.E.2d 904. The drafters of the UCC, therefore, incorporated the posted-price safe harbor to prevent extensive litigation involving any open-price term, “while seeking ‘to avoid discriminatory prices.’ ” Id., quoting Malcolm, The Proposed Commercial Code: A Report on Developments from May 1950 through February 1951 (1951), 6 Bus.Law. 113, 186. The court concluded that subjective intent was not intended to stand alone as a basis for liability: “[AJUegations of dishonesty under this section must also have some basis in objective fact which at a minimum requires some connection to the commercial realities of the case.” Id. at 435-436. ¶ 20 A few cases note the posted-price comment but conclude that it does not provide a safe harbor where there is subjective bad faith. See Marcoux v. Shell Oil Prods. Co. L.L.C. (C.A.1, 2008), 524 F.3d 33, 50; Mathis, 302 F.3d at 455-456; Bob’s Shell, Inc. v. O’Connell Oil Assoc., Inc. (Aug. 31, 2005), D.Mass. No. 03-30169, 2005 WL 2365324; see also Allapattah Servs., Inc. v. Exxon Corp. (S.D.Fla.1999), 61 F.Supp.2d 1308, 1322 (finding that when the seller double charged for credit-card processing, the action was not a “normal case,” because the dispute was not over the actual price charged but over the manner in which the price was calculated; thus, the safe-harbor provision did not apply). Those cases contend that the comment is limited to the “normal case,” which does not include a situation where the seller is purposefully trying to drive the buyer out of business. ¶ 21 This interpretation would eviscerate the safe harbor in any action in which the plaintiff alleges circumstantial evidence of an improper motive, leading to drawn-out litigation “even if the prices ultimately charged were undisputedly within the range of those charged throughout the industry.” HRN, 144 S.W.3d at 435. See Berry, Byers, & Oates, Open Price Agreements: Good Faith Pricing in the Franchise Relationship (2007), 27 Franchise L.J. 45, 49. If a subjective inquiry could determine bad faith, a seller charging a fair price, even exactly the 60 same price as another, good-faith seller, could be deemed to be acting in bad faith. ¶ 22 There appear to be five other cases, besides HRN, that directly address the issue of subjectivity. Two, each holding in favor of a subjective inquiry, were decided under Massachusetts law. See Marcoux, 524 F.3d 33; Bob’s Shell, 2005 WL 2365324. Mathis, 302 F.3d 448, the only other case proposing subjectivity, is no longer good law, as it was decided by the Fifth Circuit Court of Appeals under Texas law before the Texas Supreme Court issued its ruling in HRN. The final two cases, including one from the Sixth Circuit applying Ohio law, conclude that UCC section 2-305 requires only an objective inquiry. See Tom-Lin Ents., 349 F.3d 277; United Food Mart, Inc. v. Motiva Ents., L.L.C. (S.D.Fla.2005), 457 F.Supp.2d 1329. There are a number of other cases discussing similar open-price-term contracts under UCC section 2-305 that conduct only an objective analysis, although those cases do not directly state that a subjective inquiry is inappropriate. See, e.g., Schwartz v. Sun Co., Inc. (R & M) (C.A.6, 2002), 276 F.3d 900, 905; Mikeron, Inc. v. Exxon Co., U.S.A. (D.Md.2003), 264 F.Supp.2d 268, 276; T.A.M., Inc. v. Gulf Oil Corp. (E.D.Pa.1982), 553 F.Supp. 499, 509. In total, prior to this court’s opinion today, at least three jurisdictions found that the test could be met only with objective evidence of bad faith, while only one concluded that evidence of intent was sufficient. ¶ 23 All of this is not to say that intent is necessarily irrelevant to an analysis of good faith under UCC section 2-305(2), but only that a subjective inquiry is not permitted when the posted-price safe harbor applies. By its language, the safe harbor does not apply when it is not the “normal case” or when the price setter is not imposing a “posted price,” “given price,” “price in effect,” “market price,” or the like. As long as a price is commercially reasonable, it qualifies as the “normal case.” The touchstone of prices set through open-price-term contracts under UCC section 2-305 is reasonableness. A price that is nondiscriminatory among similarly situated buyers correspondingly qualifies as a “posted price” or the like. A discriminatory price could not be considered a “posted” or “market” price, because, in effect, the seller is not being “honest in fact” about the price that it is charging as a posted price, since it is charging a different price to other buyers. ¶ 24 Therefore, a price that is both commercially reasonable and nondiscriminatory fits within the limits of the safe harbor and complies with the statute’s good-faith requirement. Given our conclusion below that the safe harbor applies to the facts of this case, we are not required to precisely define good faith as it is used in UCC section 2-305(2). We offer no opinion, in particular, on the role of subjective intent within the good-faith analysis beyond the safe harbor. 61 IV ¶ 25 The facts of this case demonstrate that the prices set by Shell were both commercially reasonable and nondiscriminatory. Aside from claims that Shell’s goal in setting prices was to drive the dealers out of business, the only evidence of bad faith was that the prices set were too high for dealers to remain profitable and compete with jobbers in the Cleveland area. However, Shell is not required to sell gasoline at a price that is profitable for buyers. “A good-faith price under section [2-305] is not synonymous with a fair market price or the lowest price available.” HRN, 144 S.W.3d at 437. As noted by the court of appeals: “The trial court * * * found that Shell submitted expert testimony which established that the DTW prices set by the company were within the range set by its competitors.” Casserlie v. Shell Oil Co., 2007-Ohio-2633, 2007 WL 1559510, at ¶ 31. The dealers failed to rebut this evidence. Id. ¶ 26 The dealers also point out that Shell’s prices varied throughout the area because of PAD pricing. But the fact that Shell’s DTW prices varied by PADs does not itself demonstrate unreasonable or discriminatory pricing. It is reasonable for Shell to adjust according to competition, and there is no evidence that Shell discriminated among similarly situated buyers, such as dealers within a given PAD or dealers in similar PADs. ¶ 27 Finally, the only other argument of discrimination put forth by the dealers is that jobbers were charged significantly less, specifically, the rack price rather than the DTW price. Jobbers and dealers are not, however, similarly situated buyers. The price difference is partially explained by the fact that the DTW price includes a delivery charge, while the rack price does not. We further find the Sixth Circuit Court of Appeals analysis comparing jobbers and dealers in Tom-Lin instructive, just as the lower courts did. See Tom-Lin Ents., 349 F.3d at 285-286. Tom-Lin noted that jobbers perform additional functions compared to dealers, such as maintaining the properties they own and bearing the risk of environmental liability. Id. at 285. Because jobbers relieve Shell of these obligations, they are charged a lower price. The dealers have not challenged these differences. The disparate pricing between jobbers and dealers is not evidence of discrimination. y ¶ 28 When a price that has been left open in a contract is fixed at a price posted by a seller or buyer, and the posted price is both commercially reasonable and nondiscriminatory, the price setter has acted in good faith as required by R.C. 1302.18(B), and a subjective inquiry into the motives of the price setter is not permitted. In this case, the dealers have not provided any evidence that the prices set by Shell were commercially unreasonable or discriminatory. The 62 posted-price safe harbor therefore applies, and we affirm the judgment of the court of appeals. Judgment affirmed. Lundberg Stratton, O’Connor, O’Donnell, and Cupp, JJ., concur. Lanzinger, J., concurs in judgment only. Pfeifer, J., dissents. Footnotes [1] See Havird Oil Co., Inc. v. Marathon Oil Co., Inc. (C.A.4, 1998), 149 F.3d 283, 290-291; Richard Short Oil Co., Inc. v. Texaco, Inc. (C.A.8, 1986), 799 F.2d 415, 422; United Food Mart, Inc. v. Motiva Ents., L.L.C. (S.D.Fla.2005), 457 F.Supp.2d 1329, 1334-1338; Wayman v. Amoco Oil Co. (D.Kan.1996), 923 F.Supp. 1322, 1349; Shell Oil Co. v. HRN, Inc. (Tex.2004), 144 S.W.3d 429, 433-438.