Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of San Diego County, Luis R. Vargas, Judge, No. GIC848706
McCONNELL, P. J.
Stonecrest Square Auto Center, LLC (Stonecrest) appeals a judgment denying it declaratory relief. Stonecrest contends the trial court erred in determining Equilon Enterprises, LLC, dba Shell Oil Products U.S. (Shell) lawfully and reasonably withheld consent to the proposed assignment of Stonecrest's Shell franchise to a third party. We conclude the trial court did not err and affirm the judgment.
Shell filed a motion for leave to file a supplemental brief to address two issues it believed Stonecrest had raised for the first time in Stonecrest's reply brief. Stonecrest responded to the motion stating it was not raising the issues. Accordingly, we deny the motion as moot and do not address the issues in our decision.
FACTUAL AND PROCEDURAL BACKGROUND
We recite the facts in the light most favorable to the judgment, resolving all conflicts and drawing all inferences in Shell's favor as the prevailing party below. (Marriage of Mix (1975) 14 Cal.3d 604, 614; Whiteley v. Philip Morris Inc. (2004) 117 Cal.App.4th 635, 642, fn. 3.)
Stonecrest owns a combination gas station, convenience store, and car wash (business). Under the terms of the Dealer Agreement between Shell and Stonecrest, Shell permits the gas station and convenience store to use the Shell brand. Section 17.1 of the Dealer Agreement precludes Stonecrest from assigning the Dealer Agreement without Shell's prior written consent, which Shell may not unreasonably withhold.
Stonecrest entered into an agreement to sell the business to Haith Razuki. Salam Razuki, Haith's brother and an experienced gas station operator, personally guaranteed Haith's performance under the sales agreement. The sales agreement conditioned completion of the sale on Shell's consent to Stonecrest's assignment of the Dealer Agreement to Haith. In the interim, Stonecrest allowed Haith to take immediate possession of and begin managing the business, subject to Stonecrest's supervision.
We refer to the Razukis by their first names when necessary for clarity.
Consistent with the terms of the sales agreement, Stonecrest requested Shell's consent to an assignment of the Dealer Agreement to Haith. Haith later submitted an application package to Shell identifying the business as "Stonecrest Gas & Wash," a corporation owned solely by him (Stonecrest Corporation). Because Salam owns and operates an Arco station and a Chevron station, Haith gave Salam a 50 percent interest in Stonecrest Corporation to increase the likelihood Shell would consent to the assignment. Salam then submitted an application package to Shell reflecting the change in Stonecrest Corporation's ownership.
Around the same time Stonecrest and Haith entered into the sales agreement, Shell began implementing a new process for evaluating proposed assignments. The process, which is described in Shell's Retailer Assignment Guide, is intended to evaluate the proposed assignee's personal character, financial resources, business experience, and management ability.
The process commenced on November 1, 2004, but was not fully implemented until February 2005. During the implementation period, Shell revised the forms in its application package, but Shell did not change the general process or the criteria for assessing proposed assignees. The Razukis did not submit a complete application package until after the new process was fully implemented.
The first step in the process is for the existing franchisee to notify Shell of the proposed sale and request Shell's consent to an assignment of the franchise. Shell's contractor, Liberty Development Consulting (Liberty), then sends the proposed assignee an application package requesting the business's financial information and the proposed assignee's personal and financial information. Once Liberty receives a complete application package, Shell reviews the proposed assignee's financial qualifications and conducts a background check required by federal law.
If the proposed assignee passes the background check and meets Shell's financial qualifications, Shell interviews the proposed assignee. In Shell's western region, part of the interview process involves a structured inquiry designed to assess specific skills and traits, including retail and image management skills, general business skills, leadership skills, and personal commitment. This part of the interview process is scored, with the scores resulting in the candidate receiving a rating of "highly qualified," "qualified," or "not qualified."
Receiving a "highly qualified" or "qualified" rating on the structured portion of the interview does not mean the proposed assignee has passed the interview process because the proposed assignee might do poorly on the other aspects of the interview process. For instance, as part of the interview process, Shell also visits the candidate's other stations or businesses, if any, to observe how the candidate operates them. Because Shell considers this part of the interview process to have great predictive value, it is the chief consideration in Shell's western region for determining whether to approve an assignment. Consequently, a candidate could receive a "highly qualified" rating for the structured part of the interview process and still be disapproved if the candidate's other stations or business are poorly operated.
In addition to the interview, Shell requires the proposed assignee to take math and English aptitude tests. In California, Shell uses these tests exclusively to determine whether a candidate is likely to successfully complete Shell's franchisee training program. If the proposed assignee fails one or both of these tests, Shell will not withhold consent to the assignment or preclude the proposed assignee from attending the training program.
Shell requires all of its franchisees or a key management person to attend its three-week franchise training program.
After the interview process and testing, Shell's region sales manager determines whether to approve the assignment and any such approval is contingent upon the proposed assignee's successful completion of the three-week franchisee training program, unless Shell waives this requirement. If the region sales manager does not approve the assignment, the matter is referred to Shell's legal counsel for review and preparation of a letter disapproving the assignment. Among the reasons the region sales manager may choose to disapprove an assignment are the proposed assignee's lack of business experience or poor operation of a station.
A proposed assignee or key management person who has recent experience operating a gas station and who has recently completed another oil company's training program may request that Shell waive this requirement. If Shell grants the waiver, the proposed assignee or key management person must complete a three-day training program instead.
Shell's process anticipates receipt of a complete application package from the proposed assignee within 30 days. Because of delays largely attributable to Stonecrest, the Razukis, and their representatives, Shell did not receive a substantially complete application package from the Razukis for more than four months after Shell provided the application package to them. Meanwhile, the Razukis, primarily Haith, managed the day-to-day operations of the business. During this time, Barry Friedman, Shell's account manager for the business, conducted a quarterly evaluation of the business's compliance with Shell's Consumer Value Proposition standards (CVP standards).
The CVP standards address various aspects of a franchisee's facilities and operations, including whether the signage is approved and in good condition; whether the fuel dispensers are clean and working properly; whether the convenience store is clean, accessible, and well-stocked; whether the restrooms are clean; and whether the staff acts and appears professionally. Shell developed the CVP standards after researching its customers' needs in the areas of product, experience, and payment. Shell publishes the CVP standards and related reference materials on ShellSource, its on-line resource for franchisees to which the Razukis had access through Stonecrest. Shell uses the CVP standards and the quarterly evaluations as image management tools to ensure Shell maintains a consistent brand image at its franchises. The business failed the evaluation with a score of 73 percent. A passing score is 75 percent or higher. Friedman and Stephen Brommer, the Shell's western region sales manager, also observed below standard conditions during other informal visits to the business after the Razukis began managing it.
Because of the lengthy delay in receiving a complete application package from the Razukis and to accommodate Stonecrest's demands, Shell interviewed the Razukis while their financial qualifications were still being reviewed. Since the Razukis were already operating the business, key areas of inquiry during the interview were the Razukis' understanding of image management and, more specifically, their understanding of Shell's CVP standards and the reasons for the business's recent failed CVP evaluation under their management. The interviewers were concerned the Razukis blamed the failure on Stonecrest and did not take responsibility for it themselves given their active management of the business. The interviewers were also concerned that when Salam remarked he disliked the rules imposed by and the control exercised by Arco over its franchisees. Nonetheless, the Razukis assured the interviewers that if Shell conducted another CVP evaluation, the results would be better.
Another key area of inquiry during the interview was the Razukis' willingness to attend Shell's three-week franchisee training program. Because Salam had completed similar programs conducted by Arco and Chevron and because Haith had prior training and experience managing gas stations, the Razukis applied for a waiver of this requirement. Shell deferred its decision on their request pending the outcome of the interview. During the interview, the Razukis repeatedly indicated they would prefer not to attend any training program, but reluctantly agreed to have Haith attend the three-day training program if Shell insisted upon it. Conversely, Shell repeatedly indicated the Razukis would need to attend the three-week training program, largely because of Shell's concerns about their understanding of image management and their willingness and ability to comply with Shell's CVP standards.
The Razukis achieved an overall score of 63.67 on the structured portion of the interview. Under Shell's scoring system, this score equates to a "qualified" rating. However, in the specific category of "image management," the Razukis only received a score of 1.67, which, under Shell's scoring system, falls between "Strong Evidence Skill is Not Present" and "Very Strong Evidence Skill is Not Present."
After the interview, the Razukis learned for the first time they had to take English and math tests. The Razukis told Shell they could not stay to complete the test because of the late hour and their need to handle other business matters. They also did not want to return to Shell's Carson office, where Shell conducted the interview, to take the tests. Instead, they offered to take the test in their car on their way back to San Diego. Shell declined their offer because the test must be proctored by a Shell employee. The parties then agreed the Razukis could take the test in San Diego. However, neither Shell nor the Razukis followed up to finalize the testing arrangements.
The day after the interview, the lead interviewer went to the business and conducted another CVP evaluation. The business received a failing score of 62 percent. Most of the areas in which the lead interviewer marked down the business involved its cleanliness and orderliness.
After conducting the CVP evaluation, the lead interviewer prepared a summary recommending against approving the assignment to the Razukis. The summary characterized the Razukis as "qualified with concerns." Among the concerns were the business's two failing CVP evaluations under the Razukis' management, their unwillingness to attend Shell's three-week franchise training program, and their unwillingness to commit to returning to Shell's Carson office to take the English and math tests.
Approximately a week later, after Shell's in-house counsel reviewed the matter, Shell sent Stonecrest a letter disapproving the assignment. The primary reason for Shell's decision was its first-hand experience with the Razukis' interim operation of the business, evidenced in part by the two failed CVP evaluations. In the letter, Shell explained that in its experience "these consistently low image scores and lack of attention to the image and maintenance requirements as an interim operator indicates that the Assignee is either unable or unwilling to devote the proper time and attention to the operation of the business." Shell also based its decision on the Razukis' unwillingness to attend Shell's three-week franchise training program and to commit to returning to the Carson office to take the English and math tests, both of which Shell believed reflected poorly on the Razukis ability to conform to Shell's policies and procedures for franchisees.
Shell did not visit Salam's Arco and Chevron stations before disapproving the assignment. Shell did not consider it necessary to do so because the Razukis were already operating the business, which gave Shell a better view of how the Razukis would perform as Shell franchisees than Shell would have obtained by visiting Salam's other stations.
After unsuccessfully attempting to persuade Shell to reconsider its decision, Stonecrest sued Shell for declaratory relief, alleging Shell was required to approve the assignment under the terms of the Dealer Agreement. During trial, the court allowed Stonecrest to amend its complaint to additionally allege Shell was required to approve the assignment under Business and Professions Code section 21148, subdivision (a). The trial court ultimately framed the issue to be adjudicated as "whether [Shell's] refusal to permit [Stonecrest] to assign its dealer agreement to [the Razukis' corporation] was permissible under California law."
Stonecrest also sued David Burrow, Shell's western region general manager, for intentional interference with contract. At Stonecrest's request, the trial court severed the declaratory relief cause of action from the intentional interference cause of action and granted calendar priority to the declaratory relief cause of action under Code of Civil Procedure section 1062.3.
Unless otherwise stated, further statutory citations are to the Business and Professions Code.
After a lengthy bench trial, the trial court issued a memorandum of decision denying declaratory relief to Stonecrest. The trial court found Shell properly considered the Razukis' image management skills in determining whether to approve the assignment and Shell's disapproval of the assignment satisfied both the terms of the Dealer Agreement and the requirements of section 21148.
On appeal, Stonecrest contends the trial court erred in determining image management is a permissible criterion under section 21148, subdivision (a)(3). As a corollary, Stonecrest contends Shell was required to consent to the assignment because the Razukis satisfied Shell's financial requirements and achieved a "qualified" rating during Shell's interview, which are the only Shell criteria permissible under section 21148, subdivision (a)(3). Stonecrest further contends there is insufficient evidence to show Shell's evaluation process and criteria were uniformly applied or normally required of prospective franchises as required by subdivision (a)(3).
DISCUSSION
Standard of Review
This case involves a mixed question of law and fact. Deciding a mixed question requires the trial court to: (1) establish the historical facts; (2) select the applicable law; and (3) apply the law to the facts. We review the trial court's first step for substantial evidence and the second step de novo. Because the application of the law to the facts in this case primarily involves a factual determination, we review the third step under the clearly erroneous standard. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 801; People v. Louis (1986) 42 Cal.3d 969, 985-987.)
Image Management is a Permissible Criterion for Evaluating Proposed Assignees
Under section 21148, subdivision (a), a petroleum franchisor may only withhold consent to an assignment for five reasons:
"(1) The proposed purchaser of the franchise has less business experience and training than that normally required by the franchisor of prospective franchisees.
"(2) The proposed purchaser of the franchise has less financial resources than that normally required by the franchisor of prospective franchisees.
"(3) The proposed purchaser of the franchise does not satisfy the then-current uniformly applied requirements, if any, of the franchisor applicable to prospective franchisees.
"(4) The proposed purchaser of the franchise operates a franchise under an agreement with a franchisor other than the franchisor to whom the sale, transfer, or assignment is proposed, if the then-current uniformly applied requirements, if any, of the franchisor precludes prospective franchisees from operating a franchise under an agreement with another franchisor.
"(5) The franchisee has not offered in writing to sell, transfer, or assign the franchise to the franchisor on the terms and conditions which are the same as those of the sale, transfer, or assignment of the franchise to the proposed purchaser; and the franchisee has not allowed the franchisor at least 30 days in which to either accept or decline the franchisee's written offer, prior to the sale, transfer, or assignment of the franchise to the proposed purchaser."
Because Shell disapproved the assignment to the Razukis primarily based on the their lack of required image management skills, section 21148, subdivision (a)(3) is the only portion of the statute at issue here. Stonecrest contends image management is not a proper criterion under subdivision (a)(3) because it is subjective. Instead, Stonecrest contends the only permissible criteria under subdivision (a)(3) are objective criteria related to a franchisee's financial resources or business experience and training.
Nothing in the plain language of section 21148, subdivision (a)(3) limits the criteria a franchisor may use in this manner. The only limits expressed in subdivision (a)(3) are that the criteria be uniformly applied and that the criteria be the same for both proposed assignees and prospective franchisees. Moreover, the statute's legislative history indicates this subdivision allows a franchisor to withhold consent to an assignment based on the proposed assignee's character, which is an inherently subjective criterion. (California Service Station etc. Assn. v. Union Oil Co. (1991) 232 Cal.App.3d 44, 55, citing letter from Mike Wadle (consultant to Sen. Com. on Bus. & Prof.) to Legis. Counsel (July 1, 1980).)
Nonetheless, because the statute was enacted to prevent the franchisor from exercising unfettered control over assignments and to create a freer market for petroleum franchises, case law holds the franchisor may not utilize criteria that artificially or unreasonably restrict a franchisee's ability to assign the franchise. (California Service Station etc. Assn. v. Union Oil Co., supra, 232 Cal.App.3d at pp. 55-56.) Therefore, the criteria utilized under section 21148, subdivision (a)(3) should be similar to the criteria established in subdivision (a)(1), (2), and (4). (California Service Station etc. Assn. v. Union Oil Co., at p. 56.) In other words, the criteria should bear on the proposed purchaser's qualifications to operate the franchise successfully and in a manner that does not harm the franchisor competitively.
The Razukis' image management skills and their corresponding willingness and ability to comply Shell's image standards, including the CVP standards, clearly have bearing on their ability to operate the franchise successfully. The very nature of the franchise is the right to use the Shell brand. (§ 21140, subd. (a)(2), (3).) If a proposed assignee or prospective franchisee lacks image management skills or is unwilling or unable to comply with Shell's image standards, then permitting the proposed assignee or prospective franchisee to obtain the franchise would frustrate the purpose of the franchise and possibly cause Shell competitive harm if the operation of the franchise denigrates the Shell brand. Consequently, we conclude the trial court correctly determined Shell could utilize image management as an evaluation criterion under subdivision (a)(3).
Given our conclusion, we need not address Stonecrest's corollary argument that Shell must approve the assignment because the Razukis met Shell's financial qualifications and achieved a "qualified" rating on the structured portion of the interview. These criteria are not the only permissible criteria under section 21148, subdivision (a)(3) as Stonecrest contends. Moreover, there is ample evidence in the record to show achieving a "qualified" rating on the structured portion of the interview was not sufficient for the Razukis to pass the interview portion of Shell's evaluation process and, in fact, they did not pass it.
Trial Court's Determination Shell Satisfied the Requirements of Section 21148, Subdivision (a)(3) Is Not Clearly Erroneous
Stonecrest contends the trial court erred in determining Shell satisfied the requirements of section 21148, subdivision (a)(3) because there is insufficient evidence to show Shell's evaluation criteria were uniformly applied or normally required of prospective franchises. Preliminary, we note Stonecrest has waived any challenge based on the sufficiency of the evidence because Stonecrest's opening brief did not set forth all of the material evidence. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881; Nwosu v. Uba (2004) 122 Cal.App.4th 1229, 1247.) In addition, as we previously explained, we review the trial court's application of the law to the facts in this case under the clearly erroneous standard. (Ghirardo v. Antonioli, supra, 8 Cal.4th at p. 801; People v. Louis, supra, 42 Cal.3d at pp. 985-987.)
Furthermore, every Shell witness familiar with its evaluation process testified Shell used the same process and criteria to evaluate the Razukis as Shell uses to evaluate prospective franchisees. This testimony was corroborated by the testimony of the Liberty representative who assists Shell with the information gathering portion of the process. This testimony was also corroborated by Shell's Retailer Assignment Guide. Although the record shows Shell was not meticulous in its handling of this matter, there is no evidence Shell deviated materially from its established process in its evaluation of the Razukis. Stonecrest's evidence of another assignment involving a different process is unavailing because that assignment was completed before Shell began implementing the process it used for the Razukis. Accordingly, we conclude the trial court did not clearly err when it determined Shell complied with the requirements of section 21148, subdivision (a)(3).
DISPOSITION
The judgment is affirmed. Respondent is awarded costs on appeal.
WE CONCUR: McDONALD, J., AARON, J.