Administrative – Lanham Act Preemption May Work in Ethanol Case

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American Petroleum Institute v. Cooper (Lawyers Weekly No. 13-01-0579, 36 pp.) (Agee, J.) No. 12-1078, June 6, 2013; USDC at Raleigh, N.C. (Flanagan, J.) 4^th Cir.

Holding: Plaintiff trade groups that represent the natural gas and oil industry who want to enjoin enforcement of North Carolina’s Ethanol Blending Statute get another chance to prove Lanham Act preemption; the 4^th Circuit agrees with the district court’s grant of summary judgment for defendants, the state and a marketing association, on plaintiffs’ preemption challenges under the Petroleum Marketing Practices Act and federal renewable fuel program, but says there are unresolved issues on plaintiffs’ Lanham Act preemption challenge.

At the heart of the issues in this case are the two common methods employed to blend ethanol with conventional gasoline. “Inline” blending is conducted by suppliers and takes place at the terminal where distributors and retailers purchase the gasoline product from the suppliers. “Splash” blending describes a process by which a retailer purchases unblended gasoline from a supplier at the supplier’s terminal. Plaintiffs contended before the district court and on appeal that splash blending is more subject to error than inline blending and thereby inhibits their ability to preserve and verify the quality of their trademarked goods.

The North Carolina Blending Statute, N.C. Gen. Stat. § 75-90, requires entities importing gasoline into North Carolina (i.e., suppliers) to offer unblended gasoline for sale to retailers and prevents suppliers from contractually restricting retailers from splash blending.

On a legal challenge by plaintiffs, American Petroleum Institute and American Fuels and Petrochemical Manufacturers Association, the district court concluded the Blending Statute was not preempted under any of the grounds advanced by plaintiffs, and granted summary judgment in favor of the state and the intervenor-defendant, the North Carolina Petroleum and Convenience Marketers Association (collectively, defendants).

The district court entered a final judgment in favor of defendants on all of plaintiffs’ claims.

The district court properly held that the 1994 amendments to the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. §§ 1051-1113, give states the authority to pass substantive laws making certain franchise provisions illegal or unenforceable. For PMPA purposes only, the 1994 amendments render the Blending Statute immune from plaintiffs’ preemption claim.

As an alternative argument, plaintiffs contend the Blending Statute conflicts with certain provisions of the PMPA, 15 U.S.C. § 2802(b)(2)(C), that allow a franchisor to terminate a franchise agreement for “willful adulteration” of a petroleum product by the franchisee. We do not agree. There is no merit in plaintiffs’ claim that splash blending would constitute “willful adulteration” as that term is understood in statute and case law for PMPA purposes so as to bring about a conflict between it and the Blending Statute.

We agree with the district court that the PMPA does not preempt the Blending Statute, either expressly or by way of conflict preemption. The district court did not err in granting summary judgment to defendants on this issue.

Further, the district court correctly held that the Blending Statute is not preempted by the federal renewable fuel program, and the court did not err in granting summary judgment to defendants on this issue.

Plaintiffs’ final argument for preemption is that the Blending Statute interferes with suppliers’ ability to control the quality of the products bearing their trademarks. We conclude the district court erred by granting summary judgment in favor of defendants because genuine issues of material fact remain in dispute. Specific to this case, plaintiffs’ as-applied preemption challenge under the Lanham Act goes to the effect of splash blending by retailers on plaintiffs’ trademark rights; i.e., the quality of the gasoline product sold under those trademarks when it is produced by the splash blending process.

Construing the record in favor of the nonmovant, plaintiffs, the evidence presents a genuine disputed issue of material fact that does not permit the award of summary judgment in the current posture of the case.

We vacate the district court’s grant of summary judgment to defendants on the Lanham Act preemption claim, and remand for the district court to consider whether the Blending Statute, by preventing suppliers from restricting the ability of retailers to splash blend, has a “significant negative impact” on the suppliers’ ability to ensure that blended gasoline bearing the suppliers’ mark is at the level of quality suppliers reasonably demand to safeguard their trademark rights and prevent consumer confusion.

Affirmed in part, vacated in part and remanded.