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Fourth Circuit Enforces Restri...

Fourth Circuit Enforces Restrictive Covenant Forcing Gas Station Owner to Use BP Gas

In a recent decision, the Federal Court of Appeals for the Fourth Circuit upheld a contract forcing a gas station owner to buy his gas from a certain oil company, despite the similarity of the agreement to an oft-unenforceable employment non-compete.  In so holding, the Fourth Circuit distinguished between business owner restrictive purchase agreements and employee restrictive covenants, finding the former easier to enforce than the latter.   The case is BP Products N.A., Inc. v. Stanley, et al., 2012 U.S. App. LEXIS 2909 (4th Cir. 2012).

The case involved an appeal by BP Products North America, Inc. (“BP”) from the Eastern District of Virginia district court’s award of summary judgment in favor of the defendants: Charles V. Stanley, Jr. (“Stanley”) and his business, Telegraph Petroleum Properties (“Telegraph”).  BP had sued the defendants seeking to enforce a restrictive covenant in a deed which prohibited Stanley’s service station (located in Alexandria, VA) from selling fuel that was not BP-branded.  The district court had granted summary judgment in favor of the defendants on the basis that the restriction was overbroad and unenforceable under Virginia law, and had also awarded the defendants their attorneys’ fees and costs.  In a 2-1 decision, the Fourth Circuit Court of Appeals reversed the district court’s grant of summary judgment and vacated the fees award.

In 2005, Stanley signed a deed with BP to purchase the land upon which he had operated an Amoco station for many years.  The deed contained certain restrictive covenants, particularly a Petroleum Restriction (“PR”) which prohibited Stanley from selling non-BP-branded gasoline at his station.  Eventually, when BP’s regional distributor began selling gas to Stanley at prices the latter felt were “commercially unreasonable,” Stanley stopped selling BP-branded fuel and started selling AmeriGO fuel.  BP ultimately filed suit in 2009 to enforce the terms of the PR; the defendants counterclaimed, seeking a declaration that the PR was overbroad and therefore invalid.

Following cross-motions for summary judgment, the district court ruled that the restriction on Stanley’s right to sell non-BP-branded fuel at the station was overbroad and unenforceable as written.  BP then appealed, arguing that the district court erred in concluding that the PR was overbroad.

The appellate court concluded that the district court had improperly analyzed the PR under the incorrect test.  Specifically, the district court had chosen to analyze the PR under a stricter test usually applied to non-compete covenants in employment contracts.  See, e.g., Omniplex World Services Corp. v. U.S. Investigations Services, Inc., 270 Va. 246, 618 S.E.2d 340 (2005).  On the contrary, the appropriate test in cases involving the use of land is the one discussed in Merriman v. Cover, Drayton & Leonard, 104 Va. 428, 51 S.E. 817 (1905).  Under Merriman, a restraint on land use is valid and enforceable “where the restraint is limited and there is a valuable consideration to support it,” so long as “the restraint imposed is reasonable” and not against public policy.  Merriman, 51 S.E. at 819.

While it acknowledged that covenants restricting the free use of land are not favored in Virginia, the Fourth Circuit reasoned that the PR afforded “fair protection” to BP’s interest without being “so large as to interfere with the interests” of the general public.  The court determined that the intentions of the parties were clearly reflected in the deed, and noted that the PR was designed to secure Stanley’s “long-term commitment” by making sure that any gasoline sold on the Property would be BP-branded.  Accordingly, the district court’s decision was reversed, and the case was remanded to EDVA for further proceedings.

In his dissenting opinion, Judge Henry Floyd pointed to the exact language of the PR, which he believed was much broader – and therefore, more restrictive – than was truly necessary to protect BP’s legitimate business interests.  Whereas the majority (in Judge Floyd’s estimation) was willing to interpret the various terms and products listed in the PR within the context of BP’s overall goal(s), Judge Floyd felt the PR’s language was overbroad on its face, and its “sweeping” prohibitions were therefore unenforceable.

This case demonstrates the different tests applied to various non-competitive agreements in the business context.  Where a restrictive agreement applies to business owners, rather than employees of a business, the courts are generally more likely to enforce the agreement.