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					                                   NO. 03- 0555

                         IN THE SUPREME COURT OF TEXAS


              SHELL OIL COMPANY , MOTIV A ENTERPRiSES LLC
           EQUILON ENTERPRISESLLC , AND EQUIV A SERVICES LLC
                                               Petitioners
                                        vs.
                                 HRN, INC. et al.
                                              Respondents.

                  FROM THE COURT OF APPEALS FOR THE
           FOURTEENTH JUDICIAL DISTRICT OF TEXAS AT HOUSTON


                                  PETITIONERS'
                              BRIEF ON THE MERITS


SHELL OIL COMPANY                                 BAKER BOTTS L,. L.P.
Ann Spiegel                                     J. Gregory Copeland
State BarNo. 18933140                           State Bar No. 04798500
910 Louisiana Street                            J. Michael Baldwin
One Shell Plaza, 48th Floor                     State Bar No. 01625300
Houston , Texas 77002                           Macey Reasoner Stokes
(713) 241- 6899                                 State Bar No. 00788253
(713) 241- 5362 (fax)                           Richard A. Brooks
                                                State Bar No. 03072700
                                                David M. Rodi
                                                State Bar No. 00797334
                                                One Shell Plaza
                                                910 Louisiana Street
                                                Houston , Texas 77002-4995
                                                (713) 229- 1234
                                                (713) 229- 1522 (fax)

                                                A TIORNEYS FOR PETITIONERS
                                                SHELL OIL COMPANY
                                                MOTIV A ENTERPRISES LLC
                                                EQUILON ENTERPRISES LLC
                                                AND EQUNA SERVICES LLC
                               IDENTITY OF PARTIES AND COUNSEL
                    Pursuant to Texas Rule of Appellate Procedure 55. 2(a), Petitioners Shell


  Oil Company, Motiva Enterprises LLC , Equilon Enterprises LLC , and Equiva Services

 LLC provide this list of parties to the trial court' s judgment and the names and addresses

 of all trial and appellate counsel:

 P etitioners/   Appellees/Defendants:

 Shell Oil       Company, Motiva Enterprises LLC , Equilon Enterprises LLC ,                and Equiva
 Services LLC

 Trial and Appellate Counsel for Petitioners:


 J. Gregory Copeland
 J. Michael Baldwin
 Macey Reasoner Stokes
 Richard A. Brooks
 David M. Rodi
 Kristen McKeever
Baker Botts LLP.
One Shell Plaza
910 Louisiana Street
Houston, Texas 77002- 4995

Respondents/ Appellants/Plaintiffs:


HRN , Inc. et a1.l




        A complete list of Respondents is contained in Appendix A to the              court of appeals
opinion ,   102 S. W .   3d 205 , a copy of which is attached hereto as Appendix A.




HOUO1:799827
   Trial and Appellate Counsel for Respondents:

  George M. Fleming
  Sylvia Davidow
  Anita Kawaja
  Fleming & Associates , L.L.P.
  1330 Post Oak Blvd. , Suite 3030
  Houston , Texas 17056
  Telephone (713) 621- 7944
  Facsimile (713) 621- 9638

  Mike O' Brien
  Mike O' Brien , P.
  1~30 Post Oak Blvd. , Suite 2960
  Houston , Texas 77056
  Telephone (713) 222- 0088
  Facsimile (713) 222- 0888

 Robert L. Steinberg
 Law Office of Robert L. Steinberg
 917 Franklin
 Houston , Texas 77002
 Telephone (713) 225- 1275
 Facsimile (713) 225- 2646

 Paul B. Rosen
 Law Office of Paul B. Rosen
 6750 West Loop South , Suite 800
 Bellaire , TX 77401
 Telephone (713) 222- 1502
 Facsimile (713) 665- 6818




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                                                 TABLE OF CONTENTS

  INDEX OF AUTHORITIES.............................................................................................. vi

  STATEMENT OF THE CASE..........................................................................."""""""" x

  STATEMENT OF JURISDICTION.................................................................................. xi

  ISSUES PRESENTED ...................................................................................................... xii

  STATEMENT OF FACTS ......................                                                              .................................... 1



                     Shell' s distribution network and pricing systems. ........................................

           II.       Procedural history of Plaintiffs ' claims. ......................... :............................. 3

           III.      The summary judgment record. ................... ................................................. 4

           IV.       Proceedings in the court of appeals and the Fifth Circuit' s Mathis
                     decision. ....                                                                                               ..... ..... 6

 SUMMARY OF ARGUMENT ...........................................................................""""""'" 7

 ARGUMENT ....................................................................................................................

                    The posted- price presumption of UCC Section 2- 305(2) reflects the
                    drafters ' intent to prevent discriminatory pricing while avoiding
                    endless litigation over the economic reasonableness of prices. ..................

          II.       The court of appeals erred in reversing summary judgment because
                     established UCC jurisprudence holds that a refiner is entitled to
                    judgment as a matter of law on Section 2- 305 claims when it charges
                    a commercially reasonable , posted price and does not discriminate
                    among buyers. ............................................................................................. 14

                    A. .     The undisputed summary judgment evidence established that
                             Plaintiffs paid Shell's price- in-effect and that Shell did not
                             discriminate among lessee dealers with identical pricing
                             provisions in their contracts. ............... ~............................................ 15

                             The undisputed evidence also established that Shell' s DTW
                             prices to its dealers were commercially reasonable as a matter
                             of law. .................. ............................. .......... .....                                   17




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                             The court                  of appeals erred in                                                                   failing to follow well,.
                             established Section 2- 305                                                        jurisprudence because the canons
                             of construction and the Texas UCC itself require Texas courts
                             to harmonize uniform statutes with the law of other adopting
                            jurisdictions........................................ ............ ~..................... ....... "'" 18

          III.    Inappropriately relying on Mathis , the court of appeals erroneously
                  concluded that a fact issue can be created under Section 2- 305 based
                  on circumstantial evidence that has nothing to do                                                                                           with a refiner
                 pricing decisions. ........................................................................................ 20

                            In a matter of first impression under Texas law, Mathis held
                            that evidence of a subjectively improper motive umelated to
                            pricing can create a fact issue under Section 2. 305(b). ...................

                            The cases relied on by Mathis and the court of appeals do not
                            support this radical departure from mainstream Section 2- 305
                           jurisprudence. ................................................................................... 22

         IV.     The circumstantial factors cited by the court of appeals as creating a
                 fact issue as to Shell' s subjective good- faith intent are either
                 umelated to Shell' s pricing, unsupported by the record , or irrelevant
                 as a matter of law.




                           The alleged uncompetitiveness of Shell' s DTW prices is
                           unsupported by the record and , in any event , is immaterial. ........... 26

                                       There is no evidence that Shell'                                                                                         commercially
                                       reasonable,                      nondiscriminatory                                                      DTW prices rendered
                                       any Plaintiff uncompetitive                                                                          in the        real-world retail
                                       marketplace. .................................................................

                                       As a matter of law , a good- faith price under Section 2-
                                       305 is not required                                                 to be a competitive price or the
                                   lowest price available. ...........                                                                                                          """""'" 27

                                   Evidence that different prices are available to different
                                   classes of trade is legally insufficient to establish bad
                                   faith under Section 2- 305...................................................... ~. 29

                          The fact tha,t some Plaintiffs have experienced declining
                          sales , lost money, or gone out of business does not raise a fact
                          issue as to whether Shell had a bad- faith plan to use pricing to
                          drive them out of business. .............................................................. 32



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                               The uncontroverted summary judgment evidence , including
                               evidence from Plaintiffs ' own ~xpert, negates Plaintiffs
                               allegation of a purported bad- faith plan to eliminate the lessee
                               dealers in favor of company-operated stores. .................................. 34

                     D. .      Plaintiffs ' decision to become Shell-branded dealers and
                               agree to Shell' contractual terms does not make them
                                    cap lve uyers.

                              The court of appeals properly rejected Plaintiffs ' proposed
                              theories based on hidden rent and alleged underselling at
                              company-operated stores. ................................................................ 37

                    Allowing the court of appeals ' holding to stand would cause severe
                    disruption to the gasoline marketing industry, and to any other
                    industry using open- price- term contracts , and would inundate Texas
                    courts with pricing challenges. ...................................................................

 CONCLUSION .................................................................................................................

 CERTIFICATE OF SERVICE .........................................................................................

 INDEX TO APPENDIX ...................................................................................................




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                                            INDEX OF AUTHORITIES

                                                                CASES

  $165 524. 78 v. State
  47 S. W.3d 632 (Tex. App.                Houston (I4th Dist. ) 2001 , pet. denied) ............................ .40

 Adams v.         G.J.  Sons, Inc.
                         Creel

  465 S. 2d 84 (S. C. 1995) ...........................................                                                              " 17 , 31

 Ajir v. Exxon Corp.
 185 F.3d 865 (table), 1999 WL 393666 (9th Cir. May 26 , 1999) ............                                             , 16 , 17

 Ajir v. Exxon Corp.
 No. C 93- 20830 , 1995 WL 261412 (N. D. Cal. May 2 , 1995),
 aff'd 185 F. 3d 865 (table) (9th Cir. 1999) ............................................................

                   Inc. v. Exxon Corp.
 Allapattah Servs. ,
 61 F. Supp. 2d 1308 (S. D. Fla. 1999) ...............................................................................

 Arnold v. Nat' l County Mut. Ins. Co.
 725 S. 2d 165 (Tex. 1987) .............................................................................................

Au Rustproofing Ctr. , Inc. v. Gulf Oil Corp.
 755 F. 2d 1231 (6th Cir. 1985) .....................................................................................

Belger v. Sweeny,
836 S. W.2d 752 (Tex. App.                 Houston (Ist Dist) 1992 , writ denied) .............................

Butler v. Coni'! Airlines , Inc.
31 S. 3d 642 (Tex. App. Houston (1st Dist.) 2000 , pet. denied) ................................

Chawla v. Shell Oil Co.
75 F. Supp. 2d 626 (S. D. Tex. 1999) ............................................................................

  s. Bills, Inc. v. Tzucano
700 P. 2d 1280 (Cal. 1985) .....

Exxon Corp. v. Superior Court of Santa Clara County,
60 Cal. Rptr. 2d 195 (Cal. Ct App. 1997)                         Koutney

Harvey v. Fearless Farris Wholesale, Inc.
589 F. 2d 451 (9th Cir. 1979) ........................................................................



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   Havird Oil Co. v. Marathon Oil Co.
   149 F. 3d 283 (4th Cir. 1998) .....................................................................               , 12, 16 , 17

  HRN, Inc. v. Shell Oil Co.
  102 S. W.3d 205 (Tex. App.                 Houston (14th Dist.) 2003 , pet. filed)............. 1 , 3 , 6                           , 18

                                                                                                                          , 34 , 36, 48

  ISP Mineral Prods. , Inc. v. GS Roofing Prods. Co.
  Civ. A. No. 3:97- CV- 2326- , 1999 WL 102818 (N.D. Tex. Feb. 22 , 1999) ...................

  Lockhart Sav.          Loan Ass n v. RepublicBank Austin
  720 S.          2d 193 (Tex. App.         Austin 1986 ,         writ refd n.
 Lozano v. Lozano
  52 S. W.3d 141 (Tex. 2001) ...................................................................................

 Lowe v. Chevron USA. , Inc.
. 1998 Bus. Franchise Guide (CCH) ~11 572 (Ca1. Super. Ct. 1998) ...................................

 MBank El Paso, N.A. v. Sanchez
 836 S. 2d 151 (Tex. 1992) .............................................................................................

 Mathis v. Exxon Corp.
 302 F.3d 448 (5th Cir. 2002) ........................................................................ , 7

                                                                                                                   , 34 , 36 , 39
McConnell v. Southside Indep. Sch. Dist.
858 S. 2d 337 (Tex. 1993) .............................................................................................

Mikefon, Inc. v. Exxon Co., u.S.
264 F. Supp. 2d 268 (D. Md. 2003) ................................................

Nanaku/i Paving             Rock Co. v. Shell Oil Co.
664 F. 2d 772 (9th Cir. 1981) ...................................



          2d 415 (8th Cir. 1986) ,
Richard Short Oil Co. v. Texaco, Inc.
799 F.                                                                                                                          11 16




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   Schwartz v. Sun Oil Co.
   No. 96- 72862              (E. D.   Mich. Dec. 9 ,   1999),
                 rev     in   part and aff'd    in   part
                 276 F. 3d 900 (6th Cir. 2002) ....................................................              , 16

   T.A.          , Inc. v. Gulf Oil Corp.
   553 F. Supp. 499 (B. D. Pa. 1982) .................................................................                                  , 18

  TCP Indus. , Inc. v. Uniroyal, Inc.
  661 F. 2d 542 (6th Cir. 1981) .............................................................................................

  Terrebonne Parish Sch. Bd. v. Columbia Gulf Transmission Co.
  290 F. 3d 303 (5thCir. 2002) .............................................................................................

  USXCorp. v. Int' l Minerals                    Chems. Corp.
  NQ. C 2254 , 1989 WL 10851 (N. D. Ill. Feb. 8 , 1989) ................................................

  Wayman v. Amoco Oil Co.
 923 F. Supp. 1322 (D. Kan. 1996),                      aff' d mem. 145F. 3d 1347 (10th Cir. 1998) .......                             , 12

  Wilson v. Amerada Hess Corp.
 773-A. 2d         1121 (N. J.         2001) """"'"

                                                     STATUTES AND RULES

 Petroleum Marketing Practices Act , 15 D.                          C. gg 2801         et seq.




 TEX. Bus. & COM. CODE ANN. g 1.1O2(b) (Vernon 1994) ..............................................


 TEX.     Bus.      & COM. CODE ANN. g 2. 1O3(a)(2) (Vernon 1994) ..........................................

TEX.      Bus.      & COM. CODE ANN. ~ 2.305 (Vernon 1994) ................                                                  , xi , 3 , 12

TEx.      Bus.      & COM. CODE ANN. ~ 2.305 emt. 3 (Vernon 1994) ...................................                                 , 13


TEx. GOy' T CODE ANN. ~~ 22. 001 (Vernon 1988) ..........................................................

TEX. GOy T CODE ANN. ~ 311. 28 (Vernon 1998) ............................................................

TEXAS RULE OF APPELLATE PROCEDURE 55.2(a) ...............................................................




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                                                     MISCELLANEOUS

 2A ANDERSON ON THE UNIFORM COMMERCIAL CODE ~ 2- 305:6 (rev. 3d ed. 1997) ......

 Walter D. Malcolm The Proposed Commercial Code: A Report on Developments
       from May 1950 through February 1951 6 Bus. LAW. 113 (1951) .................

 PROCEEDINGS OF ENLARGED Editorial BOARD OF AMERICAN LAW INSTITUTE
      (Sunday Morning Session , Jan. 28 , 1951) .............................................................

 S. Rep. No. 95- 731 (1978),          reprinted in        1978 US.                 N. 873         877 ....,...................... .43

 1 JAMES J. WHITE & ROBERT S. SUMMERS , UNIFORM COMMERCIAL CODE ~ 3-
       . (4th ed.   1995) .................................................................




HOUOI :799827
                               STATEMENT OF THE CASE
 Nature of the Case:           A suit for damages for breach of contract for failure to set
                                                                              contract in
                               the price of gasoline under an open- price- term
                               good faith , as required by Section 2.305(b) of the Texas
                               Business and Commerce Code. (22 c.R. at 4406- 07.

 Trial court and judge:       The 234th Judicial District Court of Harris County, Texas
                              the Honorable Scott Brister, presiding.

 Trial court s disposition:   The trial court granted summary judgment for Shell         on
                              Plaintiffs ' good- faith pricing claims. (14 C. R. at 2697; 30
                                R. at 6397.

 Parties in court of          Appellants:
 appeals:
                              HRN,    Inc. et at (see App. A for a complete list)
                              (collectively, "   Plaintiffs

                              Appellees:

                              Shell Oil Company, Motiva Enterprises LLC , Equilon
                              Enterprises LLC , and Equiva Services LLC (collectively,
                               Shell"

 Court of appeals and its     In a published opinion authored by Justice Wanda McKee
disposition:                  Fowler and joined by  Justices J. Harvey Hudson and Lee
                              Duggan , Jr. , the Fourteenth Court of Appeals at Houston
                              reversed the trial court' s summary judgment on Plaintiffs
                              good- faith pricing claims and remanded those claims for
                              trial. 102 S.      3d 205 219.




HOUOl:799827
                             STATEMENT          OF JURISDICTION
                 The Court has jurisdiction of this            appeal pursuant to both   Section

 22. 001(a)(3)   and Section 22. 001(a)(6)   of the Government Code. TEx. GOy' T CODE ANN.

 ~~ 22. 001(a)(3), (6)   (Vernon 1988).        Jurisdiction exists under Section    22. 001(a)(3)


 because this case involves the proper construction            of Section 2.305(b) of the   Texas

 Business and Commerce Code , the Texas enactment of Section 2- 305(2) of the Uriiform

 Commercial Code (" the VCC").           Section 2.305(b),   which governs the setting of prices

 under open-price- term    contracts ,   has never been construed by this Court. Because


 refmers who distribute gasoline through independent lessee dealers use open.:.price-term

 contracts like the one at issue here , the proper construction of Section 2. 305(b) presents

 an issue of vital importance to the gasoline marketing industry, as well as to any other

industry that regularly conducts business through open-price-term         contracts. This Court


also has jurisdiction under Section           22. 00 1   (a)(6) because the court   of appeals

construction of this important statute places Texas at odds with the overwhelming weight

of authority construing VCC Section 2-305(2).




HOUOl:799827
                                    ISSUES PRESENTED

                                          ISSUE ONE

                Whether the court of appeals      properly construed Texas
                version of UCC Section 2- 305(2), which governs pricing in
                the gasoline marketing     industry and other industries ,   by
                holding that a seller which charges its buyers an objectively
                commercially reasonable price and which does not
                discriminate against any particular buyer may nevertheless be
                liable for bad- faith pricing if it possesses an improper motive
                or fails to ensure its buyers retail competitiveness?

                                         ISSUE Two

                Whether the court of appeals abdicated its duty to interpret
                this important Texas statute . by adopting, wholesale and
                without independent analysis , the Fifth Circuit' Erie guess
                that this Court would construe Section 2-305(2) in a way that
                conflicts with the vast majority of courts to have construed
                this UCC provision?

                                        ISSUE THREE

                Whether the court of appeals erred in holding that. a claim
                under Section 2:"305(2) necessarily involves fact findings that
                are not appropriate for summary judgment, contrary to the
                weight of UCC authority granting relief as a matter of law in
                similar cases?




HOUOI :799827                                   xii
                                     STATEMENT OF FACTS
                    Plaintiffs are several hundred " lessee           dealers" in 17           different states who

 lease service stations from Shell and buy gasoline from Shell to operate those stations as

 inqependent businesses. (22 C~R. at 4314- 80. )                    Two primary contracts govern the

 relationship between Shell and its lessee dealers: a Lease and a Dealer Agreement. (5

    R. at 970- 982 , 985- 1000. )   Shell' s   relationship with its lesse e dealers is also governed

 by the federal Petroleum Marketing Practices Act ("PMP A"), which regulates                                              the


 grounds for termination and nonrenewal of a petroleum                       franchise relationship.              See




      C. 9 2802 (1994).

         Shell' s distribution network and pricing systems.

                    In the Dealer Agreement,      each lessee dealer agrees to buy Shell- branded


 gasoline from Shell at the " dealer prices. . . in effect" at the time of purchase. (5 C. R. at

989. )   Shell' s   price to its dealers is referred to as the DTW (" dealer tank wagon ) price

because it includes delivery to the dealer        s station by a Shell tanker truck.                   (Id.   at 952. )   It
is undisputed that the DTW pricing provision                   is an " open            price term " governed by

Section 2- 305(2)       of the   UCC.   102 S. W.3d at 211. Open-price- term contracts                                  are


commonly used in the gasoline refining and marketing industry due to price volatility.

                Plaintiffs ' suit challenges the pricing and distribution systems that Shell and

other major refiners across the country have used for decades. In metropolitan areas like

Houston , Shell has historically marketed gasoline to the public through a retail network

composed of lessee dealers , open dealers , and company-operated , stations. First, Shell

distributes gasoline through lessee dealers like Plaintiffs , who lease property from Shell


HOUOl:799827
.,.                                                                             .'




        and buy gasoline at the DTW price. Shell also sells gasoline to open dealers , who control

        their own station property and have only a supply contract with Shell. (5                      C.   R. at 951.) In

        addition, Shell distributes gasoline directly to the public through salary-operated stations

       called " SOROs " and contractor-operated stations called " COROs.                    (Id.     at 952.

                             In. metropolitan - fringe   and rural areas , Shell distributes Shell-branded


       gasoline through a network of wholesale distributors called jobbers.                            Jobbers operate

       fleets of trucks to pick up gasoline at rermers ' terminals and distribute it to stations they

       own themselve~ or to independent stations.             (Id.   at 951.) .Jobbers may have distribution

       agreements with several refiners simultaneously. Jobbers pay a ' ~rack" price that is

       available for gasoline bought and picked up at Shell' s terminals.            (Id.          at 951-52. )   Shell'


       DTW price to lessee dealers and the rack price available to jobbers are not set in relation

       to each       other.        (19 C. R. at 3748.     To avoid     concerns with secondary- line price

       discrimination under federal law, Shell' s contracts with its jobbers contain disincentives

      to discourage jobbers from reselling gasoline to Shell-branded lessee dealers. (5 C. R. at

      953.

                            For decades , major refiners including Shell , Exxon , and Chevron have used

      this sort of dual distribution system ,           with separate wholesale and retail networks and

      different pricing for the different classes of trade.



                 See, e. , Lowe v. Chevron u.s.A. , Inc. 1998 Bus. FRANCHISE GrnDE (CCH) ~11 572
      (Ca!. Super. Ct. 1998) (describing Chevron s distribution system);    Exxon Corp. v.  Superior
      Court of Santa Clara County,      60 Cal. Rptr. 2d 195 , 205 (Cal. Ct. App. 1997)    Koutney
      (describing Exxon s distribution system).




      HOUOl:799827
                                                          ,"




  II.         Procedural history of Plaintiffs ' claims.

                        In 1999 ,      several dozen lessee dealers filed a federal lawsuit against Shell in

  the Southern District of Texas , alleging that Shell' s pricing practices violated federal and

  state antitrust law, as well as Section 2- 305(2) of the UCC. While the federal case was

 pending, the dealers ' counsel filed this case in state court as a placeholder on behalf of a

 single plaintiff and did not                   attempt service on Shell. (1 C. R.       at 2. ) On November 3

  1999 ,      U.   S. District Judge Nancy Atlas dismissed                   all of the dealers ' federal antitrust


 claims as a matter of law.                     Chawla v. Shell Oil Co.        75 F. Supp. 2d 626 ,   659- 60 (S.

 Tex. 1999). After Judge Atlas dismissed their federal claims , the dealers voluntarily

 dismissed their pendent state- law claims and amended their state-court petition in this

 case to add hundreds of additional plaintiffs.

                       Although Plaintiffs initially alleged a variety of common- law and statutory

 claims , the only surviving claim at issue in this appeal is Plaintiffs ' open- price- term claim

 under Section 2.305(b) of the Texas Business and Commerce Code.                               See   102 S. W.3d at

 210. Section 2.305(b)               is Texas s verbatim version ofUCC Section 2- 305(2) and provides

 that in an open-price-term contract                           (aJ price to be fixed by the seller or by the buyer

means a price for him to fix in good faith. "                         TEx. Bus. & COM. CODE ANN. ~ 2.305(b)


 (Vernon 1994).

                      Plaintiffs claim that Shell' s DTW prices are not set in good faith because

those prices are too high , rendering Plaintiffs unable to compete with nearby gasoline

. outlets ,   including other major-brand                     stations , discount or unbranded stations ,   stations


supplied by jobbers , and recent mass-market entrants like Wal- Mart and Randall' s.                            (22



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      R. at 4406- 07.             Plaintiffs further contend that Shell's allegedly uncompetitive DTW

  pricing is part of a plan to drive them out of business and convert profitable locations to

  company-operated sites.
                                             (Jd.    at 4407. ) Plaintiffs 1                 theory, as explained by their two

  experts , is that the only good- faith price for gasoline would be one based on the genenilly

  lower rack price available to jobbers. (19                               C. R.   at 3704 3709.

  ill.      The summary judgment record.
                       Because its DTW pricing system                                      comports with decades of         industry
 practice , Shell filed two motions for summary judgment on Plaintiffs ' good- faith pricing

 claims. (4 C. R. at 879; 19 C. R. at 3632. ) Shell' s                                     motions relied on the "posted-price

 presumption contained in Official Comment 3 to Section 2. 305. (4 C. R.                                             at 914- 18; 19

    R. at 3647- 50. )            Comment 3 explains that ,                          for merchants like Shell , the good- faith
 standard of Section 2- 305                  requires both honesty in fact and " observance of reasonable

 commercial standards of fair dealing in the                                      trade.     TEX. Bus. & COM. CODE ANN.

 ~ 2.305 cmt. 3 (Vernon 1994) (citing Section 2. 103(a)(2)). Comment 3 further states a

presumption that "in the normal case a ' posted price ' or a . . . ' price in effect                                           market
price,' or the like satisfies the good faith requirement."
                                                                                             Id.

                      On summary judgment,                    it was undisputed that Plaintiffs paid Shell' s "price

. . . in effect" for gasoline as provided in their Dealer Agreements.
                                                                                                        (See     5 C. R. at 989. )   It
was also undisputed that Shell did not discriminate against Plaintiffs by charging them a

different price than it charged other                        similarly-situated              buyers-           other dealers in the


same geographic price zone. (19 C. R. at 3748. )                                    Furthermore ,   Shell' s summary judgment

evidence-which Plaintiffs made no attempt to dispute-established that Shell' s DTW


iIOUOI :799827
  prices in the relevant geographic markets fell within the range of DTW prices charged by

  other refiners          (e.       Amoco , Exxon , Mobil ,                     Chevron ,   ARCO , and Marathon) to their

  lessee dealers in those markets. (19                            c.R. at 3750- 60; 30 C. R. at 6496. ) Under           the

 posted-price presumption of Comment 3 and established case law under Section 2-305

 this uncontroverted evidence was sufficient to demonstrate that Shell' s DTW prices were

 commercially reasonable and that Shell was entitled to summary judgment on Plaintiffs

 bad- faith pricing claims.               (See infra       Part II of the Argument section).

                       Unable to contest the commercial reasonableness of Shell' s DTW prices

 Plaintiffs instead argued that a laundry- list of circumstantial factors created a fact issue as

 to whether Shell had acted in bad faith by setting its DTW with the subjectively improper

 motive of running Plaintiffs out of business. 3 However, Plaintiffs conceded to the trial

 court that they had no direct evidence that Shell had such a plan to drive them out

business and convert their stations to company-operated locations. (27                                  c.R. at 5705- 07.

Indeed, the summary judgment evidence from Plaintiffs ' own expert belied the existence

of such a plan. He                   calculated that the number of Shell dealer-operated stations in

Houston had increased during the damages period , while the number of company-

operated stations had decreased. (32 C. R.                             at 6919.       Finally, Plaintiffs failed to present

any summary judgment evidence connecting the alleged dealer-elimination plan to any of

Shell' s actual pricing decisions. To the contrary, the uncontradicted deposition testimony



           These circumstantial factors are discussed in detail below in Part
                                                                                                         of the Argument
section.




HOUOl:799827
  of Shell's planning manager established that DTW pricing was never a consideration in

  Shell' s long- term strategic planning. (29 C. R. at 6193.

                          Moreover, under case law applying Section 2- 305(2),                                               none of the
  circumstantial factors on ' which Plaintiffs relied was legally sufficient to create a fact

  issue as to whether Shell acted in good faith.                                 (See infra      Part IV of the Argument section).

  Therefore ,            applying established authority                        horn around the country that had rejected
  similar claims as. a matter of law, the trial court granted summary judgment for Shell on

 Plaintiffs ' Section 2.305 claim. (30 C~R. at 6397. )                                    In one of   two reasoned letter opinions

 explaining its ruling, the trial court noted that "the holdings of numerous other courts

 throughout the country "                   supported summary judgment, while Plaintiffs could " cite no

 written opinions supporting claims like theirs. " (App. C at 2;                                      see also     App. B.)

 IV.          Proceedings in the court of appeals and the Fifth Circuit'                                         Mathis      decision.
                          Plaintiffs appealed the summary judgment to the Fourteenth Court of

Appeals. After the court of appeals heard argument in this case , the Fifth Circuit issued

its opinion in             Mathis v. Exxon Corp. 302 F.3d 448 (5th Cir. 2002) (copy attached                                             as


Appendix F). In                Mathis        the Fifth Circuit,            attempting to predict Texas law, declined to

follow existing UCC authority and became the flIst court                                                 to approve of a          Section

      305(2) claim based on a theory similar to the one advanced by Plaintiffs here.                                              Mathis

involved a group of Exxon lessee dealers represented by the same counsel who represent

Plaintiffs. 302 F.3d at                 451. Ignoring the             Mathis            opinion s status as an anomaly in UCC

jurisprudence , the court of appeals applied                                   Mathis         to this case and adopted the Fifth
Circuit's         Erie
                           guess as to Texas law. 1O2S. W.3d at 214. The court                                            of appeals also



HOUOl:799827
  ignored differences in the records of the two cases while parroting the factors discussed

  in   Mathis     to reach its conclusion that a fact issue exists as to whether Shell set its DTW

 prices with subjective good faith.                  Id.   at 214- 15.    Relying wholly on this set of

  circumstantial factors , none of which had any connection to Shell' s DTW pricing, the

 court of appeals reversed the               summary judgment on Plaintiffs '                 pricing claims and

 remanded those claims for trial.            Id.   Shell petitioned for review by this Court because the

 anomalous construction of Section 2.305 adopted by the court of appeals is contrary to

 established UCC jurisprudence in other jurisdictions.

                       Separate from its holding on Plaintiffs ' Section 2.305 claim , the court of

 appeals affirmed the trial court' s summary judgment as to 27 dealers who had executed

 releases in favor of Shell.        Id.    at 216. The court of appeals also affmned the trial court'

 dismissal of eight dealers for failure to comply                  with   discovery orders.          Id.   at 218.

 Plaintiffs have not sought review of these portions                 of the court of appeals '         judgment.

Accordingly, the only issues presented in this appeal relate to Plaintiffs ' Section 2.305

claim.

                                          SUMMARY OF ARGUMENT
                    . The court of appeals ' adoption of a novel good- faith pricing standard under

the Texas version of Section 2- 305 threatens to severely disrupt the business of Texas

refiners.         The court' s unique        construction of Section 2.305 will               allow potentially
unending suits to be brought in Texas courts challenging refiners ' pricing and distribution

systems ,       even though those systems have been in use for decades and have been

repeatedly upheld by courts around the country.


HOUOt :799827
                   The drafters of Section 2- 305 recognized that many industries , including

 specifically the oil and gas industry, regularly use open-price-term contracts to distribute

 goods. To validate such contracts and supply an implied price term , Section 2- 305(2)

 provides that, where a contract gives one party discretion in setting the price , that party

 must set the price in good faith. In       adopting this good- faith standard, however,       the


 drafters specifically sought to foreclose legal challenges to the economic reasonableness

 of prices , which they feared would spawn never-ending litigation and seriously impair the

 ability of those industries to conduct business.

                   The drafting history and subsequent case law make clear that the chief

 concern of the drafters of Section 2- 305      was to prevent   sellers from discriminating


 among similarly-situated buyers in terms of        price. Therefore , in order to    minimize

judicial intrusion into price setting        under open-price- term   contracts ,   the   drafters

incorporated a "posted-price " presumption into the good- faith standard of Section 2- 305

to allow       sellers to avoid liability by charging all similarly-situated buyers the same

 posted price "    or "price in effect."

                  Gasoline refiners have used open-price-term contracts for decades , and an

established' body       of UCC jurisprudence has emerged applying the . posted-price
presumption to refiners ' DTW prices. Applying the presumption , courts have routinely

rendered judgment as a matter of law on dealers ' Section 2- 305 claims where the refmer

used a posted price and did not discriminate against similarly-situated dealers. Here , the

undisputed summary j~dgment evidence established            that Shell   complied with this
standard: Plaintiffs paid Shell' s "price in effect" for gasoline , and Shell charged the same


HOUOl:799827
 price to all dealers in the same price zone.     Under   established authority, the trial court

 properly granted summary judgment for Shell on this basis alone.

                 Shell was also   entitled to   summary judgment because the undisputed

 evidence conclusively demonstrated that Shell' s DTW prices were well within the range

 of DTW prices that other major oil companies charged their            dealers in the relevant


 geographic markets. As the trial court recognized , under established UCC doctrine , this

 evidence was sufficient to establish the commercial reasonableness of Shell' s prices as a

matter of law.

                Ignoring the wide body of law granting judgment as a matter of law

similar cases   , the court of appeals adopted a novel construction of Section 2- 305 that

essentially writes the posted-price presumption out of Texas law. In doing so , the court

of appeals violated canons of construction       that require Texas courts to conform their

interpretation of any uniform statute , including the UCC , to the interpretation prevailing

in other states that have adopted the same statute. Rather, relying on a single case from

the Fifth Circuit-which in turn was attempting to predict Texas law-the court of
appeals concluded that, even if a refmer s prices are nondiscriminatory and commercially

reasonable as a matter of law, a fact issue can nevertheless exist as to a refmer s goo

faith motives under Section 2. 305 based on a range of circumstantial factors that have

nothing to do with the refiner s actual pricing decisions. More startling, the court of

appeals ignored decades of authority granting judgment as a matter of law under Section

  305 to reach the sweeping conclusion that "the good faith requirement of section 2.305




HOUOl:799827
 involves fact findings that are not appropriate for summary judgment." 102 S.                   3d at

 214.

               Reciting a list of circumstantial factors from the Fifth       Circuit's       Mathis

 opinion , the court of appeals erroneously concluded that a fact issue existed as to Shell'

 subjective good- faith   intent   . and whether   Shell had a plan to drive its dealers out of

 business and convert their stations       to   company operations.     However ,         each of the

 circumstantial factors cited by the court of appeals is either unsupported in the record, is

 completely unrelated to Shell' s      pricing, or is    irrelevant as a matter     of law under

 established UCC authority. For example , far from supporting an inference of a bad- faith

 conversion plan, the summary judgment evidence from Plaintiffs ' own expert reflected

 that, during the relevant period, the number of Shell dealer stations in Houston increased

 while the number of company-operated stations decreased. More importantly, courts

 granting judgment as a matter of law for refiners have routinely concluded that the very

types of evidence cited by the court of appeals are irrelevant or insufficient to create            a


fact issue under the good- faith standard of Section 2- 305.

               In essence , the court of appeals '     holding requires refiners selling under

open-price- tenn   contracts to set their prices in a      way that guarantees their dealers

competitiveness in the retail marketplace. This is not only contrary to established case

. law; it sets up a novel standard that is completely unworkable. As a practical matter

there is no way for refiners to predict how their daily DTW pricing decisions will affect

the individual competitiveness of thousands of dealers across the country.                 Thus , the

court of appeals ' holding exposes Texas gasoline refiners to potentially endless litigation


HOUOl:799827
  over the economic reasonableness of their prices and limits their ability to plan for and

  react to the undeniable market changes caused by the entry of Wal-Mart, Randall' , and

  other mass marketers into gasoline retailing. Because nothing in the purpose , drafting

  history, or established doctrine under Section 2-305 supports this outcome , this Court

  should reverse the court of appeals ' judgment on Plaintiffs ' bad- faith pricing claims.

                                                             ARGUMENT
            The posted- price presumption o~ Dee Section 2-305(2) reflects the drafters
            intent to prevent discriminatory pricing while avoiding endless litigation over
            the economic reasonableness of prices.

                          Ignoring numerous cases validating the gasoline distribution and pricing

 systems utilized by Shell and other major refiners , the court of appeals reversed the trial

 court' s summary judgment on Plaintiffs ' novel claim under UCc. Section 2- 305(2).

 Indeed , .contrary to the court of                    appeals '   conclusion that " the good faith requirement of

 section 2.305 involves fact findings that are not appropriate for summary judgment " the

vast m~ority of Section 2- 305 cases involving refiners has found no violation as a matter
            4 As the trial court correctly recognized
of law.                                                                , this case is no different. (App. C at 2.


            See,     e.   , Ajir v. Exxon Corp.      1999 WL 393666 , at *7 (9th Cir. May26
                                                           185 F.3d 865 ,
1999).      Ajir IF')                             Havird Oil Co. v. Marathon Oil Co.,
                           (affmnillg summary judgment);                               149 F.3d
283 290- 91 (4th Cir. 1998) (affirming grant of renewed motion for judgment as a matter oflaw);
Richard Short Oil Co. v. Texaco, Inc. 799 F.2d 415 , 422 (8th Cir. 1986) (affirming directed
verdict);    Mikeron, Inc.          v.Exxon Co. , u.S.              264 F. Supp. 2d 268 , 276 (D. Md.       2003)
                                                                                                                      (granting
summary judgment);               Schwartz     v. Sun Oil Co. No. 96- 72862 , slip op. at 42- 43 (E. D. Mich. Dec.

 , 1999) (a copy is attached as Appendix D) (granting judgment as a matter of law),
                                                                                                                  rev d in part
and aff'd in part 276 F.3d               900    (6th Cir.     2002); Wayman         v. Amoco Oil Co. 923 F. Supp. 1322
1346- 50 (D. Kan. 1996) (granting summary judgment),                                aff'd mem. 145 F. 3d 1347       (10th  Cir.
 1998);    USX Corp.    v.  Int l Minerals        Chems. Corp. No. 86 C 2254 , 1989 WL 10851 , at *1
(N. D. lll. Feb. 8 , 1989) (same);         T.A.M , Inc. v. Gulf Oil Corp. 553 F. Supp. 499 , 509- 10 (B.
Pa. 1982) (same);     Adams v. G. J. Creel            Sons, Inc. 465 S. 2d 84 , 86 (S. c. 1995) (affirming
directed verdict).




HODOl:799827
                 , As        part of an effort to modernize                commercial law and facilitate

 transactions , the drafters of the UCC adopted Section 2- 305 to confirm that open-price-

 term contracts are valid and enforceable. 2A ANDERSON ON THE UNIFORM COMMERCIAL

 CODE ~ 2- 305:6 , at 432 (rev. 3d ed.          1997);     see also   TEx. Bus. & COM. CODE ANN. ~
 1.1O2(b) (Vernon 1994) (providing           that the underlying purposes of the UCC are to clarify

 and modernize commercial law and validate commercial transactions established through

 usage and custom). Accordingly, to              supply an implied price term for such contracts


 Section 2- 305(2)       provides that a "price to be fixed by the seller or by the buyer means a

 price for him to fix in good faith. "        TEX. BuS. & COM. CODE ANN. ~ 2. 305(b) (Vernon

 1994) (identical to UCC ~ 2- 305(2));          see also Havird Oil         Co.    v.   Marathon Oil Co. 149

 F.3d 283, 290 (4th Cir. 1998) (noting that Section 2- 305 " serves to fill the gap and save

the contract").       In the case of a   merchant like Shell , this good- faith standard requires that

the price be set with "honesty in fact" and in " observance of reasonable commercial

standards of fair dealing in the trade. "           TEX.    Bus. & COM.           CODE ANN. ~ 2. 1O3(a)(2)

(Vernon 1994).

                   While seeking to validate the use of open-price-term contracts , the UCC'

drafters were also concerned that ' Section 2- 305 " should                       not    require suppliers in

industries where ' price- ill-effect' -type contracts are often used to establish that the price

ultimately charged was a reasonable one.                 Wayman       v.   Amoco Oil Co. 923 F.' Supp.

1322 , 1346 (D. Kan. 1996) (analyzing the drafting history of Section 2- 305 and the

posted-price presumption),         aff' d mem. 145 F.3d 1347 (lOth Cir. 1998). The drafters

recognized that there are some industries where "the entire industry is on (an open-price-


HOUOl:799827
  term) basis " and that requiring sellers in such industries             to establish the   economic

 reasonableness of their prices in order to satisfy Section 2- 305 would "mean() that in

 every case the seller is going to be in- a lawsuit" and that every sales contract would

 become " a public utility rate case.             Walter D. Malcolm The Proposed Commercial

 Code: A Report on Developmentsfrom May 1950 through February                    1951 6 Bus. LAW.

 113 , 186 (1951) (copy attached as Appendix E) (hereinafter Drafting History).                    The

 drafters specifically noted that use of posted prices is common in the oil and gas industry.

 Id.

                       In order to minimize judicial intrusion into the setting of prices under open-

 price-term contracts ,        the drafters   incorporated a legal presumption into the good- faith

 standard of Section 2- 305            to allow sellers to avoid liability by treating   all similarly-


 situated buyers the same in terms of price. TEX. Bus. &              COM. CODE ANN. ~ 2. 305(b),

 cmt. 3 (providing that " in the normal case a ' posted price ' or a future seller s or buyer

  given price,' ' price         in   effect,' ' market price,' or the like satisfies the good faith

requirement" )~ 6          The Code s reporters and drafting      committee specifically intended


             This article in The Business Lawyer   by the chairman of the UCC &afting committee is a
 compilation of various reports , coiTespondence, and meeting minutes of the Committee on the
 Proposed Commercial Code of the American Bar Association s Corporation, Banking, and
. Business Law Section.           Drafting History at 112. Among other material , the article reprints
 verbatim excerpts of an American Law Institute editorial board hearing concerning Section 2-
 305. Shell previously filed the relevant excerpts from the ALl hearing as Appendix F to its
Petition for Review.   See PROCEEDINGS OF ENLARGED EDITORIAL BOARD OF AMERICAN LAw
INSTITUTE at 170 (Sill1day Morning Session, Jan. 28 , 1951) (on file with the Biddle Law Library,
University of Pennsylvania).
6"       While the comments following the code provisions are not law, they are persuasive
authority concerning interpretation of the statutory language. Lockhart Sav.   Loan Ass n v.
RepublicBankAustin 720 S. W.2d 193 , 195 (Tex. App. Austin 1986 , writ refd n.




HOUO I :799827
  Section 2- 305(2) to preserve the practice of using "sellers ' standard prices; " however, the

  drafters "want( ed) the language to avoid discriminatory prices.                 Drafting History           at 186.


 As the      Wayman            case observed ,   it " is abundantly clear. . . that the chief concern of the
 UCC Drafting Committee in adopting ~2- 305(2) wa~ to prevent                     discriminatory            pricing-
      , to prevent suppliers from charging two buyers with identical pricing provisions in

 their. respective contracts                 different prices for arbitrary or discriminatory reasons.


 Wayman 923 F. Supp. at 1346- 47;                        see also ISP Mineral Prods.     , Inc. v.     GS    Roofing

 Prods. Co.            Civ. A. No. 3:97- CV-2326R,           1999 WL 102818 , at *3 (N. D.            Tex. Feb. 22

 1999) (adopting the                Wayman    court' s conclusion that Section 2-305 is aimed at preventing

 discrimination among buyers with identical pricing provisions).

                         The committee s comments reveal that, in adopting the posted-price

presumption of Comment 3 , the drafters intended to adopt the prevailing industry view of

 appropriate pricing under open-price- term contracts , which " is that when you come to fix

the price on a particular                    contract,   you do not discriminate against this p~rticular

purchaser.             Drafting History       at 186. Thus , where a contract calls for the seller s "price

in effect" and there is no evidence that the seller discriminated among buyers with

identical pricing provisions , there can be no Section 2- 305(2) violation as a matter oflaw.

TI.       The court   of appeals erred in reversing summary judgment because
          established UCC jurisprudence holds that a refiner is entitled to judgment as
          a matter of law on                 Section 2-305 claims when it charges a commercially
          reasonable, posted price and does not discriminate among buyers.
                       Refiners have sold          gasoline to lessee dealers under open-price- term

contracts for decades , and this pricing system has been the subject of frequent litigation



HOUOl:799827
 under Section 2- 305(2).       An established body of UCC jurisprudence has emerged
 applying the posted-price presumption to DTW pricing challenges like this one. Because

 Shell presented undisputed evidence that its DTW prices were nondiscriminatory and

 commercially reasqnable ,      the trial court    properly entered summary judgment under

 established UCC doctrine. Reversing this summary judgment,                           the court of appeals


 adopted a construction of Section 2-305(2)            that essentially writes the posted-price

 presumption out of Texas law. This violates the canons of construction that require


 Texas courts to harmonize        the Texas      versions of uniform statutes               with prevailing


jurisprudence under sister states ' law.

               The undisputed summary judgment evidence established that Plaintiffs
               paid Shell' s price- in-effect and that Shell did not discriminate among
               lessee dealers with identical pricing provisions in their contracts.
               The plain language of Shell' s Dealer Agreement sets the price of gasoline

at Shell' s DTW "prices. . . in effect" at the relevant time. (5 C. R.               at 989. )   Thus , under

Comment 3 ,    Shell'   s DTW is a "price in effect" or "posted price "                 that gives rise to a


presumption that it was set in good faith. The undisputed summary judgment evidence

established that Shell charged the same DTW price to all lessee dealers within the same

price zone. (19 C. R.    at 3748. )   Plaintiffs did not   even allege that Shell discriminated by

charging different prices to Plaintiffs than to        similarly-situated lessee dealers.               (See

Appellants ' Brief in the Court of Appeals at 3 (" Shell' s contention that Dealers within the

same price zone pay the same DTW is not at issue in this appeaL"

               Applying the posted-price        presumption ,     courts have routinely rendered

judgment as a matter of law on dealers ' Section 2- 305 claims where the refiner used a


HOUOl:799827
                                                               );                                                      ),




   posted price and did not discriminate among similarly-situated dealers. For example , the

       Wayman          court granted summary judgment for Amoco because it was undisputed that all

   the plaintiffs paid Amoco s posted " dealer buying price " and the plaintiffs did "not                                    allege


  that they were treated differently than other. similarly                     situated dealers. "        923 F.       Supp. at

   1332 (applying the Kansas version of UCC Section 2- 305(2)). Similarly, in                                       Havird Oil

  the Fourth Circuit affirmed entry of judgment as a matter law under South Carolina

  version of Section 2- 305                    where the undisputed evidence established that Marathon

  charged all similarly-situated buyers the same posted price. 149 F. 3d at 290. Numerous

  decisions under other states ' versions of Section 2- 305(2) are in accord.                                         , Ajir




 Exxon Corp.              No. C    93- 20830 1995 WL 261412 , at *4 (N. D. Ca1. May 2 , 1995)                                  Ajir

 r')        (rendering summary judgment on lessee dealers '                     Section 2- 305(2) claim because


       (t)here is no evidence that Exxon charged plaintiffs other than the price Exxon had

 established for its retail dealers , i.e. , Exxon charged its ' established dealer price                                    aff'd

 185 F.3d 865 (table), 1999 WL 393666 (9th Cir. 1999)                          (Ajir II);   Richard Short Oil Co.




 Texaco, Inc. 799 F. 2d                415 ,   422 (8th Cir. 1986) (affirming directed verdict on bad- faith

pricing claims where Texaco charged the same "posted price " to all distributors);                                     T .A.



Inc.            v.   Gulf Oil Corp.       553 F. Supp. 499 , 509 (B.D. Pa. 1982)                   (granting summary
judgment on claims that Gulf set its prices in bad faith because Gulf charged a "price in

effect" and "plaintiffs have not alleged that the prices they were asked to pay differed

from those demanded of other Gulf dealers                           Schwartz     v.   Sun Oil Co. No. 96- 72862

slip op. at 42- 43 (E. D.            Mich. Dec. 9 ,     1999) (a copy is attached as Appendix D) (entering

judgment as a matter of law for Sun Oil on lessee dealers ' Section 2- 305(2)                               claims ,        where


HouiH:799827
  Sun s DTW price was a posted price and the dealers presented no evidence that it was

  discriminatorily applied);         Adams v.    G.J.   Creel   Sons,   Inc.     465 S.      2d 84, 86 (S.

  1995) (affirming directed verdict under Section 2- 305(2)                    where the      seller charged

 plaintiff"the same price charged. . . to the other similarly situated station it serviced"

                        Thus , under this established line of Section 2.;.305 cases , Shell was entitled

 to summary judgment because it was undisputed that Plaintiffs paid Shell' s                        price- in-


 effect and that Shell did not discriminate among lessee dealers with the same pricing

 provision in their contracts.

                       The undisputed evidence also established that Shell' s DTW prices to its
                       dealers were commercially reasonable as a matter of law.
                       Summary judgment was appropriate for the additional reason that Shell

 established the commercial reasonableness of its DTW prices as a matter of                     law. Shell's


 summary judgment evidence conclusively demonstrated that its DTW prices were well

 within the range of DTW prices charged by other major oil companies in the relevant

 markets. (19 c.R. at 3752. )          Plaintiffs did not dispute this fact. (30 c.R. at 6496.


                       Courts have held that a refiner s DTW         prices satisfY the " commercial


 reasonableness " aspect of good faith as a matter of law if those prices fall within the

range ofDTW prices charged by other major refiners.                      , Ajir II 1999 WL 393666 , at

 *7 (affirming summary judgment on dealers ' Section 2- 305(2) claim because "the district

court found the evidence was undisputed that Exxon charged Franchisees prices similar

to what other major oil companies charged their dealers              ) (citation omitted);      Havird Oil

 149 F.3d at 290 (affirming judgment as a matter of law for Marathon on jobber s Section



. HOUOl:799827
                                             );




    305(2) claim because the undisputed evidence             showed that "Marathon s price was

 competitive with other wholesalers in the North AugUsta area, being in the ' middle of the

 pack' of all wholesalers in the area             T.A.   553 F. Supp. at 509 (granting summary

 judgment on Section 2- 305(2) claims because the plaintiffs had not even alleged that

  Gulf's gasoline prices at the time in issue varied significantly from other major brand

 suppliers with which Gulf may appropriately be compared" cf Exxon Corp. v. Superior

 Court of Santa Clara County,         60 Cal. Rptr. 2d 195   205 (Cal. Ct. App. 1997)        Koutney

 (reversing denial of summary judgment and rendering judgment for Exxon on lessee

 dealers ' price overcharging claims because Exxon s DTW prices " fell within the range of

 DTW prices charged by other major oil companies to their dealers " and " (t)his is all that

 is required"). Because Shell presented virtually identical evidence that its DTW prices

were within the range of DTWs charged by its major competitors , Shell was entitled to

summary judgment under longstanding DCC doctrine.

                      The court of appeals erred in failing to follow well-established        Section
                        305 jurisprudence because the canons of construction and the Texas
                      UCC itself require Texas courts to harmonize uniform statutes with the
                      law of other adopting jurisdictions.
                      In light of the wide body of law granting judgment as a matter of law

similar cases under Section 2- 305 , the court of appeals erred in reversing the trial court'

summary judgment for Shell.            Compounding its error,         the court of appeals   made the

astonishingly broad declaration that "the good faith requirement of section 2.305 involves

fact findings that are not appropriate for summary judgment." 102 S. W.3d at 214. In

reaching this striking conclusion , the court acknowledged , but then simply ignored , the



HOUOl:799827
  wide body of law from sister states applying the posted-price presumption and granting

  judgment as a matter oflaw to refiners based on a similar record.            See id.   at 212.

                        In rejecting the posted-price presumption and adopting                     a novel

  interpretation of Section 2.305(b), the court of appeals departed from                  the canons of

  construction and the terms of the Texas UCC itself, both of which require Texas courts to

 harmonize the good-faith standard of Section 2.305(b) with constructions adopted in

 other states. Under the Code Construction Act, Texas courts must construe any uniform

 statute , including the UCC ,             in a manner that promotes the "general purpose to make
 uniform the law of those states that enact it." TEX. GOy T CODE ANN. ~ 311.28 (Vernon

 1998). The UCC itself states that one purpose of the Code is "to make uniform the law

 among the various jurisdictions. " TEX. Bus. & COM. CODE ~ 1.                   02(b )(3). This    Court
 has observed that provisions of the Texas UCC should be construed in harmony with the

 interpretation adopted by other states.           See MBank EI Paso, NA. v. Sanchez 836 S. W.2d

 151 , 154 (Tex. 1992) (adopting a construction of Section 9.503 of the Code that had been

previously adopted by other states).

                       In light of the clear     legislative directive to   construe uee proV1slons
consistently with other states ' law , the court of appeals erred in adopting a constructIon

of the good- faith requirement of Section 2.305 that essentially negates the posted-price

presumption established by the drafters              and recognized in other states.      As discussed
below , the court of appeals held that a fact issue as to good faith can exist, no matter how

commercially reasonable a refiner s DTW prices may be under established industry

norms. This holding vitiates the posted-price presumption and exposes Texas refiners to


HOUOl:799827
                                                                       ).




    repeated and prolonged litigation over pricing claims that would be disposed                                          of on

    summary judgment in other states.                             Neither the drafters of the              uee nor the Texas
   legislators who adopted it ever intended such a result.

   III.         Inappropriately             relying on            Mathis,              the court     of   appeals erroneously

                decisions.
                concluded that a fact issue can be created under Section 2-305 based on
                circumstantial evidence ' that has nothing to do with a refiner s pricing



                        Ignoring the established case law under Section 2- 305 , the court of appeals

. decision relies almost exclusively on the Fifth Circuit's recent decision in
                                                                                                                  Mathis. See

   102 S.          3d at 213- 14      (quoting extensively from                         Mathis   before concluding that " (w)e
  agree with the         Mathis      court' s conclusions                     Mathis      involved the review of a jury verdiCt

  in favor of a group of Exxon lessee dealers under the Texas version of Section 2-305. In
                                            7 the court in
  an admitted           Erie
                                  guess                              Mathis            concluded that a range of subjective

 circumstantial factors unrelated to pricing can give rise                                       to a fact issue under Section
      305(b). 302 F. 3d           at 457. In so doing, the Fifth Circuit effectively predicted that this

 eourt would write the posted-price presumption out of Texas law and turn every Section

 2.305(b) claim into a jury issue.




        See Terrebonne Parish Sch. Bd. v. Columbia Gulf Transmission Co. 290 F. 3d 303 , 317
(5th Cir. 2002) (" When adjudicating a claim for which state law provides the rule of decision
federal courts are bound to apply the law as interpreted by the state s highest court; but if the
state s highest court has not spoken on a particular issue , we must make an    Erie guess ' and
detennine as best we can what the highest court of the state would be most likely to decide.
(referencing       Erie R. R.     Co. v. Tompkins 304 u.S. 64 (1938)).




HOUOl:799827
                A.       In a matter of  first                                     held that
                                                                        impression under Texas law,                  Mathis

                         evidence of a subjectively improper motive unrelated to pricing can
                      . create a fact issue                       under Section 2. 305(b).

                         The          Mathis            court recognized that "no Texas state court" had previously

  addressed the issue of good faith and the posted- price                                                   presumption under Section
  2.305(b). 302 F.3d at 455. Seizing on the word "includes " in Comment 3' s recitation

 that good faith for merchants " includes observance of reasonable commercial standards
                                                         "S the
 of fair dealing in the trade                                       Mathis           court held that the good faith required       of a


 merchant in            setting prices under open-price-term contracts necessarily " encompasses

 both obJective and subjective elements.                                       Id.    The Fifth Circuit recognized that Comment

 3 creates a presumption that " in the normal case " this good- faith obligation is satisfied

 when a seller charges a "price in effect" or "posted price                                                 like those charged by Shell

 here.    Id.     at 456. The                  Mathis      court further recognized that the posted-price presumption

was irltended to create a " safe harbor "                                     to allow    merchants to avoid challenges to their

pricing by using nondiscriminatory, posted prices.                                          Id.   at 455.

                       However,                    negating the              effect of this           " safe harbor " the Fifth Circuit


concluded that circumstantial evidence of " ( a)ny lack of subjective, honesty- in- fact good

faith" is sufficient to create an " abnormal" case in which the posted-price presumption no

longer applies.                 Id.      at 457. Although the court suggested that there must be some
evidence connecting the alleged dishonest motive to the seller s pricing decisions Mathis

ultimately held that a fact                              issue on good faith can arise                       from a set of subjective



          TEx. Bus. & COM. CODE ANN. ~ 2.305 emt. 3 (Vernon 1994).



HOUOl:799827
  circumstantial factors , none of which are connected to the seller                                           s pricing decisions.      Id.

 at 458.      (See also infra             Part IV (discussing the various circumstantial factors).

                         The effect of             Mathis         is to allow a jury to determine in every Section


 2.305(b) case whether there was any " improper motive animating the price-setter " even

 if the prices ultimately charged Were undisputedly reasonable under objective industry

 standards.        Id.    at   454. The         Mathis      opinion points to nothing in the policy behind Section

     305 that is served by this result , and indeed it is contrary                                       to the drafters ' desire to


 eliminate litigation over prices that are nondiscriminatory                                         and set in accordance with


 industry standards.               Drafting History               at 185- 86;     see also Wayman 923 F. Supp. at 1346

 (noting that the Comment 3 presumption reflects the drafters ' desire to avoid litigation

 over the reasonableness of posted prices).

                       The court of appeals adopted the                         Mathis      court' s reasoning wholesale , and

likewise cited nothing in public policy or the drafting history of Section 2- 305 to justify

such a radical departure from the national body of cases                                              applying the posted-price


presumption to cases like this one.                         See       102 S.     3d at 214. Rotely following                     Mathis the

court of appeals abdicated its responsibility to independently interpret Section 2.305(b)

and to adopt a construction of the Texas statute that conforms to prevailing national

standards.

                       The cases relied on by        and the court of appeals do not support
                                                                  Mathis

                       this radical departure from mainstream Section 2-305 jurisprudence.
                       Unable to distinguish the numerous established cases applying the posted-

price presumption , both the                      Mathis      court and the court of appeals instead relied on a



HOUOl :799827
   handful of cases that either                    involved unique factual circumstances ,                       were not decided

  under Section 2-305 , or were ultimately decided in favor of the refiner. None of                                               these


  cases provides any support for eliminating the posted-price presumption from Texas law.

                        Plaintiffs rely most heavily on                   Allapattah Servs. ,             Inc. v. Exxon Corp. 61 F.

  Supp. 2d 1308 (S. D. Fla. 1999), which was cited by both                                      Mathis     and the court of appeals.

  Mathis 302 F.3d at 457 n.11; 102 S. W.3d at 214.                                      Allapattah          involved a challenge to

  Exxon s Discount for Cash program , whereby Exxon encouraged its dealers to give

  customers a discount for paying with cash rather than by credit card. To implement this

 program , Exxon introduced a new 3% processing                                               fee on credit      card transactions.
 Allapattah         61 F. Supp. 2d at 1312. The court in                         Allapattah              found evidence that Exxon

 had made extra-contractual                        representations to its              dealers that ,         at the      same time it
 implemented the credit card fee, it would offset its DTW prices by an average amount

 equivalent to the 3% fee.                   Id.   at 1312- 13. Based on                  these separate promises about the

 discount program , the court concluded that " a duty arose to carry it out ' honestly in fact'"

 under the pricing term of Exxon                           s contracts.        Id.      at 1323. Because            the     Allapattah

plaintiffs submitted evidence that Exxon had not offset the credit card fee as promised

 the court held that a fact issue existed as to whether Exxon had acted with honesty in fact

under Section 2- 305.              Id.    Here , by contrast , Plaintiffs do not contend that Shell made any

extra-contractual promise that could give rise to a special duty under Section 2- 305(2).

Nor do Plaintiffs allege that Shell made any representations as to how its DTW price

would be calculated or what components would be included. Thus , the unique facts of

Allapattah        are simply not present here.


HOUOl:799827
                                                         );




                         Plaintiffs also rely on language in                                     Wayman           suggesting that "the          court'

   decision might be different" if the plaintiffs there had presented evidence of an attempt

   by Amoco to run dealers out of business. 923 F. Supp. at 1349. However, this passing

  reference in          dicta       cannot justify ignoring the host of cases applying the posted-price


  presumption , especially since the                               Wayman              court itself applied the presumption                        and

  ultimately rendered summary judgment for the refiner.                                                   Id.   at 1365.

                        Finally, the three other cases cited as support by                                            Mathis         and the court of
  appeals ' opinion are inapposite because they were not decided under Section 2- 305.

 Nanakuli Paving                      Rock Co. v. Shell Oil                         Co.       involved the asphalt industry, not the

  gasoline marketing industry. 664 F. 2d                                    772 ,      777 (9th eir. 1981).                    The   Nanakuli    court

 determined that Section 2- 305(2)                             was not at issue                 because the dispute was not over the

 price fixed by the seller, but rather over whether certain industry-standard terms could be

 implied in the parties ' contract.                      Id.     at 805 (noting that "the dispute here was not over. . .

 the price that the seller fixed"                              see Wayman 923 F. Supp. at 1348 (distinguishing

Nanakuli           on the ground that "the dispute was not really about good faith in setting the

price of asphalt").              Similarly,              S. Bills, Inc.           v.      Tzucanow              was not a Section 2- 305 case

but rather involved an unlawful detainer action under a ealifQfnia state statute. 700 P .                                                          2d
 1280 , 1281 (Cat. 1985).                     Tzucanow            discussed the good- faith standard of Section 2- 305

only in the context of an evidentiary ruling, and nowhere does the opinion suggest that

Section 2- 305 cases are not amenable to summary judgment under the posted- price

presumption.           See id.       at 1286- 87.




HOUOl:799827
                   The last case cited by Plaintiffs Wilson v. Amerada Hess Corp. was

 decided under a generalized implied covenant of good faith and fair dealing that is not

 recognized in Texas contract law. 773 A.2d                       1121 , 1129- 30       (N. J. 2001);   see also Arnold

 v.   Nat' l   County Mut. Ins. Co:            725 S.   2d 165 ,        167 (Tex. 1987) (observing that Texas

 courts have declined to impose an implied covenant of good faith and fair dealing in

 every contract, and that an implied duty of good faith and fair dealing arises only as a

 result of a special relationship). Thus , none of these cases supports the court of appeals

 radical departure from prevailing national authority under Section 2- 305

 IV.      The circumstantial factors cited by the court of appeals as creating a fact
                            subjective good-faith intent are either unrelated to
          issue as to Shell' s                                                                                  Shell'
          pricing, unsupported by the record, or irrelevant as a matter of law.

                  Plaintiffs         argUe      that    notwithstanding the                  objective     commercial

reasonableness of Shell' s DTW prices , they are entitled to a jury issue under Section

2.305(b) based on purported circumstantial evidence that Shell had a bad- faith plan to

drive its dealers out of business and replace them with company-operated stations. (37

      R. at 7831-32. )      The       court of appeals agreed,            citing four items of circumstantial

evidence that it found similar to factors                discussed in        Mathis.          102 S. W.3d at 214- 15.

However, by        mechanically applying the             Mathis         factors ,      the court of appeals ignored


important factual differences in the records of the two cases. More importantly, the court

of appeals erred in finding a fact issue because the circumstantial                                evidence it cited is

either legally irrelevant under established Section 2- 305                       cases or has no connection to


Shell' s actual pricing decisions.




HOUOl:799827
                    The alleged uncompetitiveness of Shell' s DTW prices is unsupported
                    by the record and, in any event, is immaterial.
                    As circumstantial evidence of a bad- faith plan to drive dealers out of
 business, the court of appeals cited a calculation by Plaintiffs ' expert that " 73- 80% of

 (plaintiffs ) Houston competition paid rack price-or              lower-for gas while (Plaintiffs)
 paid Shell' s significantly higher DTW price. "          102 S. W.3d   at 214. Repeating essentially

 the same point, the court of appeals also relied on the fact that Shell' s DTW "was often

 higher" than the prices available to Plaintiffs ' competitors.         fd.     Throughout its opinion

 the court of1appeals simply ignored the undisputed fact that Shell' s DTW prices were

 commercially reasonable under established standards.

                             There is no evidence that Shell' s commercially               reasonable,
                             nondiscriminatory DTW prices rendered any Plaintiff
                             uncompetitive in the real-world retail marketplace.

                   First ,   the allegation that Shell'   s DTW prices ,      which undisputedly were

commercially reasonable , rendered Plaintiffs uncompetitive is unsupported by the record.

Apparently crediting Plaintiffs '          expert, Barry Pulliam   , merely because he testified      in


Mathis the court of appeals ignored the admitted fact that neither of Plaintiffs ' experts

ever undertook any analysis of these Plaintiffs ' individual competitive circumstances or

the impact of Shell' s DTW prices on any Plaintiffs retail competitiveness. (27 e. R. at

5698 5715- 17. )         Rather,   Pulliam merely estimated that 73- 80% of the volume of gasoline

sold by retail outlets in Houston had a wholesale cost at or below the rack price. (32           C.




         See    102 S.    3d at 214 n.




HOUO! :799827
. at 6898. ) However, Pulliam admittedly did no work "to try to identify any business lost

 by any station to any other station in the I1ouston market" based on this market-wide

. differential in wholesale pricing. (27     c.R. at 5716.


                     Thus , Plaintiffs presented no evidence as to' who their retl,lil competitors

 were , what wholesale price those competitors paid for gasoline , what retail prices those

 competitors charged , or that any Plaintiff lost business to any other station that had a

 lower wholesale acquisition cost.          Since there is no evidence    in the record that any


 particular Plaintiff paid more for gasoline than his direct competitors---':"much less that any

 wholesale cost differential caused Plaintiffs ' Shell- branded stations to be uncompetitive

 in the retail marketplace-Pulliam s market-wide estimate of wholesale prices - cannot

 constitute evidence of a bad- faith plan by Shell to drive its dealers           out of business


 through its pricing.

                            As a matter of law, a good- faith price under Section 2-305 is not
                            required to be a competitive price or the lowest price available.

                    Second , even    if Plaintiffs could show that 73- 80% of their         direct


competitors paid a lower wholesale price for gasoline , stich evidence would be legally

irrelevant and therefore incompetent to create a fact issue. As a matter of law, evidence

that a dealer s retail competitors are able to sell gasoline for less than the dealer s buying

price " is    insufficient to establish that prices set by (the refiner) contravened reasonable

conimercial standards in the gasoline market or otherwise constituted bad faith" under

Section 2- 305.       Au Rustproofing Ctr. , Inc. v. Gulf Oil Corp. 755 F. 2d 1231 , 1235- 36 (6th

eir. 1985);     see id.   (rejecting the argUment that Section 2- 305(2) imposed a duty on Gulf



HOUOl:799827
                                             );                                );




 to set a DTW price that would keep the plaintiff competitive in the retail market for

 gasoline).

                       Established case law holds that a good- faith price under Section 2- 305 is

 not synonymous with a fair market price or the lowest price available.                                 See TCP Indus.,

 Inc. v. Uniroyal, Inc. 661 F. 2d                    542 ,   548 (6th eir. 1981) (stating that " (n)either the eode

 nor the Official eomments to the Code require that a merchant-seller price at fair market

 value under a contract with an open price term                                     Harvey v. Fearless Farris Wholesale


Inc. 589 F. 2d           451 ,   461 (9th Cir. 1979) (holding that a price fixed in good faith under

 Section 2- 305 does not mean " the                          best bargain you could get" and that there is no

requirement that the seller match the lowest price available in the market);                               Ajir II   1999

WL 393666 , at *6 n. ? (rejectin~ the suggestion that good faith requires a refiner to sell at

  the lowest possible prices                      Ajir I     1995 WL 261412 , at *4 (holding that "the existence

of a lower price in the market , without more , fails to establish a genuine issue of material

fact" under Section 2- 305);                see also Havird Oil 149 F. 3d at 291 (affirming judgment as a

matter of law for the refiner despite evidence that plaintiffs retail competitors could buy

gasoline at wholesale at a lower price);                        USX Corp. v. In!,1 Minerals          Chems. Corp. No.

86 C 2254 1989 WL 10851 , at*l (N. D. Ill. Feb. 8 1989) ("Bad faith requires mote than

proof that a price paid is higher than market price.                                 ); I JAMES J. WHITE & ROBERT S.
SUMMERS , UNIFORM COMMERCIAL CODE ~ 3-                                         , at 150 (4th ed. 1995) ("Note that the

section says ' a         reasonable price '           and not ' fair market value of the goods. '           These two

would not be identical."




HOUOl:799827
                       By allowing consideration of prices available in the market to buyers with

  different contractual arrangements , the court of appeals ' construction of Section 2.305(b)

  in essence imposes a duty on Shell and other major refiners to set their prices in a way

 that guarantees their dealers ' retail competitiveness throughout the term of the ftanchise

 relationship. Such guaranteed profitability was not part of                      Shell' s long- term               contracts

 with its dealers.          (See     5 c.R. at 994 (providing that Plaintiffs will operate their stations as

 independent businesspersons));                see also Au Rustproofing,       755 F.2d at 1235 (" (W)e do not

 find that Gulf made a binding promise to keep Au competitive in the gasoline retailing

 market for ten years.              ). Neither the court of appeals nor the Fifth eircuit             in   Mathis      could

point to anything in the language or the history of Section 2- 305 that would impose such

 a duty on refiners. Moreover, requiring a refiner to set its DTW prices to ensure each

dealer s individual profitability and competitiveness would thwart the drafters ' goal of

eliminating discrimination among buyers under open-price-term                            contracts.                 Drafting

History      at 186. That is , if a refiner is required to charge each buyer the price that will

make that buyer competitive in its particular market given its unique circumstances, there

is simply no way that the refiner could charge all buyers with identical pricing provisions

the same price.

                                   Evidence that different prices are available to different classes of
                                   trade is legally insufficient to establish bad faith under
                                   Section 2-305.

                     Finally, the court of appeals                ' reliance on evidence that other Houston
stations had a lower wholesale cost for gasoline than Plaintiffs ' Shell- branded stations is

misplaced because courts have long recognized that Section 2-305 permits refiners to


HOUOl:799827
  charge different prices to different classes of trade. As the trial court noted, each Plaintiff

  signed a Dealer Agreement agreeing to buy gasoline at the DTW price applicable only to

  Shell-branded lessee- dealers. (App. e at 3- ) However, the wholesale cost comparison

  proffered by Plaintiffs ' experts improperly compares Shell' s DTW               price to prices


  available to other classes of trade ,   each with a different contractual buying arrangement.

  Included in this    comparison are branded - and unbranded jobbers who pick up their

  gasoline at terminals , open dealers who own their own premises , and company-owned

  stations operated by other refiners. (32 e. R.        at 6897-   6919.

                     comparison across classes              of trade. is legally irrelevant under

  Section 2- 305   because courts have long recognized that stations in different classes of

  trade perform different functions and have different contractual relationships with

  refiners , and therefore that "the existence of different prices for different classes of trade

  is not sufficient to demonstrate that (a refmer) is overcharging plaintiffs for gasoline.

 Ajir I   1995 WL 261412 , at *4;   see also Koutney,        60 eal. Rptr. 2d at 205 (reversing the


 denial of summary judgment on lessee dealers ' price overcharging claim despite evidence

 that jobbers paid lower prices because "Exxon distributes to two different classes, each

 performing different functions           These cases recognize that such dual         distribution

, systems , including differential pricing, are standard in the industry and are not arbitrary,

 but rather are based on substantive contractual and functional differences between dealers

 and jobbers.


                Moreover, these cases are consistent with the drafters '        goal of preventing


  suppliers from charging two buyers with identical pricing provisions in their respective


 HOUOl:799827
  contracts differentprices for arbitrary or discriminatory             reasons.   Wayman 923 F. Supp.

  at 1357;     see also Drafting History         at 186. Therefore ,   because lessee dealers and jobbers

  are not similarly-situated buyers and have different pricing tenns in their contracts , as a

  matter of law, the existence of a differeqtial between a refiner s DTW price and the rack

  prices charged by that refiner or others cannot constitute evidence of bad faith pricing

  under Section 2- 305.              See Schwartz slip op. at 42 (granting judgment as a matter of law

  on dealers ' bad- faith pricing claim that was based on "the differentials between DTW

  prices and rack prices and the fact that their service stations lost sales to competitors

 Adams 465 S. 2d at 86 & n.2 (holding that the fact that a lessee dealer was charged a

  higher price than was charged to other customers constitutes no evidence of bad- faith

 pricing since it             was " undisputed that these customers had a different           contractual


 relationship with (the seller)");             see also Lowe 1998 Bus. FRANCHISE GUIDE (eeH)

 '11 572 ,      at 4- , 6 (rendering         judgment for Chevron on lessee dealers '      unfair pricing


 claim, despite evidence that jobbers paid lower wholesale prices , because the " lessee

 dealers were not singled out for overcharging since DTWs were set by trade class

                      In sum, given the         overwhelming precedent holding that Section 2- 305

, allows different prices to different classes of trade        , and does not require a refiner to set its

 prices to guarantee competitiveness , Plaintiffs cannot rely on evidence that they paid a

 higher price than other buyers in the marketplace to establish a fact issue as to whetber

 Shell acted in good faith in setting its DTW prices. Therefore , the court of appeals erred

 in reversing summary judgment based on purported circumstantial evidence                      of such a


 price differential , especially since it was undisputed that Shell' s nondiscriminatory DTW


 HOUOl:799827
                     , "




  prices were commercially reasonable because they were within the range of DTW prices

  that other refiners charged to their dealers.

                 The fact that some Plaintiffs have experienced declining sales, lost
                 money, or gone out of business does not raise a fact issue as to whether
                 Shell had a bad-faith plan " to use pricing to drive them out of business.

                 As further circumstantial evidence of Shell' s improper motive , the court of

  appeals cited the general fact that some dealers have experienced decreasing business

  over the last few years , have lost money, or have gone out of business. 102 S. W.3d at

  214. However, as even the       Mathis   court recognized , evidence of dealer unprofitability,

  by itself, is insufficient to create a fact issue as to whether a refiner has a bad- faith plan to

  eliminate its lessee dealers. 302 F. 3d at 458 n. 13 (citing       Meyer v. Amerada Hess Corp.

  541 F. Supp. 321 ,   331 (D.    J. 1982), which held that under the good- faith standard of the

 PMP A evidence of dealer unprofitability is legally insufficient to create a fact issue as to

 whether a refiner intended       to eliminate    lessee dealers);    cf Schwartz slip op. at 38

 (refusing to indulge an inference that Sun Oil had violated Section 2- 305(2) based on

 evidence that the plaintiffs ' service stations lost money).

                Even if evidence of dealer unprofitability were legally relevant , the scant

 circumstantial evidence in the record of this case is too slight to have any-legal effect.

 Under Texas law           when the circumstantial      evidence is so slight that any plausible


 inference is purely a guess     , it is in legal effect     no evidence.     Lozano v. Lozano

- S. W.3d 141 , 148 (Tex. 2001) (Phillips , C. , concurring in part ,       dissenting in part). Here

 the fact that some Plaintiffs have had economic difficulty is consistent with a range

 explanations that have nothing to do with Shell' s         pricing: a dealer   s business may suffer


HOUOl:799827
 due to road construction , the opening of a new competitor s station , a regional economic

 downturn, or simply because the dealer made poor business decisions.

                      Because nothing in the record provides any direct evidence linking the

 declining business of some Plaintiffs to any action by Shell , any inference that Shell had

 a plan to use DTW pricing to drive Plaintiffs out of business is purely a guess.                             See

Lozano 52 S. W.3d at 148 (" (I)n                           cases with only slight    circumstantial evidence


 something else must be found in the ,record to corroborate the probability of the fact's

 existence " or non-existence.              ). Indeed ,       contrary to any such unsupported,. speculative

 inference , the summary judgment record includes direct testimony from                        Plaintiffs' own

expert     that the lessee dealer is " a class of trade whose economic viability is dying "                 due to


broader market forces , including the entry of Wal- Mart and other mass merchandisers

into gasoline retailing. (27 e. R. at 5703. ) Furthermore ,                   as the trial court noted, neither

Plaintiffs nor their experts made any effort on summary                          judgment to    calculate any

damages that resulted from diminished sales or from being driven out of business. (App.

C at 2.

                     Accordingly, because evidence of dealer unprofitability cannot support a

claim under Section 2- 305 ,                  and because , in any event, any link        between Plaintiffs
                                                                                                   JO the
economic troubles and the alleged bad- faith plan by Shell "is purely a guess                               court

of appeals erred in relying on this item of circumstantial evidence to overturn the



          Lozano 52 S.           3d at 148.




HOUO1:799827
  summary judgment                     which was based          on   undisputed   evidence     of Shell's
 nondiscriminatory, commercially reasonable pricing.

                           The uncontroverted summary judgment evidence , including evidence
                           from Plaintiffs ' own expert, negates Plaintiffs allegation of a
                           purported bad-faith plan to eliminate, the lessee dealers in " favor of
                           company-operated stores.
                           In concluding that a fact issue on good faith exists , the court of appeals also

 relied on Shell' s strategic planning documents suggesting that, unbeknownst to Plaintiffs

   Shell intended to reduce the number of dealer stations while increasing the number of

 conipany- or              contractor-operated stations " that would be "more profitable operations.

 102 S. W.3d at 215.                  In fact, however,   the   summary judgment evidence-including

 evidence from Plaintiffs ' own experts-negates the                    existence of any such bad- faith

 conversion plan.

                           Strikingly, the summary judgment evidence from Plaintiffs ' own expert

reflects that , during the 1995- 1999 damages period, the number of Shell dealer stations in

Houston        increased           from 128 to 136 ,   while the number of company-operated stations

decreased        from 58 to 43. (32 C. R.        at 6919. )   Far from supporting an inference of   a bad-

faith plan , this direct evidence introduced by Plaintiffs themselves is inconsistent with the

existence of any take-over plan.              Cf Mathis 302 F. 3d    at 458 (relying on evidence that the

number of Exxon dealer stations had steadily declined, while Exxon projected an increase

in the number of company-operated stores).

                       The other evidence relied on by Plaintiffs likewise contradicts                the


suggestion of a bad- faith strategy to illegally co-opt dealer sites. For example , Plaintiffs



HOUOl:799827
 rely heavily on a 2000- 2004 "Marketing Strategy Summary, " which notes that Shell'

 focus in 14 markets will be to move "toward a primary eompany operated channe1."                      (52


    R. at 11002. ) However, in the same paragraph , this document states that: "This activity

 will be accomplished             through a voluntary and negotiated purchase of dealer operated


 sites.     (Id.       Plaintiffs also point to the testimony of Shell' s planning manager David

 Miller as suggesting a malicious conversion strategy. However, Miller actually testified

 that a dealer would have to be a " willing participant" in any conversion because the

 Petroleum Marketing Practices Act ll requires Shell to properly terminate or. nonrenew

 any petroleum franchise before converting a station to company operations. (29 e. R. at

 6343- 44. )   Far from suggesting a bad- faith            plan , the only inference reasonably supported

by the evidence of Shell' s planning process is that Shell intended to comply with its legal

obligations and to buyout                    dealer franchises at the sites that it   wished to convert to

company- or         contractor-operated stores.            Cf Lozano     52 S. W.3d at 145 (noting that

circumstantial evidence must " fairly and reasonably" support an inference in order to

constitute legally sufficient evidence of an alleged fact).

                   Plaintiffs '     assertions of a- ..bad-   faith conversion plan also fail because the

undisputed evidence establishes that there was no connection betWeen Shell' s forward-

looking strategic plans and its current DTW pricing to its lessee dealers.                         Under

examination by Plaintiffs ' counsel , Shell' s planning manager affirmatively testified that

DTW pricing was never a consideration in Shell' s strategic planning. (29 e. R. at 6193.


          15 U.s. C.   ~~ 2801     et seq.    (1998).



HOUOl:799827
                                                                                                      , "




  Plaintiffs presented no contrary evidence connecting Shell's DTW pricing with an.

  alleged bad- faith plan to eliminate lessee dealers. Under Texas law                                      uncontradicted

  testimony. . . that is clear,                direct ,   positive , and otherwise credible          may be treated as
  conclusive evidence where the party opposing summary judgment presents no evidence.

 to the contrary.         Belger v. Sweeny,           836 S.         2d 752 , 754 (Tex. App.        Houston (1st Dist.

  1992 , writ denied) (emphasis added). Even the                           Mathis     court held that , to support a jury

 question under Section 2- 305 based on a bad- faith motive , there must be some evidence

 to support an " inference                  connecting pricing to the elimination of dealer- lessees. " 302

 F.3d at 458. In this                case ,   however~ the uncontradicted summary judgment evidence

 conclusively negates any such connection, while also establishing the                                        commercial

 reasonableness of Shell'                      DTW prices under long-standing,                    objective     standards.

 Accordingly, the court of appeals erred in holding that a fact issue exists as to Shell'

 good faith based on evidence concerning Shell' s strategic plans.

                     Plaintiffs ' decision to become Shell- branded dealers and agree to
                     Shell' s contractual terms does not make them " captive buyers.

                     Once again parroting                 Mathis      the court of appeals held         that Plaintiffs

alleged status as "captive buyers " who were required to purchase gasoline from Shell at.

the DTW price constitutes circumstantial evidence that Shell was acting with a subjective

bad- faith motive.            102 S. W.3d at 214. Of course,                        as in any franchise      relationship,

Plaintiffs are only "captives " as a result of their own choice to become Shell-branded

lessee dealers ,      which involved their agreement to buy gasoline from Shell at the DTW

price, rather than at rack or some other price. (5 C. R. at 989.



HOUOl:799827
.'                                 '"                              );




                        Recognizing that lessee dealers voluntanly enter into petroleum franchises

     with refiners that include a variety of contractual benefits and restrictions , courts in other

 jurisdictions have routinely rejected the argument that dealers ' status as " captive buyers

. creates a fact issue under Section 2- 305.                       g., Ajir II 1999 WL 393666 , at *3 (affirming

 summary judgment on dealers ' Section 2- 305 claim despite the contractual requirement

 that plaintiffs buy gasoline directly from                             Exxon);        Wayman 923 F. Supp. at 1349

 (rejecting plaintiff's assertion that " the ' captive' buyer ' situation is not a ' normal case

 within the meaning of Official Comment 3" Schwartz slip op. at 10 (granting judgment

 as a matter oflaw where dealers were required to buy gasoline solely from the refiner and

 could not buy from jobbers);                see also Koutney,             60 Cal. Rptr. 2d at 204 (" The franchisees

     lock- ' to Exxon results from a business relationship of their choosing, the franchise

 whose terms were freely entered into by both parties.

                      Plaintiffs        captive buyer " claim here is no different.                  Cf Chawla v. Shell

 Oil Co.       75 F. Supp. 2d 626 ,            641 (S. D.        Tex. 1999) (dismissing federal antitrust claims

brought by many of the same Plaintiffs here and noting that "Plaintiffs , by entering into

their Dealer Agreements , were aware                             that Defendants would control the gasoline
product").        Accordingly; the court of appeals erred                         in failing to follow established Section

      305 cases that have rejected similar " captive buyer" allegations as a matter oflaw.

                     The court of appeals properly rejected Plaintiffs ' proposed theories
                     based on hidden rent. and alleged underselling at company-operated
                     stores.

                     Finally, Plaintiffs also alleged that Shell' s commercially reasonable


nondiscriminatory DTW' prices were set in bad faith because they contained a "hidden


HOUOI:799827
                                                                                                               ' "




   rent component" and because Shell allegedly undersold certain Plaintiffs at retail through

   company-operated stores. The                      trial court properly rejected the hidden-rent theory, and

   Plaintiffs waived the underselling theory by not presenting it in their summary judgment

  response below. The court of appeals correctly did not cite either hidden. rent                                          or

  underselling as circumstantial evidence creating a fact issue here. Nonetheless ,                                   since


  Plaintiffs raised these two theories in their response to the petition for review, Shell will

  address them briefly.

                       The trial court properly held that, even assuming that Shell recovered part

  of its landlord cost through the DTW price it charged for gasoline , Plaintiffs                                 hidden-

 rent" theory is not actionable since neither the Dealer Agreement nor Section 2- 305(2)

 limits the types of costs that Shell may recoup through its wholesale gasoline price.

 (App. B at 4; App. Cat 4. )                  Indeed ,   Plaintiffs themselves conceded that Shell can include

 whatever components it likes in the DTW price.                       (See    39 C. R.     at 8211 ("Plaintiffs do not

 dispute that DTW prices may legitimately be based on many factors. . . .                                  ) As the   trial

 court recognized, absent                   some contractual provision limiting a seller                  s price-setting


discretion to specific factors ,                  accepting Plaintiffs ' hidden rent theory would enmesh the

courts in " an impossible parsing" of the economic components                              of prices.      (App. B at 4.

This is the very result that the drafters of Section 2-                      305(2) wished to avoid.            Drafting
History      at 185- 86.

                      As to underselling,              Plaintiffs assert that Shell violated the good- faith


standards of Section 2- 305                   by selling ' gasoline   to the public at its             company-operated

stores for a retail price lower than the wholesale DTW price available to nearby dealers.


HOUOl:799827
 Although such underselling was a factor discussed in                            Mathis the court of appeals did not

 rely on it here because Plaintiffs did not raise it in their response to Shell' s motion for

 summary judgment, but merely attached isolated deposition and affidavit testimony on

 the issue. -The law is clear that                       the nonmovant waives a ground for avoiding summary

 judgment by failing to present it to the trial court.                          McCoimell v. Southside /ndep. Sch.

 Dist. 858 S.              2d 337 ,      341 (Tex. 1993) (" (I)ssues a non-movant contends avoid the

 movant' s       entitlement to summary judgment must be                            expressly presented by written

 answer to the motion or by other written response to the motion and are not expressly

 presented by mere reference to summary judgment evidence.

                       In any event, the evidence of underselling that Plaintiffs belatedly point to

 is too meager and conclusory to create a fact issue. This evidence consists of only two

 deposition excerpts and three cookie-cutter affidavits from among the several hundred

Plaintiffs. In the deposition excerpts ,                       two Plaintiffs refer to seeing lower prices at Shell

company-operated stations between 16 and 32 miles away from their own locations. (53

   R. at 11334 , 11396.                    Such tenuous evidence of differing retail gasoline prices in

different parts of town does                      nothing to           establish that SheIl was intentionally using

company-operated stores to undersell competing dealers.                                   The three affidavits   are


similarly insufficient since they contain no factual detail of the aIleged underselling. As a

matter of law , such " (c)onclusory                           statements may not be considered        as   summary

judgment proof.                Butler      v.   Cont      l Airlines, Inc.,    31 S.   3d 642 , 653 (Tex. App.

Houston (1st Dist) 2000 , pet. denied). Moreover, given the undisputed evidence that

Shell' s DTW prices were commercially reasonable , such meager testimony from only


HOUOI :799827
 five dealers does not even create a " surmise                           or suspicion" as to a nationwide plan to


 eliminate lessee dealers through price competition at company stores.                          See   $165 524. 78

 State 47 S.            3d 632 , 635 (Tex. App.                    Houston (14th Dist.) 2001 , pet. denied) ("When

 evidence offered to prove a vital fact is so weak as to do no more than create a mere

surmise or suspicion of its existence , the evidence is . . . in legal effect, no evidence.

           Allowing the court of appeals ' holding to stand would cause severe disruption
           to the gasoline marketing industry, and to any other industry using open-
           price-term contracts, and would inundate Texas courts with pricing
           challenges.

                      If allowed to stand , the court of appeals ' holding that a fact issue is created

by circumstantial evidence of a bad- faith intent completely umelated to pricing---even if

the prices ultimately charged are nondiscriminatory and commercially reasonable-will

have dramatic consequences for ~he gasoline marketing industry in Texas , as well as any

other industry that regularly uses open-price-term contracts. To satisfy the court of

appeals ' interpretation of the good- faith standard of Section 2.305(b), sellers under open-

price- term contracts would be required to establish that their DTW prices render their

buyers competitive in the retail marketplace. However, as a practical matter, in a volatile

market like retail gasoline, refiners have no way to predict how their                        daily   DTW pricing

decisions will affect the individual                       competitiveness of thousands of dealers in different

geographic markets. Thus , under the standard adopted by the court of appeals , refiners in

Texas will have no way of conducting business in a way that ensures compliance with the

uee.




HOUOI:799827
                          Moreover, because it is based on the premise that a rack':based                  price is the


- only good- faith           price for gasoline , Plaintiffs ' theory of the case is not a              challenge to

 particular bad- faith conduct,                but rather is a   fundamental attack on the DTW pricing

 system that Shell and other refiners have used for decades.                        Indeed ,   Plaintiffs      ' expert

 testified that under his damages theory, Plaintiffs ' right to recover damages " (d)oesn

 depend on (the refiner s) motive" and , in fact, is causally unrelated to the subjective bad-

 faith plan that Plaintiffs allege:

                                (G)iven the theory that you ve used , it doesn t matter
                                whether or           not
                                                    Shell is trying to run these
                                lessee/dealers out of business or not, your calculation
                                would be the same?

                                I think that's right.

(27 e. R.       at 5718- 19.        eonsequently, the court of appeals ' holding not only opens the

door to endless litigation over the economic reasonableness of prices ,                         but also allows


Plaintiffs to secure a jury issue based on an alleged                  bad- faith   conversion plan without

presenting any evidence of damages related to such a plan. The uec' s drafters adopted

the posted-price presumption precisely to avoid subjecting sellers to such rudderless jury

review of their prices.           Drafting History      at 185- 86.

                        The significance of the court of appeals ' decision is highlighted by the

wave of copy-cat litigation filed against Texas refiners , beginning just days after the

opinion was issued. 12 If the court of appeals ' holding is not overturned , Texas courts will


12 Only a few days after the court of appeals released its decision, a new group of out-of-
state plaintiffs filed a putative class action under Section 2. 305(b) against Shell on behalf of
thousands of dealers.           Court House Petroleum , Inc. et al. v. Shell Oil Co. et aI. Civil Action No.
                                                                                                (continued..




HOUOl:799827
,-




       become enmeshed in exactly the sort of endless judicial scrutiny of prices that the UCC'

       drafters sought to avoid by incorporating the posted-price presumption in the goo&. faith

       standard of Section 2- 305. Such continuous           judicial oversight of pricing will infringe on

       Texas refmers ' flexibility to respond to changes in the retail marketplace caused by larger

       economic forces , which even Plaintiffs ' experts admit threaten the future profitability of

       both refiners and dealers.

                       Texas refiners ' ability to plan for such undeniable market changes will be

       impaired if,   as the court of appeals found here , planning documents that merely forecast a

       decline in the number of dealer stations can be taken as evidence of subjective bad faith

      in the refiner    s current pricing decisions. For example, one can imagine three refiners

      who charge their dealers exactly the same commercially reasonable , nondiscriminatory

      DTW price. The first refiner creates planning documents predicting that the profitability

      of dealer stations will decline and recommending a shift to company-operations through

      negotiated buy-outs of its dealers; the second refiner s planning documents foresee                        a


      rebound in the       dealer class of trade and recommend building more dealer-operated

     , stations ; the third refiner does no planning at all. Under the court of appeals ' holding, the



          03- 678 in the United States District Court for the Southern District of Texas (Houston
      Division). Similar cases              have been filed against Exxon in various parts ofthe state. Dan Gill et
      a!. v. ExxonMobil Corp. Cause No. 03- 60079-4 in the County Court Number 4 , Nueces County,
      Texas (putative nationwide class action);             Jerry King et a!. v. ExxonMobil Corp. eta!. Cause No
      2003- 11161 in the 295th Judicial District Court, Harris County, Texas (multiplaintiff case filed
      by dealers from Texas, Connecticut, and Pennsylvania);                   James Branda et a!. v. ExxonMobi!
      Corp. Cause No. 2003-49037 , in the 334th Judicial District Court, Harris County, Texas
      (involving many of the same dealers who previously sued in                      Mathis) Shiraz Ali et at.
      ExxonMobil Corp. Cause No. 2003-53000 , in the 270th Judicial District eourt , Harris County,
      Texas (including plaintiffs from five far- flung Texas counties).



      HOUOl:799827
                                , '




 second and third refiners could not be liable in a Section 2- 305 case , while the good faith

 of the first refiner s prices would be determined by a jury-even                          though   all three charged

 exactly the same price.                Nothing in Texas law, the uee' s drafting history, or established

 Section 2- 305 jurisprudence supports such an absurd result.

                       In regulating the               relationship between refiners and franchised         dealers


 eongress has specifically recognized " the importance of providing adequate flexibility so

 that franchisors may initiate changes in their marketing activities to respond to changing

market conditions and consumer preferences.                             S. REp. No. 95- 731 , at 19 (1978)

 (concerning the Petroleum Marketing Practices Act),                        reprinted in       1978 u.       c.A.

 873 ,   877. The court of appeals ' holding restricts that flexibility while exposing Texas
refiners to liability for bad- faith pricing even if they meet the traditional standard of

charging commercially reasonable , nondiscriminatory prices to their dealers.                               Because

this holding departs from mainstream UCC jurisprudence and sets a bad precedent for

Texas , this Court should reverse.

                                                         CONCLUSION
                      For these reasons , Shell respectfully requests that the                      Court grant its

petition for review                   reverse that part of the court of appeals '           judgment addressing
Plaintiffs ' claim under Section 2.3 05(b), and affIrm the judgment of the trial court on that

claim.




HOUO1 :799827
               Respectfully submitted

               BAKER BOTTS LLP.


               By:
                          regory 0 and
                       tate Bar No. 04798500
                     J. Michael' Baldwin
                      State Bar No. 01625300
                     Macey Reasoner Stokes
                     State Bar No. 00788253
                     Richard A. Brooks
                     State Bar No. 03072700
                     David M. Rodi
                     State Bar No. 00797334
                     One Shell Plaza
                     910 Louisiana Street
                     Houston , Texas 77002-4995
                     (713) 229- 1234
                     (713) 229- 1522 (fax)

               ATTORNEYS FOR PETITIONERS
               SHELL OIL COMPANY
               MOnV A ENTERPRISES LLe
               EQUILON ENTERPRISES LLe
               AND EQUIV A SERVleES LLe




HOUOl:799827
                              CERTIFICATE OF SERVICE
                I certify that a copy of the foregoing Petitioners ' Brief on the Merits was
 sent to all counsel of record by certified mail , return receipt requested, on October 8
 2003 , as indicated below.

         Counsel for Respondents:

         George M. Fleming
         Sylvia Davidow
         Anita Kawaja
         Fleming & Associates , LL.P.
         1330 Post Oak Blvd. , Suite 3030
         Houston , Texas 77056

         Mike O' Brien
         Mike O' Brien , P.
         1330 Post Oak Blvd. , Suite 2960
         Houston , Texas 77056



                                                        ~ ~oL;~
                                            David M. Rodi




HOUOI:799827
                                           INDEX TO APPENDIX
Appendix A:     HRN. Inc. v. Shell Oil Co. 102 S. W.3d 205. (Tex. App.                 Houston (14th
                Dist) 2003 , pet. filed)
Appendix B:     Trial court' s         letter opinion dated April 17 , 2000

Appendix C: Trial court' s letter opinion dated November 10 , 2000

Appendix D:     Schwartz v. Sun Oil Co.             No. 96- 72862 , slip op. at 42- 43 (E. D. Mich.
                Dec. 9 ,      1999),      rev d in part and aff'd in part 276 F.3d 900 (6th eir.
                2002)

Appendix E: Walter D. Malcolm                        The Proposed Commercial Code:      A Report on
                Developmentsfrom May 1950 through February                    1951 , 6 Bus. LAW. 113
                186 (1951)

Appendix F:     Mathis v. Exxon Corp. 302 F.3d 448 (5th Cir. 2002)




HOUO1 :799827

				
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