Honorable M. Jodi Rell, Governor, State of Connecticut, Formal Opinion 2008-010, Attorney General State of Connecticut

Attorney General's Opinion

Attorney General, Richard Blumenthal

June 9, 2008

The Honorable M. Jodi Rell

Governor

State of Connecticut

State Capitol

Hartford, CT  06106

Dear Governor Rell:

          You have asked for my legal opinion on whether federal law would bar the state of Connecticut from requiring Connecticut gasoline retailers to offer cash customers a discount.  
Specifically, you ask whether this issue is solely within the purview of federal authority.

          I conclude that the state has full authority in this area.  No federal law -- including the Petroleum Marketing Practices Act (PMPA), federal regulations regarding octane information and the Interstate Commerce or Contract clauses of the United States Constitution -- bar states from regulating cash discounts by gasoline retailers.  In fact, nothing in state or federal law presently prohibits gasoline retailers from offering a discount for cash purchase. 

          A common provision in franchise agreements prohibits gasoline retailers from offering such discounts.  This provision affects up to 85% of the franchisees in Connecticut, including Mobil, Exxon, Shell and Citgo.  For several years, I have advocated legislation banning these restrictive provisions in franchise agreements and I have urged that the legislature consider such legislation in the June 11, 2008 Special Session.  In contrast to mandating cash discounts, my proposal would give small business retailers discretion to offer cash discounts but not impose a mandate.  Some gasoline retailers unrestricted by franchise agreements are already offering them. 

As a threshold issue, any such prohibition on the use of franchise agreements to bar cash discounts would require state legislation.  It could not be done by regulation.  The Commissioner of Consumer Protection simply lacks the authority to adopt regulations governing franchise agreements under the Connecticut Gasoline Franchise Act, Conn. Gen. Stat. § 42-133j to 42-133n, inclusive.

          Neither my proposal to prohibit restrictive contractual provisions, nor a mandated cash discount, violates federal statutory or constitutional law.  In general, states may regulate commercial transactions within their borders.  The Commerce Clause, <st2:country-region>United States</st2:country-region> Constitution Art. I, § 8, proscribes state laws that discriminate against interstate commerce by benefitting in-state economic interests at the expense of out-of-state economic interests. Department of Revenue v. Davis, 128 S.Ct. 1801 (2008); New Energy Co. of Indiana v. Limbach, 486 <st2:country-region>U.S.</st2:country-region> 269, 273 (1988).  In the absence of discrimination against interstate commerce, state law does not abridge the Commerce Clause unless the burdens imposed on interstate commerce are "clearly excessive in relation to putative local benefits."  Pike v. Bruce Church, Inc., 397 <st2:country-region>U.S.</st2:country-region> 137, 142 (1970).    In this situation, there will be some small burden on commerce because a cash discount would require additional signage and perhaps reconfiguration of the pump to accommodate another price per gallon.  As shown by gasoline stations that already provide a cash discount, these practical issues can be easily addressed. The cost of  these changes will not be so substantial as to outweigh the benefits to consumers of lower gasoline prices.

          Neither a statutory ban on restrictive franchise contract provisions nor statutorily-required cash discount offers would violate the Contract Clause.  <st2:country-region>United States</st2:country-region> Constitution, Art. I § 10 cl.1.    State law may nullify contract provisions when there is a legitimate public purpose for such legislation and the public purpose outweighs any substantial impairment of the contract.  Serrano v. Aetna Ins. Co., 233 Conn. 437 (1995); See also, Allied Structural Steel v. Spannaus,  438 U.S. 234 (1978); U.S. Trust Co. v. New Jersey, 431 <st2:country-region>U.S.</st2:country-region> 1 (1977).  In this situation, there is no substantial contract impairment.  The prohibition on cash discounts is a minor provision in a contract that governs the broad issues of a franchisor-franchisee relationship.  Even if a court deems the ban on prohibiting cash discounts to be substantial, there is a strong public purpose to providing consumers the option of significantly reducing gasoline costs by paying cash.    

No federal preemption of state law appears to bar such action by Connecticut.  The Petroleum Marketing Practices Act (PMPA), 15 U.S.C. 2801, et seq., regulates certain aspects of the gasoline franchisor-franchisee relationship.   The clear intent of this act is to protect franchisees, Brach v. Amoco Oil Co., 677 F.2d 1213 (7^th Cir., 1982), rather than restrict state authority to require cash discounts.  The PMPA specifically preempts state laws only “with respect to termination (or the furnishing of notification with respect thereto) of any such franchise or to the nonrenewal (or the furnishing of notification with respect thereto) of any such franchise relationship” 15 U.S.C. 2806.  A cash discount has nothing to do with the termination or nonrenewal of a franchise agreement. 

         Courts have repeatedly upheld state laws regulating aspects of the relationship between gasoline distributors and their retailers.  For example, federal courts have sustained state laws requiring certain payments to franchisees, Bellmore v. Mobil Oil Corporation, 783 F.2d 300 (2^nd Cir. 1986),  regulating the rent that may be charged to franchisees, Esso Standard Oil Company v. Department of Consumer Affairs, 793 F.2d 431 (1^st Cir. 1986), and prohibiting minimum hours of operation by a franchisee.  Getty Petroleum Corp. v. Harshbarger, (1^st Cir. 1992)

          Clearly, a state law requiring all gasoline retailers, whether or not they are franchisees to offer a cash discount, would not be preempted by the PMPA.  Neither would a ban on restrictive franchise provisions barring such discounts. 

          Finally, the federal government regulates the posting of octane ratings for gasoline.  16 CFR Part 306.  This regulation does not in any way affect the pricing of gasoline nor the posting of such prices. 

          In conclusion, legislation requiring gasoline retailers in this state to offer a cash discount or banning franchise agreement provisions prohibiting franchisees from offering cash discounts would not be prohibited by federal law, including the PMPA or federal octane rating posting regulations.  Such legislation should be upheld as well against any challenge under the Contracts Clause or the Interstate Commerce Clause of the United States Constitution.  As in the past, I will continue to urge as sound public policy that the legislature unshackle retailers, giving them discretion to offer cash discounts without imposing a mandate.  The result would be enhanced competition, and benefits for consumers.

Sincerely,

RICHARD BLUMENTHAL

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