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Shell Oil Company Scores a Major Victory in Texas Supreme Court

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Baker Botts team leads appeal effort in suit brought by service station dealers across 17 states; Court’s opinion sets important precedent for wholesale gasoline pricing policies in Texas

The Texas Supreme Court, on August 27, 2004, handed a significant victory to Shell Oil Company in a suit brought by several hundred independent service station dealers challenging the pricing system used by Shell and other major gasoline refiners. The court’s opinion clarifies the Texas statute that governs most refiners’ wholesale pricing policies, and it has the potential to impact lawsuits currently pending against Shell, Exxon, and other refiners across Texas and elsewhere.

Dealers from 17 states originally filed suit in in HRN, Inc. v. Shell Oil Company in 1999, alleging that Shell’s wholesale gasoline prices were set with the intent of driving them out of business and converting their locations to company-operated stations.  Like most major refiners, Shell’s contracts with its dealers contain an open price term, under which the price of gasoline can vary on a daily basis.  The dealers alleged that Shell’s pricing violated Section 2-305 of the Uniform Commercial Code, which requires sellers with open price term contracts to set their prices in good faith.

In December 2000, Judge Scott Brister of the 234th District Court in Houston  granted summary judgment in favor of Shell, holding that Shell set its prices in good faith as a matter of law.  The dealers appealed, and while their appeal was pending, the United States Court of Appeals for the Fifth Circuit decided Mathis v. Exxon Corp., holding that circumstantial suggestions of dishonest motives are enough to support a claim under the Texas version of Section 2-305.  Although Mathis was contrary to the UCC jurisprudence of other states, the Fourteenth Court of Appeals adopted the Fifth Circuit’s reasoning and reversed Judge Brister’s summary judgment.

Shell then appealed to the Texas Supreme Court, asking it to reject the Fifth Circuit’s prediction and harmonize Texas law with prevailing national standards.  Citing the UCC’s drafting history, the court declared that allowing the dealers’ claims to go forward based on “assumed subjective motives” would inject uncertainty into contracts and undermine the purposes of the Code.  The court also rejected the dealers’ allegation that Shell had tried to run them out of business, noting that the dealers did not dispute the fact that Shell’s prices were commercially reasonable.

“The Texas Supreme Court’s opinion adopts an objective standard of good faith under Article 2 of the UCC,” said Baker Botts L.L.P. partner J. Michael Baldwin, who argued the case on appeal.  Baldwin added, “The ruling gives comfort to gasoline marketers and other open price term sellers that their pricing decisions will not be subject to attack years after the fact based merely on circumstantial or subjective factors.”

Shell was represented in the trial court and on appeal by a Baker Botts L.L.P team that included J. Michael Baldwin, J. Gregory Copeland, Macey Reasoner Stokes, Richard Brooks, and David Rodi.

Baker Botts L.L.P., founded in 1840, is a leading international law firm with offices in Austin , Baku , Dallas , Houston , London , Moscow , New York , Riyadh and Washington .  With more than 650 lawyers, Baker Botts provides a full spectrum of legal services to regional, national and international clients.  For more information, please visit www.bakerbotts.com.

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