Windy Cove, Inc., along with two other gasoline dealers, entered into a 15-year exclusive fuel supply agreement with Circle K Stores Inc. to supply Mobil-branded stations in Southern California. The contract stipulated that the price per gallon would be the seller's 'price in effect' at the time and place of delivery. The dealers sued, alleging that Circle K did not set these prices in good faith because it used a non-industry-standard pricing formula and charged rates higher than other wholesalers. The district court granted summary judgment in favor of Circle K, and the dealers appealed to the Ninth Circuit.
The Ninth Circuit analyzed the case under California Commercial Code section 2305(2), which requires a party with the power to fix a price to do so in good faith. The court noted that the Uniform Commercial Code includes a 'safe harbor' provision stating that in the normal case, a 'price in effect' satisfies the good faith requirement. The court explained that to rebut this presumption, the plaintiff must show objective bad faith, which occurs if prices are discriminatory or not commercially reasonable. The court rejected the dealers' argument that Circle K's use of a non-industry-standard formula rendered the prices unreasonable, citing the majority rule that commercial reasonableness is determined by the actual price charged rather than the formula used. Furthermore, the court addressed the definition of competitors, ruling that in the gasoline market, a wholesaler competes with all suppliers, including refiners. Because it was undisputed that Circle K's prices were lower than those charged by at least one refiner, the prices were deemed 'within the range' of competitors and thus commercially reasonable. The court concluded that the dealers failed to rebut the presumption of good faith.
The decision affirms the district court's judgment in favor of Circle K, leaving the exclusive distributorship contract intact. It clarifies that wholesalers can rely on the 'price in effect' safe harbor if their prices fall within the range of competitors, including refiners, even if they do not use industry-standard pricing formulas. The ruling limits future challenges to open-price contracts to cases involving evidence of discriminatory pricing or prices that fall outside the competitive range.
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