Constitutional – Preemption – Ethanol Blending Statute – Federal Renewable Fuel Program – Intellectual Property – Lanham Act – PMPA – Commerce Clause

American Petroleum Institute v. Cooper (Lawyers Weekly No. 12-02-0025, 43 pp.) (Louise W. Flanagan, J.) 5:08-CV-396; E.D.N.C.

Holding: North Carolina’s Ethanol Blending Statute – which allows gasoline marketers in our state to participate in the blending of ethanol and gasoline (and the tax credits that go along with such blending) – does not conflict with and is not preempted by the Federal Renewable Fuel Program, the Lanham Act, or the Petroleum Marketing Practices Act, nor does the Ethanol Blending Statute violate the Commerce Clause.

Defendants’ motion for summary judgment is granted.

Federal Renewable Fuel Program

The purpose of the renewable fuel program is to ensure jobs through secure, affordable, and reliable energy and to move the U.S. toward greater energy independence and security by increasing the production of clean, renewable fuels.

Parties obligated by the Federal Renewable Fuel Program, such as refiners, are only required to acquire Renewable Identification Numbers (RINs), which the EPA determined would in almost all cases result from either gaining ownership of renewable fuel at some point in the distribution chain or trading for RINs on the market.

The N.C. Ethanol Blending Statute was meant to allow marketers in North Carolina to obtain gasoline suitable for blending so that they might participate in the federal renewable fuel program, which offers significant financial benefits to market participants. Defendant and intervenor-defendant contend that, without the statute, it would be possible for suppliers to monopolize blending and thereby prohibit marketers from participating in the RIN-trading program or collecting the Volumetric Ethanol Excise Tax Credit (VEETC), which grants to entities that blend gasoline with ethanol a tax credit of 45 to 51 cents per gallon of ethanol blended. 26 U.S.C. § 6426.

Under the Ethanol Blending Statute, suppliers must give marketers the option to buy and blend unblended gasoline.

The vulnerability to market forces that plaintiffs repeatedly point out is the consequence of the Ethanol Blending Statute’s choice for marketers, has not resulted in suppliers failing to meet their obligations under federal law. As applied, the Ethanol Blending Statute does not inhibit Congress’s objectives under the renewable fuels program.

Furthermore, there is no showing that similar laws in other states have resulted in a cumulative effect of the dangers plaintiffs have forecast with regard to frustration of federal objectives.

The federal program expressly relies on multiple actors for implementation, regardless of where the burden for noncompliance ultimately falls, and there is no showing that the Ethanol Blending Statute interferes with the interaction of these parties as envisioned by the EPA.

Underlying plaintiffs’ preemption argument is an assertion that it is unfair for their members to bear the risk of penalties for failing to produce renewable fuels or to be required to buy credits for those who overproduce while being unable to monopolize the benefits created by the congressional incentive program for such production.

The relevant question for preemption analysis is not which private parties benefit from the respective statutes, but rather whether the objectives or methods of the congressional statute are interfered with by the state statute. Furthermore, the “flexibility” that the renewable fuel program envisions is manifestly not the flexibility for refiners to develop a system where they blend all of their gasoline with ethanol and sell only blended gasoline to distributors, and where distributors cannot participate in selling and trading of RINs.

Plaintiffs have not demonstrated a disputed material fact that suggests the Ethanol Blending Statute will interfere with Congress’s objective to increase production of renewable fuels.

Lanham Act

Plaintiffs contend that a supplier is unable to control the quality of the products bearing its trademark because the Ethanol Blending Statute authorizes marketers to produce ethanol-blended  gasoline bearing that trademark without the supplier’s consent or oversight. Additionally, plaintiffs argue that the Ethanol Blending Statute requires the uncompensated sale of a branded product. The court addresses each argument in turn.

A federal trademark holder has the right to dictate and oversee quality control measures for the production and sale of its products. A state law will be preempted if it interferes with a trademark owner’s ability to engage in that quality control or creates a substantial likelihood of confusion.

Importantly, plaintiffs have brought suit not for trademark infringement but for a finding of preemption.

The Ethanol Blending Statute, as applied, does not prevent suppliers from engaging in quality control of their trademarked, branded products. The statute appears concerned with restrictions on quantity of blending (and the resulting amount of the related federal tax credit) rather than on quality of blending.

Plaintiffs’ members may set forth specific guidelines for blending and require random testing of the resulting blended gasoline, though they are not necessarily limited to these measures. For sales of gasoline outside a franchise agreement or to buyers unwilling to submit to or diligently follow their quality control procedures, suppliers may forbid use of the trademarked name as to the subsequent sale of the blended gasoline and bring suit under the Lanham Act where such unauthorized use occurs.

Because they maintain the ability to engage in quality control and bring suit to enforce their trademarks, plaintiffs cannot contend that consumer confusion is likely to occur.

Plaintiffs also argue that, if 10 percent of every gallon of blended fuel consists of ethanol, when the blended fuel is sold under a supplier’s trademark, that supplier has only been paid for 90 percent of the gallon, however, when marketers sell fuel that was preblended by a supplier under that supplier’s trademark, the supplier is being compensated for 100 percent of the product.

This argument fails. Blended fuel contains a supplier’s unblended gasoline plus roughly 10 percent ethanol, regardless of whether the blending occurs through inline processes (conducted by the supplier) or through splash blending (conducted by the marketer).

Furthermore, blended gasoline, regardless of how it was blended, is still subject to suppliers’ quality control standards; thus, there is no conflict with the Lanham Act that results in preemption.

Additionally, suppliers set the price for gasoline sold to marketers. Suppliers can contract to require marketers to state whether or not they intend to blend trademarked gasoline with ethanol, and can use this information to determine price and forecast supply, among other things. As such, plaintiffs’ arguments that sale of splash blended gasoline results in a sort of theft of their trademarked product is not supported by the record.

The Ethanol Blending Statute is not preempted by the Lanham Act.

PMPA

The Petroleum Marketing Practices Act permits termination of a franchise relationship by a franchiser for “willful adulteration, mislabeling, or misbranding of motor fuels or other trademark violations by the franchisee.” 15 U.S.C. § 2802(c)(10).

At issue is the meaning of a statutory term, “adulteration,” and this is clearly a question of law.

Congress’s intent in enacting the PMPA was to protect petroleum franchisees from arbitrary or discriminatory termination and nonrenewals.

Based on the ordinary meaning of “adulteration,” the court concludes that the adulteration envisioned by the PMPA is mixing or commingling a trademarked supplier’s fuel with other fuel.

However, blending fuel with renewable fuel is an accepted industry practice that Congress has recognized and mandated through federal law. When Congress mandated the blending of fuels through the renewable fuel program, it did not require inline or splash blending, just that the fuel be blended, and the parties have stipulated that splash blending has been practiced since the 1980’s.

It would belie congressional intent to suggest that the plain meaning of adulteration in the PMPA includes blending gasoline with renewable fuels. This would lead to the illogical result that marketers complying with the federal renewable fuels program would be simultaneously engaging in a prohibited activity that constitutes grounds for termination of their franchise under the PMPA. The PMPA and the federal renewable fuels program coexist because blending is not equivalent to adulteration.

Plaintiffs have failed to point to any evidence that suppliers have been unable to terminate franchises if a franchisee willfully mislabels, misbrands, or mixes that supplier’s product with a different type or brand of gasoline and then sells under that supplier’s trademark. Under the plain meaning of adulterate, such practice would clearly be prohibited under the PMPA, and the Ethanol Blending Statute does not diminish the supplier’s right to terminate a franchise for such behavior.

The Ethanol Blending Statute does not conflict with the adulteration provision of the PMPA, specifically the provisions in the PMPA that allow a franchiser to bring suit if a franchisee engages in adulteration of the franchiser’s product.

Commerce Clause

In determining whether the Ethanol Blending Statute violates the Commerce Clause, the court considers whether the General Assembly had a rational basis for enacting the statute. The court applies a deferential standard in identifying the putative benefits to the state.

As to plaintiffs’ suggestion that the Ethanol Blending Statute could lead to supply disruptions or run-outs, the evidence in the record shows this has not happened since the statute has been in effect. Additionally, the parties have stipulated that suppliers have numerous mechanisms in place to forecast the amount of fuel they must supply.

Furthermore, plaintiffs acknowledge that, regardless of the requirements imposed by the Ethanol Blending Statute or how much they would prefer to ship only blendstock, suppliers will ship a form of unblended full octane gasoline to North Carolina that is suitable for certain boating and two-stroke engine applications. Arguments that suppliers suffer an undue burden from having to ship multiple products along the pipelines, resulting in storage disruptions or insufficient product segregations, do not ring true based on plaintiffs’ own acknowledgment of what products they would ship with or without the Ethanol Blending Statute.

Additionally, plaintiffs have not shown that shipping unblended gasoline in addition to the various other gasoline products currently shipped has resulted in any storage difficulties at the various terminals; they only speculate that such problems might occur. Plaintiffs argue that most suppliers have reduced the frequency and size of the shipments of full octane gasoline to other states. But the crux of plaintiffs’ argument regarding a burden on interstate commerce is that they have to ship unblended gasoline at all, and the record clearly reveals that suppliers ship unblended gasoline in states with and without statutes like the Ethanol Blending Statute, and that suppliers will continue to ship full octane gasoline with or without the statute.

The state has a rational interest in promoting the use of blended fuel and reducing dependence on imported oil. The Ethanol Blending Statute helps the state realize these goals by giving businesses within its borders the opportunity to participate in blending and possibly promoting the production of renewable fuels within the state. Additionally, the statute does not require that suppliers sell only unblended fuel; rather, it requires that if suppliers sell unblended gasoline, that marketers have the option of purchasing it.

Without the Ethanol Blending Statute, it would be possible for suppliers to monopolize blending of fuel, completely excluding local marketers from participating in the blending process. With the statute, local marketers are at the very least given the option to blend fuels if they are interested in participating in the program and if it is in their economic interest to do so. The record shows that having this option has helped local marketers in difficult economic times.

The overall effect of the statute is to allow more entities to blend fuel, thus promoting the use of a renewable source of fuel consistent with federal objectives.

The Ethanol Blending Statute imposes burdens on local interests by forcing marketers to weigh the possible benefits of blending against the risks of losing potential customers and incurring liability for blending errors. These burdens suggest that the General Assembly was not engaging in legislative abuse when it enacted the Ethanol Blending Statute; rather, it was giving local marketers the option of participating in the sale of gasoline blended with renewable fuel that enables them to possibly enjoy certain tax credits, ultimately promoting the use, sale, and consumption of renewable fuel in North Carolina. Accordingly, the court finds no undue burden on interstate commerce as a result of the Ethanol Blending Statute. Any burden is further outweighed by the potential putative local benefits of the statute, and as applied, no dormant Commerce Clause violation is found.

Motion granted.