Hurricanes, Hugo Chavez Are the Nature of CITGO Franchisee Litigation

HOUSTON (Blue MauMau) - A legal battle is escalating between gasoline refiner and supplier CITGO Petroleum Corporation and a 14-year veteran franchise owner of 39 branded gasoline stations operating in America's heartland of Illinois, Wisconsin, Indiana and Iowa. Until 2005, Dan Arnold, owner/founder of Ranger Enterprises, felt his relationship with CITGO had been a win-win situation, which started in 1991.

But when Hurricanes Katrina and Rita hit the Gulf Coast states that year, leaving destruction and damages in oil refinery territories, new issues surfaced over supply and demand. Arnold found himself churning in rough waters with an unfamiliar CITGO franchisor, a wholly-owned subsidiary of Venezuela's state-owned oil company, Petroleos de Venezuela S.A., controlled by President Hugo Chavez. Previously, the gasoline refiner had been owned by Southland Corporation, franchisor of 7-Eleven stores, which debranded away from CITGO in 2006.

The Crux of the Litigation

The litigation started when CITGO filed a lawsuit against the Road Ranger franchisee chain in November 2007, for breach of contract, after Arnold de-branded all of his 39 locations under the CITGO flag. The petroleum refiner/marketer claimed it was in violation of all its contractual obligations to CITGO. But Ranger filed its counterclaim on February 19, alleging breach of contract, as well as violations of the Petroleum Marketing Practices Act, caused by CITGO's unnecessary failure to supply gasoline to Ranger's stations, and for damaging the CITGO brand and dealing in bad faith. It is seeking damages in excess of $30 million.

The legal disputes surrounds Ranger's allegations that although CITGO's Louisiana refinery was not seriously damaged by the 2005 Hurricanes Katrina and Rita, the petroleum company took the unprecedented, drastic step of declaring force majeure--in effect, declaring that an act of God made it impossible for it to supply gasoline to Ranger. According to Ranger's lawsuit, CITGO had become an unreliable supplier of gasoline, even though it had access to additional gasoline from Venezuela and the market. During that period, Ranger claimed it was two-days away from being out of product, which would have caused its stations to close their doors. And it stated that CITGO was the only U.S. fuel company to declare force majeure, and its action was contrary to all industry standards and practices.

In response to Ranger's attempts to receive media coverage regarding its lawsuit, CITGO issued a statement: "It is CITGO's policy not to discuss ongoing litigation. However, the fact that Road Ranger issued a detailed press release on the case, showing inaccuracies and placing claims out of context, leaves us no choice but to provide some relevant information." In its rebuttal, CITGO said it has never in the company's history invoked force majeure on any branded gasoline customers. It states, "This naturally covers the period immediately following Hurricane Rita in 2005."

Carmen Caruso, Schwartz Cooper Chartered, franchise attorney for Ranger Enterprises, said their position on the supply interruption is that CITGO needs to prove that they really were running out of gasoline and that this wasn't some kind of contrived rearrangement for Venezuelan purposes that got into problems. And he said, "They better be able to show that we were treated fairly." He feels CITGO's own gasoline stations were not cut off the way his client's were. But Caruso explains, "It all gets into the complexities of the oil industry."

Another issue in the litigation is that of Ranger's franchise contract renewal. It alleges that CITGO's actions were dishonest, and a pretext to ending Ranger's franchise relationship, which it legally could not do under the Petroleum Marketing Practices Act. The franchisee is claiming that CITGO deliberately designed the new contract to discourage it from renewing.

But CITGO again responded saying in a statement, that it complied with all of its contractual obligations and requirements under the PMPA, that the company was in the process of updating agreements for all CITGO branded marketers.

President Chavez's Assault on America Causes Boycott

Another allegation Ranger feels was critical to its case was that at the same time CITGO was becoming an unreliable source for its gasoline, President Hugo Chavez was engaging in "vitriolic personal attacks against the Government and President of the United States." The lawsuit claims his unrelenting verbal assaults spurred organized boycott efforts against CITGO gas stations, causing lost sales at the pump. According to Arnold, there are no fewer than 13 CITGO boycott websites on the Internet, from www.chavezgohome.com to www.citgoboycott.org.

In his press release, Arnold stated, "In view of CITGO's horrendous behavior, I am determined to hold CITGO accountable and seek the court's help in recovering the damages they brought my business." He said the legal process would prove to a jury that CITGO, under the control of President Hugo Chavez, undermined the CITGO brand, and betrayed its responsibilities demanded by American franchise law, contract law and the Petroleum Marketing Practices Act.

Ranger's lawsuit states that in a matter of months the Road Ranger chain was hit on the supply and demand sides because of CITGO's actions.

But CITGO rebutted Ranger's allegations, saying it denies that its parent company, Petroleos de Venezuela, S.A. and ties to controversial Venezuela President Hugo Chavez hurt the value of its franchise marketers in the United States. It said, "Venezuela's huge crude oil reserves strengthens CITGO's unique position to serve the U.S. market."