Frank Shop Inc. v. Crown Central Petroleum

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FRANK SHOP, INC.
OPINION BY
v. 	Record No. 011562 	CHIEF JUSTICE HARRY L. CARRICO
June 7, 2002
CROWN CENTRAL
PETROLEUM CORPORATION
FROM THE CIRCUIT COURT OF HENRICO COUNTY
George F. Tidey, Judge
This is the second time this case has come before the
Court. 	In Frank Shop, Inc. v. Crown Central Petroleum Corp.,
261 Va. 169, 540 S.E.2d 897 (2001) (
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Frank Shop I), we reversed a
judgment adverse to Frank Shop, Inc. (Frank Shop) and held that
because Crown Central Petroleum Corporation (Crown) had failed
to prove its entitlement to protection under the "grandfather
clause" of the Virginia Petroleum Products Franchise Act, Code
§§ 59.1-21.8 through -21.18:1 (the Act), it was in violation of
the Act for operating a refinery-owned gasoline service station
located less than one and one-half miles from a franchised
retail gasoline station operated by Frank Shop.
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1 We remanded the
case "for determination of the relief to which Frank Shop may be
entitled." 	Id. at 177, 540 S.E.2d at 902.	25
Our opinion in Frank Shop I was handed down January 12,
2001, and we refused Crown's petition for rehearing on March 2,
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1 The one and one-half mile prohibition is found in Code
§ 59.1-21.16:2(A) and the "grandfather clause" is found in Code
§ 59.1-21.16:2(E). 	The "grandfather clause" states that "[t]he

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2001. 	Thereafter, Crown continued with the operation of its
service station.
On May 11, 2001, Frank Shop filed in the trial court a
Motion for Entry of Permanent Injunction and Award of Attorney's
Fees, Costs, Liquidated Damages and Disgorgement of Profits
(Motion for Relief). 	In the motion, Frank Shop sought a
permanent injunction prohibiting Crown from further operation of
its service station, $2,500 in liquidated damages, and
attorney's fees, all as prescribed by Code § 59.1-21.12.2 In
addition, noting the reference in Code § 59.1-21.12 to "such
other remedies, legal or equitable, . . . as may be available to
the party damaged," Frank Shop sought to have Crown required to
disgorge the profits it had derived from the "illegal operation"
of its service station since March 2, 2001, the date this Court
refused the petition for rehearing in Frank Shop I.	15
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Crown responded by contending Frank Shop was not entitled
to a disgorgement of profits. 	Crown argued that because this
Court did not enjoin it from operating its service station and
provisions of this section shall not be applicable to retail
outlets operated by producers or refiners on July 1, 1979.
2 Code § 59.1-21.12(A) provides in pertinent part as
follows:
Any person who violates any provision of [the Act] shall be
civilly liable for liquidated damages of $2,500 and
reasonable attorney's fees, plus provable damages caused as
a result of such violation, and be subject to such other
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the trial court had not entered an injunction prohibiting the
operation, Crown was not illegally operating the station. 	Crown
also argued that Frank Shop was not entitled to an injunction
but that, if the court awarded Frank Shop an injunction, Crown
"should be allowed 60-90 days to complete its search for, and
installation of, a franchise dealer to operate the retail
outlet."
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On June 4, 2001, the trial court heard argument on the
parties' respective positions concerning the relief to which
Frank Shop was entitled. 	In a letter opinion dated the next
day, the trial court allowed Frank Shop $52,500 in attorney's
fees, $2,500 in liquidated damages, and an injunction, but
delayed the effective date of the injunction until August 1,
2001. 	The court denied Frank Shop's request for a disgorgement
of profits, stating that Crown "has acted properly pursuant to
the ruling of the Supreme Court of Virginia" and disgorgement
would not be "appropriate in this case." 	A final decree entered
June 19, 2001, embodied the trial court's rulings. 	We awarded
Frank Shop this appeal.
Frank Shop has assigned two errors, as follows:
A. 	The trial court erred in delaying the effective date of
its permanent injunction to August 1, 2001.
remedies, legal or equitable, including injunctive relief,
as may be available to the party damaged by such violation.
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B. 	The trial court erred in failing to order Crown to
disgorge its profits earned subsequent to March 2, 2001.
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Crown contends the first assignment of error is moot
because "[t]he trial court's permanent injunction is now
effective and, moreover, Crown Central complied with the
permanent injunction on July 19, 2001."3 Frank Shop maintains
that the first assignment of error is not moot because the delay
in the effective date of the injunction is not only an issue
with respect to the first assignment of error but also to the
second. 	According to Frank Shop, it is Crown's contention that
the delay in the effective date of the injunction "essentially
'authorized' [Crown's] continuing conduct so that disgorgement
is not appropriate." 	Frank Shop says that while it disagrees
with Crown's contention, the contention itself demonstrates that
the delay in the effective date of the injunction is an issue
that permeates both assignments of error.
We agree with Frank Shop that the first assignment of error
is not moot; the issues raised by the two assignments are
intertwined. 	As the parties have addressed the question of
3 The trial court's final decree provided that the retail
outlet in question should not be operated under the Crown name
after August 1, 2001, unless and until Crown gave counsel for
Frank Shop notice in writing under oath by certified mail that
the operator of the outlet was a franchised dealer. 	Crown
states in its brief that it gave Frank Shop the required notice,
certifying that a franchise dealer was operating the retail
outlet as of July 19, 2001, but there is nothing in the record
to support Crown's statement.
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disgorgement, resolution of the question would depend, at least
in part, on whether delaying the effective date of the
injunction was proper or improper. 	Assuming disgorgement is
available to Frank Shop, if the delay was proper, Crown would
not be required to disgorge, at least for the period of delay;
if the delay was improper, Crown could be required to disgorge
for the period of delay as well.
With respect to the first assignment of error, Frank Shop
argues that this Court's opinion in Frank Shop I "was clear and
unequivocal: Crown's continuing conduct was in violation of
Virginia law." 	The trial court was duty bound to uphold the law
as this Court pronounced it, and "that meant ordering Crown to
stop its unlawful operation." 	In exercising its equitable
powers, a trial court cannot permit what this Court and the
General Assembly have said is unlawful. 	The trial court's
action in this case can only be explained by its acceptance of
Crown's plea of hardship in finding a franchise dealer, and it
was an abuse of discretion for the court to accept the plea and
refuse to make the injunction effective immediately.
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Responding, Crown argues that the issuance of an injunction
and the timing of its effective date were matters within the
sound discretion of the trial court. 	Crown introduced evidence
showing what is involved in installing a franchise dealer, which
includes extensive searching for a person or entity willing to
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invest $80,000 to $100,000, followed by equally extensive
training and education of the person in the operation of a
retail outlet. 	The trial court was within its discretion to
consider and credit Crown's evidence and determine that, while a
permanent injunction was appropriate, it was equitable to allow
Crown a relatively short period of time to comply with the
injunction.
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We do not question the power of a court of equity, in the
exercise of its discretion in an ordinary case, to fashion a
remedy that would eliminate or lessen the hardship imposed upon
a party by a particular decision. 	But this is not an ordinary
case. 	This is a situation where a party, held by this Court to
be in violation of the law, seeks judicial permission to
continue violating the law until it works itself out of the
supposed hardship in which it finds itself. 	In the peculiar set
of facts involved in this case, it was a clear abuse of
discretion for the trial court to grant such permission.4 The
4 Crown argues that the trial court's decision to allow
Crown time to comply with the injunction is in accord with a
regulation adopted pursuant to the Act that allows a producer or
refiner to operate temporarily a previously franchised dealer-
operated retail outlet when the franchised dealer is lawfully
terminated or not renewed, or if the franchised dealer becomes
ill or injured. 	2 VAC 5-460-10. 	However, there is a
substantial difference between Crown's situation and that of a
producer/refiner entitled to the benefit of the regulation. 	The
regulation contemplates a previous legal operation of a retail
outlet; Crown's operation was illegal.
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trial court should have made the injunction effective
immediately.
This brings us to the question of disgorgement. 	With
respect to this question, Frank Shop argues that its entitlement
to disgorgement "is rooted in two principles: 	(1) Crown should
not be permitted to profit from its wrongdoing, and (2) 'equity
will not suffer a wrong to be without a remedy.' 	Price v.	7
Hawkins, 247 Va. 32, 37, 439 S.E.2d 382, 385 (1994)." 	This
Court explicitly held in
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Frank Shop I that Crown's operation of
its retail outlet was unlawful, yet Crown deliberately
repudiated that decision and continued the operation for months
until enjoined effective August 1, 2001. 	Crown is a large,
sophisticated refining company, and it cannot contend that it
thought the lack of an injunction somehow made lawful or
otherwise authorized conduct this Court expressly said was
unlawful.
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Continuing, Frank Shop says that Crown's action subjects it
to a panoply of statutory remedies, including an injunction to
stop the violation, and other remedies to redress the violation,
including liquidated damages of $2,500. 	The Act also provides
"such other remedies, legal or equitable, . . . as may be
available to the party damaged by such violation," Code § 59.1-
21.12(A), and this expressly allows a court to fashion remedies
beyond, and in addition to, those enumerated. 	Disgorgement of
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profits is one such equitable remedy, particularly significant
for Crown's deliberate violation of the law. 	If Frank Shop is
limited to recovering liquidated damages of $2,500, then Crown
will have suffered no real consequences for its wrongdoing.
Countering, Crown maintains that it did not ignore this
Court's ruling. 	Immediately after this Court's reversal, and
before the denial of Crown's petition for rehearing, Crown
commenced its search for a franchise dealer who could operate
the retail outlet. 	When the trial court did impose a permanent
injunction, Crown complied with its terms. 	In fact, Crown had a
franchise dealer in place and operating the outlet earlier than
the effective date of the injunction.
Moreover, Crown continues, this Court did not enjoin its
operation of the retail outlet or make any other determination
concerning the appropriate relief, but instead left that
determination to the sound discretion of the trial court. 	Such
discretion would include a determination by the trial court
regarding if and when an injunction should issue and whether
Crown's profits should be disgorged. 	The court determined that
a permanent injunction was appropriate, but that it was
reasonable to allow Crown time to install a franchise dealer.
For the same reasons, the court determined that Crown had not
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acted in bad faith5 and that the unusual remedy of disgorging
profits would not be appropriate. 	In making these
determinations, Crown concludes, the trial court did not abuse
its discretion.
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We have not previously considered the question whether
disgorgement of profits is an appropriate remedy for a violation
of the Act. 	In resolving the question, the provisions of the
Act are pertinent.
The purpose of the Act is set forth in Code § 59.1-21.9 as
follows:
The General Assembly finds and declares that since the
distribution and sales through franchise arrangements of
petroleum products in the Commonwealth of Virginia vitally
affect the economy of the Commonwealth, the public
interest, welfare, and transportation, and since the	15
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17 	independence of the small businesses in the Commonwealth is
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essential to economic vitality, it is necessary to define
the relationships and responsibilities of the parties to
certain agreements pertaining thereto.
(Emphasis added.)
Code § 59.1-21.16:2(A) contains the one and one-half mile
prohibition at issue in Frank Shop I. 	That Code section states
in pertinent part as follows:
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5 What the trial court actually said was that Crown had
"acted properly pursuant to the ruling of the Supreme Court of
Virginia handed down on January 12, 2001 and the denial of the
rehearing on March 2, 2001." 	It should not be necessary to
observe that a party cannot be acting properly under a ruling
when this Court has determined that the party's action is
illegal.
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[N]o refiner of petroleum products shall operate any major
brand, secondary brand, or unbranded retail outlet in the
Commonwealth of Virginia with company personnel, a parent
company, or under a contract with any person, firm, or
corporation, managing a service station on a fee
arrangement with the refiner; however, such refiner may
operate such retail outlet with the aforesaid personnel,
parent, person, firm, or corporation if such outlet is
located not less than one and one-half miles . . . from the
nearest retail outlet operated by any franchised dealer.
These statutory provisions were considered in Crown Central	12
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Petroleum Corp. v. Hill, 254 Va. 88, 488 S.E.2d 345 (1997).
There, we stated as follows:
The specific location prohibition at issue is completely
consistent . . . with the expressed legislative intent, to
preserve "the rights, responsibilities, and independence of
the small businesses in the Commonwealth." 	§ 59.1-21.9. 	A
refiner operating a retail outlet is an integrated business
entity which produces its product and sells that product at
both the wholesale and retail level. 	Thus, the refiner has
the ability to allocate availability of its product and
subsidize the price of its product sold at its retail
outlets. . . . 	It is the refiner's integration and access
to the product that puts the retail franchised dealer at a
potentially competitive disadvantage. 	Therefore, to	26
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independence of dealers, the General Assembly chose to
require a minimum distance of one and one-half miles
between a refinery-owned-and-operated retail station and a
retail station operated by a franchised dealer.
Id. at 92-93, 488 S.E.2d at 347 (emphasis added). 	Keeping in
mind the emphasis on the purpose of the Act to preserve the
rights and independence of small businesses,
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i.e., franchise
dealers, we now turn to the remedies the General Assembly has
provided for a violation of the Act.
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As noted previously, Code § 59.1-21.12 provides that any
person who violates the Act "shall be civilly liable for
liquidated damages of $2,500 and reasonable attorney's fees,
plus provable damages caused as a result of such violation, and
be subject to such other remedies, legal or equitable, including
injunctive relief, as may be available to the party damaged by
such violation." 	It will be observed that the remedy provided
is not liquidated damages
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or attorney's fees or provable damages	8
or such other remedies, legal or equitable, including injunctive
relief, as may be available to the party damaged by such
violation. 	Rather, the remedies provided are liquidated damages
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and attorney's fees and provable damages and such other
remedies, legal or equitable, including injunctive relief, as
may be available to the party damaged by such violation.
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In other words, the General Assembly intended not only to
provide remedies in the form of liquidated damages, attorney's
fees, proven damages, and injunctive relief but also, in the
broadest of terms, to provide other remedies appropriate to a
particular violation of the Act. 	And the language employed
cannot be read to exclude the remedy of disgorgement of profits.
Indeed, considering that the remedies provided are intended to
carry out the purpose of the Act to preserve the rights and
independence of franchised dealers, we are of opinion that
disgorgement of profits fits logically within the framework of
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"other remedies, legal or equitable, . . . as may be available
to the party damaged by such violation." 	We are further of
opinion, however, that the remedy of disgorgement should only be
available for a willful violation of the Act, and not for some
innocent or unintended violation.
There can be no dispute that Frank Shop is a party within
the class protected by the Act. 	Nor can there be any dispute
that Crown's violation was willful. 	At least from March 2,
2001, when this Court refused Crown's petition for rehearing,
Crown was on notice it was in violation of the Act. 	Yet, it
took the position in response to Frank Shop's Motion for Relief
that, because this Court did not enjoin it from operating its
retail outlet and the trial court had not entered an injunction
prohibiting the operation, it was not illegally operating the
station. 	And it apparently thought it could keep on operating
until someone made it stop by way of an injunction.
But an injunction was not needed to make the operation
illegal. 	Our opinion in Frank Shop I and the refusal of Crown's
petition for rehearing made clear that the operation was
illegal. 	Crown's willfulness was evidenced by the deliberate
decision it made thereafter to continue operating even at the
peril of becoming subject to the remedies provided by the Act.
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Crown's willfulness was displayed in another way. 	When
faced with the entry of an injunction, its immediate reaction
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was to ask for a delayed effective date. 	The delay did not make
Crown's operation legal, but Crown deliberately took advantage
of the delay to continue its illegal operation.
What makes disgorgement such an appropriate remedy in this
situation is that it was Crown's obvious purpose to continue
operating, although illegally, until a franchise dealer was in
place so there would be no break in its receipt of profits from
each day's operation. 	To permit Crown to retain the profits
under these circumstances would run counter to the principles
that one should not be permitted to profit from his own
wrongdoing and that equity will not suffer a wrong to be without
a remedy. 	To require disgorgement in this case would serve
those principles well.
But, Crown argues, Frank Shop's disgorgement theory is an
unwarranted attempt to obtain punitive damages, and in the
absence of a statutory provision, Frank Shop is not entitled to
seek punitive damages under any guise. 	The Act does not provide
for punitive damages, so Frank Shop is not entitled to any such
exemplary damages no matter how it frames the recovery.
We disagree with Crown. 	Punitive damages are not allowed
as compensation for plaintiff's loss but as a warning to others
and punishment to the wrongdoer. 	Giant of Virginia, Inc. v.	22
Pigg, 207 Va. 679, 685, 152 S.E.2d 271, 277 (1967).
Disgorgement on the other hand is "[t]he act of giving up
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something (such as profits illegally obtained) on demand or by
legal compulsion,"
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Black's Law Dictionary 480 (7th ed. 1999),
with the amount disgorged awarded to the party damaged by the
illegal act.
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Crown also argues that Frank Shop waived any claim for
disgorgement because it did not request that relief in its
original bill of complaint or at the original trial and did not
raise the claim until after the remand of Frank Shop I. 	But, as
Frank Shop points out, it could not have foreseen that after
this Court announced Crown's operation was unlawful, Crown would
continue the unlawful operation. 	Hence, the claim for
disgorgement did not mature until after the remand.
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Finally, Crown argues that Frank Shop's equitable theory of
disgorgement is barred by the doctrine of unclean hands because
Frank Shop failed to disclose pertinent, responsive materials
during the discovery phase of Frank Shop I, and the trial court
was within its discretion to consider this failure in denying
Frank Shop's request for relief. 	However, in the final decree,
the trial court stated that Frank Shop's motion for disgorgement
was denied for the reasons set forth in the court's letter
opinion. 	Frank Shop's alleged failure to disclose was not
listed as one of the reasons set forth in the letter opinion, so
the trial court apparently did not consider the failure a
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sufficient reason to deny disgorgement. 	We would not disagree
with the trial court on this point.
For the reasons assigned, we will reverse the judgment of
the trial court and remand the case with direction to determine
the date on which Crown ceased operating the retail outlet, to
determine and make an award to Frank Shop of the profits earned
by Crown from its unlawful operation of the retail outlet from
March 2, 2001 to the date Crown ceased such operation, and to
determine and make an award to Frank Shop of reasonable
attorney's fees and costs incurred subsequent to the trial
court's June 4, 2001 hearing, including those incurred in this
appeal.
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