The U.S. Court of Appeals for the Fourth Circuit recently remanded a challenge to a North Carolina fuel blending statute, holding the district court must evaluate if the statute prevents gasoline suppliers from exercising quality control of trademarked ethanol gas blends sold to consumers.  Am. Petroleum Inst. v. Cooper, No. 12-1078 (4th Cir. Jun. 6, 2013) (Motz, J., King, J. and Agee, J.) The Lanham Act preempts restrictions on quality control of trademarks, the appeals court said.  The Fourth Circuit ordered the district court to conduct further fact-finding whether the blending statute has a “significant negative impact” on the suppliers ability to ensure that blended gasoline bearing their trademarks meets the level of quality needed to safeguard their trademark rights and prevent consumer confusion.

Underlying this issue are two common ethanol-gasoline blending methods.  Suppliers conduct the first, called “inline blending,” using computers to measure and blend ethanol and conventional gasoline.  The blended gasoline is then transported for delivery to retailers.

Retailers conduct the second method, call “splash blending.”  Retailers purchase unblended gasoline and separately adds ethanol into the transportation vehicle.  The blending occurs trough the vehicle’s movement.

North Carolina’s Ethanol Blending Statute essentially prevents suppliers from selling pre-blended gasoline to retailers.  The statute, signed in 2008, requires suppliers to offer unblended gasoline for sale to retailers and prevents suppliers from contractually restricting retailers from splash blending.

In 2008, the plaintiffs, trade organizations representing gasoline suppliers, sued North Carolina in federal district court, arguing that the blending statute was preempted by federal law.  The plaintiffs relied on preemption by (1) the Petroleum Marketing Practices Act (PMPA)—which protects retailers from arbitrary or discriminatory terminations and nonrenewals of franchise agreement; (2) the federal renewable fuel program—which mandates the use of ethanol in gasoline; and (3) the Lanham Act—which establishes uniform regulation of trademarks.  U.S. District Judge Louise Flanagan rejected the suppliers’ arguments, and held that the federal statutes do not preempt the state blending statue.

The suppliers appealed, and the Fourth Circuit upheld the district court’s decision on the PMPA and the renewable fuels program.  But applicable to the efforts of this publication, the Fourth Circuit that a genuine issue of material fact existed as the whether splash blending interfered with the suppliers’ ability to control the quality of blended gasoline bearing their trademarks.  As the appeals court noted, “the Lanham . . . Act affords the trademark holder the right to control the quality of the goods manufactured and sold under its trademark.”  And it noted that the Lanham Act has as a purpose to “protect registered marks used in [interstate] commerce from interference by State . . . legislation.”

The Fourth Circuit found that as-applied to the suppliers, the Lanham Act would preempt the blending statute if the quality of gasoline produced by splash blending is less accurate than inline blending.  As the appeals court said, the suppliers “presented competent evidence that splash blending could result in an inferior quality product that could harm vehicle engines or performance thereby denigrating the value of the trademarked goods and fostering consumer confusion.  If, as a factual matter, inline blending is generally more accurate, or less likely to result in subquality blended gasoline, suppliers may have a legitimate Lanham Act claim.”

Under the Lanham Act, the suppliers have the right to protect their products from “significant negative impact.”  The appeals court remanded this issue to the district court to make factual findings to determine whether splash blending meets the suppliers’ quality standards for gasoline, and whether there are quality control measures  to mitigate risks with splash blending.  The Fourth Circuit further noted in conclusion that even if the court finds suppliers cannot not adequately control the quality of splash-blended gasoline, the Lanham Act would not preempt the blending statute in its entirety.  Rather, preemption would go to limiting North Carolina from requiring suppliers to allow the sale of splash-blended gasoline under their trademarks.

As to the contract and environmental statutes, the appeals court stated that Congress amended the PMPA in 1994, narrowing the preemptive scope and allowing states to enact laws that protect franchisees from unlawful termination of an agreement.  Further, the appeals court held that the blending statute does not conflict with provisions of the PMPA allowing franchisers to terminate a franchise agreement for “willful adulteration.”  Congress mandates ethanol blending, so the appeals court reasoned that practice could not be the definition of “willful adulteration” in the PMPA.

The appeals court also upheld the finding of non-preemption under the renewable fuels program, noting the program contemplates retailers as the parties blending ethanol.  Nothing under this program grant the suppliers a blending monopoly.

The Fourth Circuit’s decision in this case highlights the scope and reach of the Lanham Act, which seeks to ensure uniform application and protection of trademarks used in interstate commerce.