Current Gasoline Franchisees May Not Claim Constructive Termination, Nonrenewal: High Court

This posting was written by John W. Arden.

Gasoline station franchisees may not maintain actions for constructive termination or constructive nonrenewal under the federal Petroleum Marketing Practices Act (PMPA) after accepting renewal agreements from a franchisor and continuing to operate their franchises, the U.S. Supreme Court ruled in a unanimous decision on March 2.

The high court held that (1) franchisees cannot recover for constructive termination under the PMPA if the franchisor’s allegedly wrongful conduct did not compel the franchisees to abandon their franchises and (2) franchisees that sign a renewal agreement and continue to operate their franchises may not maintain a claim for constructive nonrenwal under the PMPA.

Petroleum Marketing Practices Act

The PMPA (15 U.S.C. §2801—§2807, CCH Business Franchise Guide ¶6940) establishes federal minimum standards for the termination and nonrenewal of gasoline franchises, authorizing franchisors to end a franchise relationship only for enumerated causes and with advance written notice. To enforce these requirements, franchisees may bring suit in federal court for equitable relief, compensatory and punitive damages, attorney’s fees, and costs.

For many years the franchisor (Shell Oil Company) provided its Massachusetts franchisees with a rent subsidy that reduced the monthly rent of franchise premises for every gallon of gasoline sold. The subsidy was renewed annually by written notice, and franchisor representatives made oral representations that the subsidy or something like it “would always exist.”

Discontinuation of Rent Subsidy

In 1998, the franchisor assigned its rights and obligations to a joint venture (Motiva), which ended the volume-based rent subsidy and offered franchisees renewal agreements that contained a new formula for calculating rent. These actions generally resulted in an increase of rent.

Sixty-three franchisees filed suit against Shell and the joint venture in July 2001, alleging that the discontinuation of the rent subsidy constituted a breach of contract under state law and a “constructive termination” within the PMPA. They further claimed that the joint venture’s offer of new franchise agreements calculating rent in a different way amounted to a “constructive nonrenewal.”

After trial of these claims in the federal district court in Boston, a jury found against the franchisor and the joint venture on all claims. Both defendants had unsuccessfully moved for judgment as a matter of law on the PMPA claims, arguing that they could not be held liable for constructive termination or nonrenewal because none of the franchisees abandoned their franchises.

On appeal, the First Circuit affirmed in part and reversed in part, holding that a franchisee is not required to abandon its franchise to recover for constructive termination. A simple breach of contract can amount to constructive termination, the court held, if the breach resulted in “such a material change that it effectively ended the lease . . . ” On the other hand, the First Circuit agreed with the defendants that a franchisee continuing to operate under a renewal agreement cannot maintain a claim for lawful nonrenewal under the PMPA. (Marcoux v. Shell Oil Products Co, LLC, CCH Business Franchise Guide ¶13,890).

Supreme Court Petitions

Subsequently, both the franchisees and the franchisor filed petitions for review by the U.S. Supreme Court. (Mac's Shell Service, Inc. v. Shell Oil Products Co., Docket No. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Docket No. 08-372) The Supreme Court granted their petitions on June 15, 2009.

Petitioning franchisees contended that there was a split among the circuits on “whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.”

They cited a 1986 Ninth Circuit decision—Pro Sales, Inc. v. Texaco, U.S.A., CCH Business Franchise Guide ¶8604—that recognized the “Catch-22” situation and rejected such a requirement.

Supreme Court Rulings

On review, the Supreme Court concluded that “a necessary element of any constructive termination claim under the Act is that the franchisor’s conduct forced an end to the franchisee’s use of the franchisor’s trademark, purchase of the franchisor’s fuel, or occupation of the franchisor’s service station.”

The PMPA uses the word “terminate,” which ordinarily means “put an end to,” the court said. Thus, when given its ordinary meaning, the Act is violated only if a franchise is put to an end.

“Requiring franchisees to abandon their franchises before claiming constructive termination is also consistent with the general understanding of the doctrine of constructive termination,” Justice Alito wrote. In order for an employee to recover for constructive discharge, he or she generally must quit the job. A tenant claiming constructive eviction must actually move out.

Contentions that this interpretation of the PMPA fails to give franchisees protection from unfair and coercive acts by their franchisors “ignores the fact that franchisees still have state-law remedies available to them,” the Court explained.

On the constructive nonrenewal claim, the Court held that a franchisee choosing to accept a renewal agreement cannot be allowed to thereafter claim wrongful nonrenewal. The plain text of the PMPA says that there is a violation of the statute when the franchisor “fails to renew” a franchise for reasons not provided by the statute. Thus, the threshold requirement of a wrongful nonrenewal action is that there is a nonrenewal.

Continuation or Extension of Relationship

The Act speaks of a franchisor’s failure to reinstate, continue, or extend the franchise relationship, the Court stated. In a situation like this one, the franchises had been continued and extended.

Finally, the Court noted that the PMPA authorizes franchisors to respond to market demands by proposing different contractual terms at the expiration of a franchise agreement. The statute allows franchisors to refuse to renew franchise relationships when the franchisees refuse to agree to changes proposed “in good faith and in the normal course of business.”

Allowing franchisees to sign renewal agreements and then pursue wrongful nonrenewal claims would undermine this procedure and frustrate the franchisors’ ability to propose new terms.

The 20-page opinion in Mac’s Shell Service, Inc. v. Shell Oil Products Co. LLC is available here on the U.S. Supreme Court website. It will appear in CCH Business Franchise Guide.