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.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The U.S. Supreme Court has scheduled oral argument on January 19, 2010, on Mac’s Shell Service Inc. v. Shell Oil Products Co., a case involving constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA). The U.S. Court of Appeals in Boston (CCH Business Franchise ¶13,890), held that the PMPA did not support a claims for constructive nonrenewal where a franchisee had signed and continued to operate under the complained of renewal agreement. On June 15, 2009, the Supreme Court granted the petitions of the franchisees and Shell (see June 16, 2009 posting at Trade Regulation Talk). The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’ They alleged that there was a split among the circuits “over 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.” The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.

□ The ABA Forum on Franchising is presenting a teleconference and live audio webcast of “Mediating Franchise Disputes,” a CLE program presented from 1 p.m. to 2:30 p.m. EST on Tuesday, December 3, 2009. This program— “one of the best programs presented at the 32nd Annual Forum on Franchising”—will cover the benefits and strategies used in mediations, as well as how to effectively draft mediation clauses. Moderated by Earsa Jackson of Strassburger & Price, the program will feature Michael K. Lewis of JAMS, Peter R. Silverman of Shumaker, Loop & Kendrick, and Peter J. Klarfeld of Grey Plant Mooty. Further information appears here on the ABA website.

□ The plenary session on Annual Franchise and Distribution Law Developments is always a highlight of the annual meeting of the ABA Forum on Franchising. This year’s plenary session—presented on October 16 by Joel R. Buckberg and Jon P. Christiansen—was no different. Each year since 2002, the presentation has been accompanied by a soft-cover bound volume containing more details of the developments and trends of the year. The introduction to this year’s book included a particularly interesting list of themes and trends from the reporting period of August 1, 2008 through July 31, 2009:

■ The extraordinary impact of automobile industry contraction, manufacturer bankruptcy, brand terminations, and dealer network shrinkage produced a sizable number of challenges to auto industry practices and efforts to restructure.

■ Franchisee challenges to franchise selling practices using deceptive practice statutes gained traction with appellate courts and demonstrated desperation in selling tactics, even for experienced franchisors.

■ Arbitration provisions continued to face uncertain enforcement, but challenges to arbitration awards were unsuccessful for the most part.

■ The U. S. Court of Appeals for the Ninth Circuit and its District Courts, the Federal Trade Commission and the California Department of Corporations again ignored each other’s policies on negotiation of franchise agreements and fostered their contradictory policy approaches to franchise empowerment.

■ There was no meaningful harmonization of the revised FTC Franchise Rule and state franchise laws, regulations, exemptions, and exclusions.

■ Damages for early termination of franchise relationships became less certain of collection, particularly where the franchisee’s history of unprofitable operation made its viability for the remainder of the franchise term speculative.

■ Bankruptcy court decisions highlighted the unfortunate risks that reward entrepreneurship with asset liquidation when a franchise, a franchisee and the franchisee’s financing are mismatched.

■ In-term non-competition covenants came under attack in the Ninth Circuit, applying California law, and in Georgia, where the state’s constitution supplied the firepower, in both cases to curtail the scope of these restrictions substantially.

■ Courts once again wrestled with legal principles underlying voluntary choice of law, fundamental public policy identification for conflict of laws purposes, and the applicability of state franchise statutes, producing some inconsistency and reduced predictability in case outcomes.

Further information about the ABA Forum on Franchising and its publications appears here.

High Court to Consider Class Arbitration in Price Fixing Case, Constructive Nonrenewal under PMPA

This posting was written by Jeffrey May, Editor of CCH Trade Regultion Reporter.

The U.S. Supreme Court on June 15 agreed to take up two important issues facing antitrust and trade regulation practitioners.

In one case, the Court agreed to decide whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court granted a petition filed by international shipping companies seeking review of a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355) holding that purchasers of the shipping services could proceed with class arbitration of their price fixing claims against the shipping companies.

The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it.

The petitioners argued that review was appropriate in light of a split among the circuits on the issue, and because the case was free of threshold issues that previously thwarted review of the question.

Moreover, the petitioners contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.”

The petition is Stolt-Nielsen SA v. v. Animalfeeds International Corp. Dkt. 08-1198.

On the same day, the Court agreed to review of a decision of the U.S. Court of Appeals in Boston (Business Franchise Guide ¶13,890), rejecting the constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA).

The appellate court held that the PMPA did not support a claim for constructive nonrenewal where a franchisee had signed and continued to operate under the renewal agreement complained of. The Court granted the petition of the franchisees and Shell.

The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’

According to the petitioners—gasoline station operators—the circuits “are fundamentally split over 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.”

There is a split between the First and Ninth Circuits on the issue. The franchisees contended that, under the First Circuit decision in Marcoux v. Shell Oil Products Co, LLC, a dealer presented with a questionable lease must either sign the lease and forgo the claim that the lease violates the Act or refuse to sign, receive a notice of termination, and risk the franchise on a chance that a district court will grant injunctive relief.

The franchisees contend that the Ninth Circuit, on the other hand, recognized the Catch -22 situation, and rejected such a requirement on the franchisee. In Pro Sales, Inc. v. Texaco, U.S.A. (Business Franchise Guide ¶8604), the U.S. Court of Appeals in San Francisco rejected a reading of the PMPA that would force a franchisee to choose between accepting an unlawful and coercive contract in order to stay in business or rejecting the contract and going out of business.

The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.