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.

Discontinuation of Truck Line Did Not Terminate Franchise

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A truck manufacturer and one of its subsidiaries did not terminate, cancel, or fail to renew a truck dealer’s franchise when they discontinued the production of the subsidiary’s truck line because the dealer continued to have the right to sell parts and provide service for the manufacturer’s products, a federal district court in Brattleboro, Vermont, has ruled. Thus, the manufacturer and subsidiary did not violate the Vermont motor vehicle dealer law.

The motor vehicle dealer law prohibited the termination of franchises unless the manufacturer satisfied the law’s notice requirement, had "good cause" for termination, and acted in good faith.

Continuation of Part Sales, Service

Although the manufacturer discontinued the manufacture of the line of trucks, as it had reserved the right to do in the parties’ agreement, the dealer could continue to sell parts and provide service for the line of trucks, and the agreement remained in effect with regard to everything but selling new trucks, according to the court.

Because the dealer law’s termination provision applied only when a franchise had been terminated, cancelled, or not renewed—and the dealer’s entire franchise agreement had not been terminated, cancelled, or not renewed—the dealer failed to state a claim for which relief could be granted.

Constructive Termination

The dealer argued that the defendants constructively terminated its franchise. It contended that a constructive termination occurred when a franchisor took actions that were not expressly a termination of the agreement, but had a sufficiently adverse effect upon the franchisee. However, the dealer made no allegations that its dealership could not survive or that the discontinuation of the manufacture of the truck line would have an adverse effect, the court observed.

The dealer could continue to provide parts and service to trucks of the line under the agreement, and the dealer’s franchises for other of the manufacturer’s brands continued in effect. Thus, even if a claim for constructive termination was cognizable under the dealer law, the dealer did not adequately plead such a termination, the court held.

The decision is L&B Truck Services, Inc. v. Daimler Trucks N.A. LLC, CCH Business Franchise Guide ¶14,249.

New Jersey Dealership Was Constructively Terminated Without Good Cause

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A forklift manufacturer’s actions—geared towards forcing a dealer out of its role as an authorized dealer of the manufacturer’s forklifts—amounted to constructive termination without good cause, in violation of the New Jersey Franchise Practices Act (NJFPA), according to a New Jersey appellate court.

A trial court’s ruling and award of compensatory damages for lost profits in the amount of $679,414 were affirmed. An award of $3,533,642 in attorneys’ fees was also upheld, but an award of $477,611 in expert witness fees was reversed.

Effective Termination

The manufacturer argued that the NJFPA prohibited only actual terminations and, because the dealer was never terminated, there was no violation. However, the manufacturer’s conduct was geared to terminating the dealer as a franchisee, the court determined. That conduct included breaching the parties’ agreement by the appointment of a competing dealer in the dealer’s exclusive territory.

Indeed, a letter from one of the manufacturer’s officers to the dealer included the statements: (1) "it's my intent to ask our people to begin a search for another dealer to represent [the manufacturer’s] products in Northern New Jersey;" and (2) "I'm prepared to continue selling [the manufacturer’s] parts to [the dealer] for a year after any new [authorized] dealer is appointed," the court noted. Effectively, it was a termination letter, the court determined.

The record established that the manufacturer’s officers were well aware that the NJFPA prohibited them from terminating the dealer unless they could establish "good cause." The manufacturer's efforts to create the appearance of substantially deficient performance by the dealer, and its assertion that the dealer breached a best efforts provision in the parties' agreement failed, the court ruled. The manufacturer’s effort to force out the dealer was thwarted only by virtue of the dealer’s filing of the instant action.

Requirement of Good Cause

The NJFPA was remedial legislation designed to protect franchisees from the superior bargaining power of franchisors, the court reasoned. In the absence of a substantial failure of franchisee compliance, the statutory requirement of good cause prohibited a franchisor from terminating for other reasons, even if they reflected a sound and nondiscriminatory business strategy.

The legislature’s decision not to recognize a valid business reason as constituting "good cause" for termination in the NJFPA distinguished the Act from the less-protective franchise statutes in other states, the court remarked. Further, the manufacturer provided no persuasive authority to support its argument against liability for constructive termination.

The manufacturer’s assertion that the letter from its officer was merely a suggestion to the dealer to end its relationship with the manufacturer was an obvious revision of history and its claim that it did not constructively terminate the dealer was disingenuous, according to the court.

In addition to the letter, the manufacturer’s decision to stop providing annual business plans to the dealer was further evidence that it expected to abandon the dealer in favor of another dealer. The court rejected the manufacturer’s position that if the dealer wanted to claim damages under the NJFPA for termination, it was required to withdraw from the agreement and thus allow itself to be terminated. Such a requirement would fly in the face of the Act's purposes of leveling the playing field between the typically more powerful franchisor and less powerful franchisee, the court held.

Loss of Exclusivity

The dealer's loss of the exclusivity of its territory, in and of itself, could qualify as such a change in the agreement's terms that constituted constructive termination, the court held. In the instant case, the "change" that the manufacturer proposed for the dealer upon appointing a competing dealer to the dealer’s territory would have gone even further than a mere loss of exclusivity; instead of simply establishing the competing dealer as a second dealer in the franchise territory, the manufacturer would have eliminated the dealer as an authorized dealer by ending its ability to purchase new forklifts and parts.

The manufacturer’s conduct proved its intent for the cessation of exclusivity to undermine the dealer’s franchise, according to the court. It appointed the competing dealer and blanketed the dealer's territory with the message that the competing dealer was its favored dealer in the territory in all regards, without informing the complaining dealer. It also provided discounts, rebates, and other subsidies to the competing dealer that let it undercut the complaining dealer’s prices.

Attorney Fees, Expert Witness Fees

The trial court's awarding of $3,533,642 in attorney fees to the dealer under the NJFPA's attorney fee provision was not an abuse of discretion, the court held. The trial court found that the work, expenses, and fee requests were reasonably required to establish the dealer’s NJFPA claim and to refute the counterclaim that the manufacturer asserted.

The Act’s authorization of an award of “costs of the action" did not encompass the award of expert witness fees, the court decided. Thus, the trial court’s award of costs to the dealer was reduced from $724,817 to $247,206 to reflect the deletion of $477,611 that the trial court had awarded for expert witness fees.

The decision is Maintainco, Inc. v. Mitsubishi Caterpillar Forklift, CCH Business Franchise Guide ¶14,195.