A gasoline retailer defaults on its obligations under an ongoing Franchise Agreement that it has with a brand name in the oil & gas industry. What steps are available to the franchisor to protect its economic interests in that particular station or station(s)? How about if the franchisee/retailer files for bankruptcy protection? As the Energy Capital of the World, this issue is particularly relevant in Texas, home to thousands of retailers and dozens of the world’s top brands. This Insolvency Insights blog post provides a brief overview of the PMPA and the remedies available to franchisors.

SUMMARY

Title I of the Petroleum Marketing Practices Act (PMPA) sets certain requirements for the contracts between gasoline refiners or distributors and their retailers. It prohibits franchisors from terminating a franchise, or failing to renew one, except in accordance with its provisions. It is intended to protect distributors and retailers. A supplier may terminate a franchise only for certain reasons such as the franchisee’s failure to make a good faith effort to carry out the terms of the franchise or if the supplier loses the right to grant use of the trademark under which the gasoline is sold. A supplier may choose not to renew a franchise for all of the reasons it may terminate a franchise and for certain other additional reasons. These include the franchisee’s failure to agree to certain additional franchise terms or if the franchisee has a record of numerous customer complaints.

The PMPA preempts state laws concerning gasoline franchise termination and non-renewal.

Title II of the act requires sellers to disclose octane rating and Title III required the federal energy secretary to study fuel marketing subsidization and report to Congress in 1980.

FRANCHISES

Title 1 of the PMPA (15 USCA §§ 2801 to 2806) defines “franchise” as the contract between (1) a refiner and distributor, (2) refiner and retailer, (3) a distributor and another distributor, or (4) a distributor and a retailer under which a refiner or distributor allows a retailer or distributor to use a trademark owned or controlled by the refiner or distributor in connection with the sale, distribution, or consignment of gasoline or another motor fuel. Under the Act’s definition, a refiner, distributor, jobber, or subjobber may be the “franchisor” and a jobber, subjobber, or retailer may be the “franchisee.” Franchisors are commonly characterized as suppliers.

In general, the act applies to franchises with terms of three years or longer. It does not apply to trial franchises.

RULES FOR ENDING A FRANCHISE RELATIONSHIP

The PMPA establishes substantive and procedural rules for ending a franchise relationship. The rules for terminating a franchise are narrower than those for not renewing one.

Termination

The act allows a franchisor/supplier to terminate a covered franchise (1) for noncompliance with a franchise agreement concerning a reasonable and important requirement, (2) for the franchisee’s lack of a good faith effort to carry out the franchise’s terms, (3) by mutual agreement, (4) if the supplier withdraws from the market area, or (5) for certain other reasons.

These other reasons include the franchisee’s:

  1. fraud or criminal action;
  2. declaration of bankruptcy;
  3. severe physical or mental disability lasting at least three months that renders the franchisee incapable of properly operating the premises;
  4. failure to pay the supplier on time;
  5. failure to operate the premises for seven consecutive days or for a shorter period if the failure is unreasonable;
  6. intentional adulteration, misbranding, or mislabeling of the fuel;
  7. failure to comply with relevant law; or
  8. conviction of a felony involving moral turpitude.

They also include:

  1. expiration of the supplier’s underlying property lease,
  2. the property is taken through eminent domain,
  3. loss of the supplier’s right to grant the use of the trademark, and
  4. destruction of the premises other than by the supplier.

Non-Renewal

Under the PMPA, a franchisor/supplier may choose not to renew a franchise for the same reasons that it may terminate one. It may also choose not to renew (1) if the franchisee fails to agree to changes or additions to the franchise; (2) if there is a record of numerous customer complaints relating to the condition of the premises or the conduct of employees; (3) for unsafe or unhealthful operations, or (4) the supplier has decided, in the normal course of business, (a) to change the use of the property on which the premises operates, (b) to materially alter or add to the premises, (c) to sell the premises, or (d) that continuing the franchise is uneconomical. In the case of a leased marketing premises, the PMPA requires the supplier, during the 90-day notice period, to make a bona fide offer to sell, transfer, or assign the premises to the franchisee or, if applicable, to give the franchisee a right of first refusal of at least 45 days of an offer, made by another, to purchase the franchisor’s interest in the premises.

Procedural Rules

The PMPA’s procedural rules require a franchisor/supplier to give notice, usually 90 days, before taking any action. If 90-day notice is not possible, then a supplier must give notice as soon as he can. Notices must state the intention to terminate or not renew and the date the action takes effect. For certain grounds, the PMPA also requires the supplier to give the franchisee an opportunity to correct the problem. For example, if a franchise is being terminated or not renewed for failure to carry out the terms of the franchise, the supplier must inform the franchisee of the intention and give a reasonable opportunity to make good faith efforts to comply. The act also prescribes the method and form of giving notice.

THE PMPA PREEMPTS STATE LAWS ON TERMINATION OR NON-RENEWAL

The PMPA prohibits states and their political subdivisions from adopting or enforcing any law concerning the termination or non-renewal of a franchise unless its provisions are the same as the provision in the PMPA. Further, states may not adopt laws that require a goodwill payment on the termination or non-renewal of a franchise by a supplier.

The act states that it does not (1) authorize or prohibit a transfer or assignment of a franchise allowed by the franchise or by state law or (2) prohibit states from specifying terms and conditions under which a franchise may be transferred to a designated successor upon the franchisee’s death.

ENFORCEMENT FOR FRANCHISORS

The PMPA authorizes franchisors to sue in federal court to enforce the rights it establishes. Generally, urgent injunctive relief is requested in these types of actions. Such relief includes, but is not limited to, immediately terminating the Franchise Agreement, permanently enjoining the retailer from further selling branded gasoline products on the premises, permanently enjoining the retailer from further selling non-branded gasoline products on the premises, permanently enjoining the retailer from further displaying the Franchisor’s trademark and brand on the premises, dispossessing the retailer from the commercial premises so as to allow for the franchisor to take possession of and operate the same, and general economic damages.

In the bankruptcy context, the Franchisor will have several options to enforce its rights against a bankrupt retailer. The relief sought generally comes by way of a Motion for Relief from the Automatic Stay; said motion can ask for the urgent relief outlined above, amongst other remedies. In Chapter 11 matters, procedural aspects of the case will come into play, such as the 120-day period which allows debtors-in-possession time to determine if they will reject or assume certain pre-petition executory commercial contracts. In any event, the Franchisor can strategically apply pressure and get any issue that is pertinent to its rights before the court on an urgent basis.