On March 2, 2010, the Supreme Court of the United States in Mac’s Shell Service, Inc., v. Shell Oil Products Co., LLC, ruled that a petroleum franchisee could not maintain a constructive termination claim under the Petroleum Marketing Practices Act (“PMPA” or “the Act”), 15 U.S.C. §§ 2801 et seq., where the franchisor’s allegedly wrongful conduct did not compel the franchisee to abandon its franchise. Additionally, the Court held that the PMPA did not permit a franchisee to recover on a constructive nonrenewal claim where the franchisee had signed and operated under a renewal agreement with the franchisor, even where the franchisee did so under protest. The opinion, written by Justice Antonin Scalia, provides clarity on the scope of the PMPA and the parameters of federal law governing the petroleum franchisor-franchisee relationship.

The PMPA governs franchise agreements between petroleum companies and independent petroleum retailers. Congress enacted the PMPA in 1978 in response to widespread concern of increasing allegedly unfair petroleum franchise terminations and nonrenewals that effectively severed the franchise agreements. Under such agreements, a franchisor would refine and sell the motor fuel to an independent franchisee, lease the service-station premises to the franchisee, and grant it rights to use the franchisor’s trademark. The PMPA established minimum federal standards governing the termination and nonrenewal of these petroleum franchise agreements by providing a franchisee with a cause of action where the franchisor fails to comply with the Act’s restrictions on termination and nonrenewals. Under the Act, a franchisee may seek a preliminary injunction under a relaxed standard in addition to various remedies, including compensatory and punitive damages, attorney’s fees, expert costs and equitable relief.

In Mac’s Shell Service, 63 Shell Oil Company franchisees (“dealers”) sued its franchisor, Shell Oil Company, and the franchisor’s assignee, Motiva Enterprises LLC, alleging violations of state contract law and the PMPA. For many years, Shell had offered the dealers rent subsidies reducing the monthly rent by a set amount for every gallon of motor fuel a franchisee sold above a specific amount. Shell renewed this subsidy with the dealers annually under an agreement that provided for “cancellation [of the subsidy] with thirty days’ notice.” After Shell joined with Motiva in 1998 and assigned Motiva its rights and obligations under the franchise agreements, Motiva ended the volume-based rent subsidy with the dealers and, when the franchise agreements expired, it offered the dealers new agreements that had a different formula for calculating rent. The dealers continued to pay rent without the subsidy and signed the new franchise agreements under protest.

In 2001, the dealers brought state law claims against Shell and Motiva, in addition to a constructive termination and constructive nonrenewal claim under the PMPA. Under the PMPA claims, the dealers alleged that Shell and Motiva violated the Act because eliminating the rent subsidy constructively terminated their franchises by increasing their rent, and offering new franchise agreements that calculated rent differently amounted to a constructive nonrenewal of their franchise relationships by increasing their rent. A jury in the U.S. District Court for the District of Massachusetts found against Shell and Motiva on all claims. On appeal, the U.S. Court of Appeals for the First Circuit agreed with the judgment on the dealers’ constructive termination claim as it held that a simple breach of contract by a franchisor or assignee can amount to constructive termination, and thus the dealers did not have to abandon their franchises to recover. But the Court of Appeals disagreed on the nonrenewal claim, concluding that the dealers could not maintain a claim for unlawful nonrenewal “where the franchisee has signed and operates under the renewal agreement complained of.” Looking at both issues, the Supreme Court reversed the Court of Appeals decision on the constructive termination claim but agreed with its decision on the nonrenewal claim.

A Constructive Termination Claim Under the PMPA Requires The Franchisor’s Conduct To Force The Franchisee To Abandon Its Business

Based upon the plain language of the Act, the Supreme Court held that a franchisor’s conduct must force the franchisee to abandon its franchise in order for the franchisee to maintain a constructive termination claim under the PMPA. A franchisor’s conduct forces the franchisee to abandon its franchise when the franchisee must stop using the franchisor’s trademark, buying its fuel, or occupying its service station.

The PMPA plainly states that “no franchisor . . . may . . . terminate any franchise,” unless for a reason provided in the Act and after notifying the franchisee in writing. Analyzing the ordinary meaning of the word “terminate,” the Court determined that “the Act is violated only if an agreement for the use of a trademark, purchase of motor fuel, or lease of a premises is ‘put to an end’ or ‘annulled or destroyed.’” The Court found that this conclusion also was consistent with the general understanding of “constructive termination” as it is used in the employment law context, as well as in the landlord-tenant law context, where a plaintiff “must actually sever a particular legal relationship in order to maintain a claim for constructive termination.” The Court stated:

As generally understood in theses and other contexts, a termination is deemed ‘constructive’ because it is the plaintiff, rather than the defendant, who formally puts an end to the particular legal relationship-not because there is no end to the relationship at all.

Accordingly, because Shell and Motiva’s actions did not force the dealers to abandon any element of their franchise operations, the dealers could not maintain a constructive termination claim.

Additionally, the Court asserted that it would contravene the purpose of the Act to allow a franchisee to obtain PMPA relief when a franchisor’s conduct did not force the franchisee to end its franchise. Congress enacted the PMPA to regulate only “the circumstances in which franchisors may terminate a franchise or decline to renew a franchise relationship.” The PMPA was not intended to extend beyond the scope of these actions in the franchisor-franchisee relationship, and thus it does not cover “simple breaches of contract” that do not amount to a termination. As the Court clarified, state law regulations should reach where the PMPA does not. And as Justice Scalia pointed out, state laws did in fact protected the dealers here - where the PMPA did not - as confirmed by the jury’s finding in the dealers’ favor on their state-law claims and awarding them nearly $1.3 million in damages.

Moreover, the Court assuaged the dealers of any angst that, under the Court’s interpretation of “termination,” they would have to “go out of business before obtaining an injunction” in actual termination cases. The PMPA’s notice requirement prevents this from coming to pass because it requires a franchisee receive written notice of termination well in advance of the date on which actual termination is set to occur. Thus, a franchisee will have sufficient time to seek a preliminary injunction should the franchisor seek to terminate the franchise agreement before the franchisee has to go out of business.

A Franchisee Cannot Bring A Constructive Nonrenewal Claim Under The PMPA Where It Accepts A Renewal Agreement

On the issue of whether a franchisee could bring a constructive nonrenewal claim under the PMPA, once again the Court looked to the plain meaning of the PMPA and said, “No.” The Court agreed with Shell and stated that the dealers could not bring a constructive nonrenewal claim because they had entered the renewal agreement with Motiva as the Court held that a franchisee cannot maintain a constructive nonrenewal claim where it has accepted a renewal agreement with the franchisor.

The PMPA provides that a franchisor violates the Act when it “fail[s] to renew” a franchise relationship for a reason not provided for in the Act or absent the required notice. The Act defines “fail to renew” as a “failure to reinstate, continue, or extend the franchise relationship.” Based on this definition, the Court concluded that “if a franchisee signs a renewal agreement, the franchisor clearly has ‘reinstate[d], continue[d], or extend[ed]’ the franchise relationship.” The Act only requires renewal of the franchise relationship – not the same franchise agreement. The Court noted that a franchisee might find the new terms of the agreement objectionable, but even so, a franchisee cannot meet the burden of showing nonrenewal when it has in fact renewed. As well, a renewal signed “under protest” does not change the fact that the franchisee has renewed as in such cases there “has been no ‘failure to renew’” the franchise relationship.

Finding that this interpretation comported with the purpose of the Act, the Court explained:

[T]he PMPA contemplates that franchisors can respond to market demands by proposing new and different terms at the expiration of a franchise agreement. To that end, the Act authorizes franchisors to decline to renew a franchise relationship if the franchisee refuses to accept changes or additions that are proposed “in good faith and in the normal course of business” and that are not designed to convert the service station to direct operation by the franchisor.

Hence, allowing franchisees that have renewed to pursue nonrenewal claims would effectively “chill franchisors from proposing new terms” in response to market changes, in addition to extending the PMPA’s reach when it was only intended to protect a franchisee from “arbitrary and unreasonable new terms” that are wholly objectionable to the franchisee.

Furthermore, as the Court highlighted, the PMPA’s procedural mechanisms provide adequate time for the franchisor and franchisee to resolve disputes over newly proposed terms as the Act requires the franchisor provide written notice “well in advance of the date when the nonrenewal takes effect.” And upon receipt of the nonrenewal notice, the franchisee may seek a preliminary injunction to maintain the status quo pending a court’s review of the proposed changes.