In a rare look at franchise practices, the United States Supreme Court has unanimously held that a franchisee may not recover for constructive termination under the Petroleum Marketing Practices Act (PMPA) if the franchisor's allegedly wrongful conduct did not compel the franchisee to abandon its franchise. The court further concluded that a franchisee that enters into a renewal agreement with a franchisor may not maintain a claim for constructive nonrenewal under the PMPA.

Mac's Shell Service, Inc. v. Shell Oil Products Co. LLC, No. 08-240, 2010 WL 693684 (U.S. Mar. 2, 2010), arose from a dispute between Shell Oil Company (Shell), a petroleum franchisor, and a number of Shell franchisees in Massachusetts. For many years, Shell offered franchisees volume-based rent subsidies in connection with their lease of service station premises. Shell renewed the subsidies annually by written notice, which explicitly provided for cancellation of the subsidies upon 30 days' notice.

In 1998, Shell and two other oil companies created Motiva Enterprises LLC (Motiva), a joint venture, which consolidated the companies' petroleum-marketing operations in the eastern United States. In connection with the transaction, Shell assigned the Massachusetts franchise agreements to Motiva. In 2000, Motiva terminated the rent subsidies and began offering franchisees, upon renewal, a new form of agreement that included a different formula for calculating rent, which, in some cases, resulted in a higher rent. Notwithstanding these changes, the Massachusetts franchisees continued to operate their franchises and entered into renewal agreements with Motiva, albeit under protest.

In 2001, the Massachusetts franchisees sued Shell and Motiva for breach of contract and violations of the PMPA, a federal statute that limits the circumstances under which petroleum franchisors may "terminate" any "franchise" or "fail to renew" any "franchise relationship." Specifically, the franchisees contended that the elimination of the rent subsidy constituted constructive termination and the offer of a new form of agreement on renewal was tantamount to constructive nonrenewal, each in violation of the PMPA. A jury found against Shell and Motiva on all claims.

The United States Court of Appeals for the First Circuit affirmed the judgment on the constructive termination claim, holding that a breach resulting in a material change that effectively terminates the lease can amount to constructive termination under the PMPA, even if the franchisee continues to operate the franchise. The First Circuit reversed the verdict on the constructive nonrenewal claim, however, concluding that such claims cannot be maintained where the franchisee has entered into, and operates under, the renewal agreement.

The Supreme Court reversed the lower court's ruling on the constructive termination claim and affirmed the ruling on the constructive nonrenewal claim. The court held that a necessary element of any constructive termination claim under the PMPA is that the franchisor's allegedly wrongful conduct compels the franchisee to cease using the franchisor's trademark, purchasing the franchisor's fuel or occupying the franchisor's service station. As none of the franchisees abandoned their franchises after the elimination of the rent subsidy, they could not maintain a constructive termination claim. The court specifically did not address Shell's and Motiva's alternative argument that no cause of action for constructive termination actually exists under the PMPA.

In so holding, the court relied on the ordinary meaning of the text of the PMPA, which only prohibits franchisor conduct that has the effect of ending a franchise. The court noted that this conclusion was consistent with the interpretation of constructive termination in analogous legal contexts where the plaintiff, rather than the defendant, must actually sever a particular legal relationship in order to maintain a claim for constructive termination.

The court explained that a contrary interpretation would expand the scope of the PMPA's prohibitions from unlawful terminations and nonrenewals to include certain serious breaches of contract that do not cause an end to the franchise-a domain traditionally reserved for states. Moreover, any standard for identifying when a simple breach of contract constitutes a PMPA termination in circumstances where the franchisee continues to operate the business would be "indeterminate and unworkable" and "simply evades coherent formulation." The court also noted that, under the franchisees' theory, the PMPA's mandate to award attorneys' fees and expert witness fees in certain cases and to permit punitive damages would transform everyday contract disputes into "high-stakes affairs."

Finally, the court stated that, because the PMPA preempts only state and local regulation that governs the termination of petroleum franchises or the nonrenewal of petroleum franchise relationships, franchisees confronted with similar circumstances may seek redress under state or local law. The court concluded that the franchisees' $1.3 million jury award on their state law claims demonstrates that franchisees do not need a PMPA remedy to have meaningful protection from abusive franchisor conduct.

Turning to the franchisees' constructive nonrenewal claim, the court relied on the plain text of the PMPA in holding that a franchisee that chooses to enter into a renewal agreement cannot thereafter assert a claim for unlawful nonrenewal under the PMPA. As with the constructive termination claim, the court specifically did not address whether constructive nonrenewal claims were cognizable under the PMPA.

The court explained that the PMPA "prohibits only unlawful fail[ures] to renew a franchise relationship, not renewals of a franchise relationship on terms that are less favorable to the franchisee." The court rejected the franchisees' argument that, by signing the renewal agreements under protest, they preserved their ability to assert a claim for unlawful nonrenewal under the PMPA; rather, signing the renewal agreement "negate[d] the very possibility of a violation of the PMPA." In referring to the renewal of "the franchise relationship," rather than the franchise agreement, "the PMPA contemplates that franchisors can respond to market demands by proposing new and different terms at the expiration of the franchise agreement." The PMPA thus permits franchisors to decline to renew a franchise relationship if the franchisee refuses to accept modifications that are proposed "in good faith and in the normal course of business," provided that such changes are not designed to facilitate the takeover of the service station by the franchisor.

The court speculated that permitting a franchisee to sign a renewal agreement while simultaneously pursuing a claim under the PMPA also would undermine the procedural mechanism created by the PMPA to resolve disputes over the legality of proposed new terms. Specifically, such a ruling would encourage the franchisee to challenge a much broader range of franchisor conduct-conduct to which the franchisee might object but not consider so serious as to risk the nonrenewal of the franchise by mounting a legal challenge. Such a result would cast "a cloud of uncertainty over all renewal agreements and could chill franchisors from proposing new terms in response to changing market conditions and consumer needs."

While not revolutionary, the Supreme Court's decision is helpful since it injects an element of common sense into the interpretation of the PMPA and reaffirms the statute's limited reach.