March 10, 2010

U.S. SUPREME COURT RENDERS OPINION ON PMPA'S CONSTRUCTIVE TERMINATIONS & NON-RENEWALS

THERE IS NO CONSTRUCTIVE TERMINATION WITHOUT ABANDONMENT OR CONSTRUCTIVE NON-RENEWAL IF RENEWED “UNDER PROTEST” UNDER THE FEDERAL PETROLEUM MARKETING PRACTICES ACT, 15 U.S.C. §§ 2801, et seq.

SIGNING YOUR FRANCHISE RENEWAL UNDER PROTEST DOES NOT PRESERVE A TERMINATION CLAIM UNDER THE FEDERAL PETROLEUM MARKETING PRACTICES ACT, 15 U.S.C. §§ 2801, et seq.

Eventually, all questions get answered – a couple we had as to protections under the Federal Petroleum Marketing Practices Act 15 U.S.C. §§ 2801, et seq., (“PMPA” or “Act”) were recently answered by the United States Supreme Court with Justice Alito’s rendered opinion in Mac’s Shell Service, Inc. et al. v. Shell Oil Products Co. LLC et al.  No. 08-240. The questions posed were as follows:  (1) Can a Franchisee recover under the PMPA for constructive termination of their Franchise if the Franchisor’s alleged conduct did not compel the Franchisee to abandon the Franchise; and   (2) Does a Franchisee who signs his Franchise Renewal Agreement under “Protest” and thus does not abandon the Franchise reserve its right to maintain a constructive non-renewal claim under the PMPA. 

The law as to whether or not a “constructive” termination of the franchise or “constructive non-renewal of the franchise relationship” (as apposed to an actual termination or actual non-renewal) claim arises when a Franchisee does not receive a termination or non-renewal notice but takes the position that its Franchisor has taken an action that amounts to a termination of the Franchise has been answered.  In Mac’s Shell Service, Inc. v. Shell Oil Products Co. LLC the Shell branded franchisees took such a position, but did not abandon the Franchise or Franchise Relationship continuing to operate their Shell branded fuel facilities.  The Supreme Court’s held that: (1) “A franchisee cannot recover for constructive termination under the Act if the franchisor’s allegedly wrongful conduct did not compel the franchisee to abandon its franchise.” Pp. 6-15; and (2) “A franchisee who signs and operates under a renewal agreement with a franchisor may not maintain a constructive nonrenewal claim under the Act.”  Pp. 15-19.

The rational for the above holdings is that “[a]llowing franchisees to obtain relief for conduct that does not force a franchise to end would ignore the Act’s scope, which is limited to the circumstances in which franchisors may terminate a franchise or decline to renew a franchise relationship . . .” Pp. 6-12.;   “[t]he Act . . . defines ‘fail to renew’ as a ‘failure to reinstate, continue, or extend the franchise relationship.” 2801(14).  A franchisee that signs a renewal agreement cannot carry the threshold burden of showing a ‘nonrenewal of the franchise relationship,” 2805(c), and thus necessarily cannot establish that the franchisor has violated the Act.  Signing their renewal agreements ‘under protest’ did not preserve the dealers’ ability to assert nonrenewal claims.  When a franchisee signs a renewal agreement – even ‘under protest’— there has been no ‘fail[ure] to renew,’ and thus no violation of the Act.” Pp.15-19.

Although, no claim arises under the PMPA for wrongful (constructive) termination or non-renewal under these circumstances, any independent State law (common law or statutory) claims survive, i.e., suit for breach of contract.  The Mac’s Shell Service, Inc. case arose from a dispute several Shell franchisees in Massachusetts had with its Franchisor, Shell Oil Company (“Shell”) when the rent subsidy the Dealers where receiving was cancelled in keeping with the thirty day notice right to cancel under the franchise agreements, but contrary to purported oral representations that the rent subsidy or something similar would always exist to reduce the Dealer’s rent.  The Dealers brought suit-claiming breach of contract under state law by eliminating the rent subsidy and that elimination constituted ‘constructive termination’ of their franchise under the PMPA.  The Dealers also asserted that the new entity created by Shell and two other Oil Companies in creating Motiva Enterprises LLC (“Motiva”) offer to them of new franchise agreements that calculated rent using a different formula amounted to ‘constructive nonrenewal’ of their franchise relationship.  The Dealers signed the new franchise agreements under protest and remained at their leasehold fuel facility selling petroleum product under the trademark and trade name of Shell – continuing the franchise relationship.  The problem stated by the Supreme Court is “[h]ow is a court to determine whether a breach is serious enough effectively to end a franchise relationship when the franchisee is still willing and able to continue its operation?” Pp. 11-12.  As to signing under protest, the court stated:  “When a franchisee signs a renewal agreement—even ‘under protest’—there has been no ‘fail[ure] to renew,’ and thus the franchisee has no cause of action under the Act.  See U.S.C. 15 § 2805(a).” Pp. 16-17.

The PMPA deals only with wrongful termination or non-renewal of the franchise and franchise relationship.  The Franchisor can only terminate or non-renew the franchise and franchise relationship for specific reasons stated in the PMPA and only after providing proper notice specifying the reason(s) for termination or non-renewal.  The Act does not protect against breaches of the franchise agreement or guarantee that the terms at renewal of the franchise agreement will remain the same as under the prior franchise agreement.  As stated by the Supreme Court – “…a franchisee faced with objectionable new terms must decide whether challenging those terms is worth risking the nonrenewal of the franchise relationship, if the franchisee rejects the terms and the franchisor seeks nonrenewal, the franchisee runs the risk that a court will ultimately determine that the proposed terms were lawful under the PMPA.  See §2802(b)(3)(A).”  Pp. 18-19.  The risk is great – advice should be sought.

What to do if you think your Franchisor has taken action that amounts to the effective termination of your Franchise: Have the facts and law analyzed by your legal counsel reviewing the PMPA and its related case law. 

What to do if you do not agree with changed terms in your franchise renewal documents: Keep in mind that signing under “protest” and operating under the renewal franchise agreement will not preserve your right to later assert that a term or terms in the franchise agreement amounted to constructive non-renewal of the franchise.  The issues by their very nature are complicated.

The above is a recitation of a specific fact pattern and ruling concerning the PMPA and is not intended as a recitation of all facts, issues and legal effect under the PMPA, legal counsel should be sought immediately when any issue arises concerning your motor fuel franchise renewal, termination, non-renewal or issues under your franchise agreement and related documents.

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