U.S. Supreme Court to Decide Issues of Constructive Termination and Non-Renewal under the PMPA

On January 19, 2010, the United States Supreme Court is scheduled to hear oral arguments in Mac’s Shell Service, Inc. v. Shell Oil Products, Inc., a case involving a group of Shell service station franchisee dealers who claim that their franchisor violated the Petroleum Marketing Practices Act (“PMPA”), through acts that constitute either constructive termination or non-renewal.

For nearly two decades, Shell Oil Products offered its franchisee dealers a rent subsidy called the Variable Rent Program that offset the flat monthly rents provided for in each of the dealers’ leases. Shell Oil Products continuously offered the rent subsidy to its dealers, and it was understood by the dealers that the subsidy was a permanent part of each lease. In 1998, Shell Oil Products assigned its franchise agreements to Motiva Enterprises, a subsidiary created by Shell Oil Products in that same year. According to the dealers, “with the creation of Motiva, [Shell Oil Products and Motiva] embarked on a secret plan to transform their gasoline distribution network,” by squeezing the dealers out of business in order to capture profits then being earned by the independent dealers. To capture and convert the independent dealers’ profitable stations into company-operated stations, and more importantly, to get around the requirements of the PMPA, Motiva began offering the dealers new leases on a take-it-or-leave-it basis that eliminated the rent subsidies, thus dramatically increasing the dealers’ rent. Faced with these unlawful new terms, the dealers executed the new leases under protest and immediately filed suit against Shell Oil Products and Motiva challenging the terms of the new leases under the PMPA.

The PMPA was enacted in part to “remedy the disparity in bargaining power between franchisors and franchisees.” Accordingly, the PMPA prohibits, among other things, the termination and non-renewal of a petroleum franchise where the purpose of the termination or non-renewal is to convert the leased premises to stations operated by employees or agents of the franchisor for the franchisor’s own account.

After extensive discovery in the lower court, a jury rendered a unanimous verdict in favor of the dealers, finding that Shell Oil Products and Motiva constructively terminated the franchise agreements by the actions described above. On appeal, the First Circuit Court of Appeals found that the jury’s verdict was supported by sufficient evidence. Nonetheless, the First Circuit reversed the judgment of the lower court, finding that Shell Oil Products and Motiva were not liable on a theory of constructive termination or non-renewal because the dealers continued to operate their service stations under the new leases that had been signed under protest. In other words, the First Circuit found under the PMPA that a petroleum franchisor can “lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms [and thus waive their rights under the PMPA] or risking their livelihood” on the chance that a court will issue injunctive relief against them should they continue to operate their service stations without a valid lease and without the permission of the franchisor.

The U.S. Supreme Court decided to hear Mac’s Shell Service because the First Circuit’s decision conflicts with Pro Sales, Inc. v. Texaco, U.S.A., an earlier Ninth Circuit Court of Appeals decision holding that “a franchisee who signs a successor contract under protest and promptly seeks to invoke its rights under the PMPA…has not renewed the franchise relationship so as to bar relief under the PMPA.” In particular, the U.S. Supreme Court will decide the question of under what circumstances may a franchisee bring suit against a petroleum refiner or distributor for “constructive termination” or “constructive non-renewal” under the PMPA.

About the author: Robert Salkowski is a franchisee attorney at Miami-based law firm Zarco Einhorn and Salkowski PA. Admitted to practice law in Florida, New Jersey and other parts of the country, he is a 1988 graduate of George Washington University. Robert earned his J.D. from the University of Miami School of Law in 1991.