March 02, 2010

Supreme Court Decides Mac's Shell Service, Inc. v. Shell Oil Products Co.

On March 2, the Supreme Court decided Mac's Shell Service, Inc. v. Shell Oil Products Co., No. 08-240, holding that a franchisee cannot sue under the Petroleum Marketing Products Act, 15 U.S.C. §2801, et seq. (PMPA), for "constructive termination" of its franchise unless the franchisor's conduct compelled the franchisee actually to abandon the franchise. The Court also held that a claim of "constructive nonrenewal" is unavailable to franchisees who actually renewed their franchises, albeit under terms that they found objectionable.

The PMPA limits the circumstances under which petroleum franchisors may "terminate" or "fail to renew" their franchise. It also gives franchisees a right to sue for damages and injunctive relief if such an adverse action is taken where those circumstances do not exist. In this case, several Shell Oil franchisees in Massachusetts sued, claiming that Shell had "constructively terminated" their franchises by ending a rebate program that for many years had subsidized the amount they paid to rent their gas stations. They also asserted that Shell had "constructively failed to renew" their franchises by offering to renew based on a formula that resulted in higher rental rates. Despite their objections to the new terms imposed by Shell, however, the plaintiffs signed new franchise agreements containing those terms and continued to operate their franchises.

A jury found against Shell on both the claims under the PMPA and state-law claims for breach of contract. The U.S. Court of Appeals for the First Circuit affirmed on the state-law and "constructive termination" claims, holding that a franchisee is not required to abandon its franchise to recover under the PMPA; rather, a simple breach of contract was sufficient if it resulted in "such a material change that it effectively ended the lease," even if the franchisee continued to operate. But the Court of Appeals reversed the judgment on the "constructive nonrenewal" claim, holding that a franchisee cannot maintain such a claim where it signs and operates under the renewed agreement about which it complains.

The Supreme Court reversed on the claim of "constructive termination," holding that a necessary element of such a claim is that the franchisor's conduct forced an end to the franchisee's use of the franchisor's trademark, its purchase and sale of the franchisor's products, or its occupation of the franchisor's service station. Because all of the plaintiffs here had continued to use the franchisor's property, they had no claim. The Court reasoned that this conclusion flows from the ordinary meaning of the term "termination," which was not otherwise defined in the PMPA. It is consistent with the understanding of "constructive termination" in other areas, such as employment and landlord-tenant law, in which an actual end to the relationship is required. And it is consistent with the PMPA's intention of federalizing only specific aspects of petroleum franchises, which are otherwise governed by state law; indeed, the jury awarded damages of $1.3 million on state-law breach of contract claims for Shell's conduct in this case.

The Court also affirmed the First Circuit's judgment rejecting the plaintiffs' "constructive nonrenewal" claims, holding that a franchisee cannot accept a renewal agreement and then claim that its franchise was not renewed. The PMPA requires franchisors only to renew "the franchise relationship," not the previous terms of the franchise agreement, and an actual end to the relationship is therefore required.

Justice Alito delivered the opinion for a unanimous Court.

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