The Franchise Memorandum

In Santiago-Sepulveda v. Esso Standard Oil Co. (Puerto Rico), Inc., 2008 WL 4684150 (D.P.R. Oct. 18, 2008), a United States District Court considered Esso’s proposed withdrawal from selling gasoline through service stations in Puerto Rico. Esso had announced to its franchisees that it planned to sell its assets, including its franchise agreements, to Total Petroleum. Total then offered franchise agreements to most, but not all, of Esso’s franchisees. Esso’s franchisees brought suit, arguing that Esso’s proposed withdrawal from the market violated the Petroleum Marketing Practices Act (“PMPA”). Although it does not apply directly to most business format franchises and non-gasoline dealerships, decisions interpreting the PMPA may be considered by courts in analyzing whether a market area withdrawal constitutes good cause under state franchise and dealer termination statutes.

The Puerto Rico federal court noted that the PMPA requires a withdrawing franchisor to provide 180 days’ notice to its existing franchisees. The statute further requires a franchisor either to make a bona fide offer to sell the franchisor’s interest in a particular location to that location’s dealer or, if it intends to sell its interest to another franchisor, to ensure that the new franchisor offers the dealer a nondiscriminatory franchise on the same terms as offered to the purchaser’s existing dealers. Applying those standards to the facts before it, the court found no evidence that Esso acted with an improper motive in withdrawing from the market. The court found that Esso had clearly communicated its intent and provided proper notice of its planned withdrawal.

The court then considered whether Esso had complied with its obligation to ensure that the new franchisor (Total) offered nondiscriminatory contracts to Esso’s franchisees. The court concluded that Total’s contracts were not discriminatory and thus complied with the PMPA. For that reason, the court denied the plaintiffs’ motion for injunctive relief to prevent Esso’s proposed withdrawal. The court found, however, that Total had failed to make franchise offers to three existing Esso franchisees. The court found that failure to be a violation of the PMPA that subjected Esso to damages for failing to ensure that such offers were made equally to all its existing franchisees. The court found that a hearing would be required to determine appropriate damages against Esso.

Before the court issued its decision on the PMPA claims, Total filed a motion for preliminary injunction asking the court to require the plaintiffs either to accept the franchise agreements that the court had concluded were nondiscriminatory or surrender their stations by October 31, 2008. In a subsequent order issued October 29 (found at 2008 WL 4737197), the same court denied that motion on ripeness grounds, finding that the franchise termination date of October 31 had not yet passed. Until the plaintiffs refused to comply with the termination date by either signing the new agreements or surrendering their stations, the controversy alleged by Total was not yet ripe for resolution.