The Franchise Memorandum

In a case that could have broad implications for franchisors, the United States Supreme Court heard oral argument on cross appeals involving two related questions arising under the Petroleum Marketing Practices Act (“PMPA”):  (1) whether a gas station franchisee who continues to operate its franchise using the franchisor’s marks may bring a valid claim for “constructive termination,” and (2) whether executing “under protest” a renewal franchise agreement precludes a claim for “constructive nonrenewal.”  The consolidated petitions, Mac’s Shell Service, Inc. v. Shell Oil Products Co., No. 08-240, and Shell Oil Products Co. v. Mac’s Shell Service, Inc., No. 08-372, will result in the first Supreme Court decision to interpret the PMPA. 

The plaintiffs had Shell franchise agreements that specified the monthly rent for the property leases.  However, Shell had offered a variable rent program to its franchisees since 1982 that reduced the monthly rent payment depending on the franchisee’s volume of gasoline sales.  According to the franchisees, Shell promised that this program would always be available even though the written terms of the program allowed Shell to cancel after giving notice.  Thereafter, Motiva Enterprises, LLC, a joint venture between Shell and Texaco, notified Shell franchisees that the “volume-based” variable rent program would be discontinued.  The franchisees sued, claiming that Shell’s assignment of the franchise agreements to Motiva was a “constructive” termination and nonrenewal of their franchise agreements because Motiva’s modification to their lease terms resulted in a substantial increase to the rent, which was driving the franchisees out business.  Shell and Motiva argued, however, that termination and nonrenewal claims cannot be brought under the PMPA unless an actual cessation of the franchise has occurred.  The jury awarded $3.3 million in damages for termination of the franchise agreements and for nonrenewal. 

The Supreme Court will have an opportunity to resolve a split among the courts on whether constructive termination claims are recognized by the PMPA.  In its amicus brief, the United States warned that accepting the franchisees’ broad interpretation of the PMPA would “federalize” all disputes between oil companies and their franchisees.  Whatever the result, the Supreme Court decision could be an important one for both franchisors and franchisees.