Supreme Court hears arguments in case against Shell Oil Products

Mac’s Shell Service v. Shell Oil Products Co. (08-240); Shell Oil Products Co. v. Mac’s Shell Service (08-372)

Oral argument: Jan. 19, 2010

Appealed from: United States Court of Appeals for the First Circuit (Apr.18, 2008)

CONTRACT, PETROLEUM MARKETING PRACTICES ACT (“PMPA”)

The Petroleum Marketing Practices Act (“PMPA”) is a federal law regulating the relationship between oil companies and independent franchised gas retailers. Here, Shell Oil assigned its rights under a number of existing franchise agreements to a third party. The plaintiffs, Mac’s Shell and a group of gas station owners (“Mac’s”) signed new modified franchise agreements with the third party “under protest,” and brought suit on the theory that signing the lease under protest amounted to a “constructive nonrenewal,” which in turn allowed them to bring a claim for relief under the PMPA. Additionally, Mac’s claims that the assignment of the lease itself was a “constructive termination” of the contract. The First Circuit Court of Appeals held that there was no claim for “constructive nonrenewal” under the PMPA, but upheld a jury verdict for the plaintiffs on their “constructive termination” claim. Both parties were granted certiorari, and their claims were consolidated.

• [Question(s) presented]
• [Issue(s)]
• [Facts]
• [Discussion]
• [Analysis]

Questions presented

08-240:

Whether the PMPA [Petroleum Marketing Practices Act,15 U.S.C. §§ 2801 et seq.] encompasses a claim for “constructive” nonrenewal of the franchise relationship where:

(i) the petitioner-franchisees filed suit prior to receiving new lease agreements that violated the Act;

(ii) the lease agreements were presented on a take-it-or-leave-it basis;

(iii) respondent-franchisor stated it would terminate the franchises unless

petitioners signed the lease agreements; and

(iv) the franchisees signed the lease agreements, under protest, and pursue their legal claims against the franchisor.

08-372:

Whether a service station operator that continues to operate its franchise-using the same trademark, selling the same fuel, and occupying the same premises-can bring an action claiming that it was “constructively terminated” in violation of the Act [PMPA].

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Issue

What—if any—circumstances allow a gas station owner to bring a suit for “constructive termination” or “constructive nonrenewal” of their franchise agreement under the Petroleum Marketing Practices Act, the federal law governing the relationship between oil companies and franchised gas stations?

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Facts

The federal Petroleum Marketing Practices Act (“PMPA”) governs franchise agreements between oil companies and independent petroleum retailers. See 15 U.S.C. §§ 2801–2806. Under the PMPA, a “franchise” is defined to include three elements: a lease of the premises, a license to use the franchisor’s trademark, and a fuel supply agreement. See 15 U.S.C. § 2801.

Shell Oil Products Co. (“Shell”) maintained franchise agreements with a number of gas station owners throughout Massachusetts. See Marcoux, et al. v. Shell Oil Products et al., 524 F.3d 33, 37 (1st Cir. 2008). In 1998, Shell transferred its interest in these franchise agreements to Motiva, a new joint venture between Shell and other oil companies. See id. Motiva, in turn, modified the franchise agreements by ending a subsidy program—in existence since 1982—which tied the cost of rent to the volume of gas sold. See id. at 38. Motiva instead offered the franchisees new leases that calculated rent differently. See id. The net effect to the franchisees was that the cost of their rent increased substantially. See id. Despite this, the franchisees all agreed to sign these new leases “under protest.” See id. at 47.

In 2000, Mac’s, and a group of seven other Massachusetts Shell franchisees affected by the new franchise agreements, filed suit in the United States District Court for the District of Massachusetts seeking injunctive and declaratory relief as well as damages. See Marcoux, 524 F.3d at 38. In addition to a state law contract claim, Mac’s raised two claims relevant to this appeal. See id. First, Mac’s alleged that the rent subsidy should be read as incorporated into the property lease, and that Shell “constructively terminated” the franchise agreement under the PMPA when it assigned the agreement to Motiva, and Motiva terminated the subsidy. See id. Additionally, Mac’s alleged that Motiva had “constructively non-renewed” the franchise agreements in violation of the PMPA when it increased the rent. See id. After Shell unsuccessfully moved to dismiss the claims, a jury returned a verdict against them on all counts.

Shell appealed to the United States Court of Appeals for the First Circuit, which interpreted the PMPA to allow the constructive termination claim, but concluded the PMPA did not support a claim for constructive nonrenewal. See Marcoux 524 F.3d at 53–54. Because Mac’s had relied for so many years on the rent subsidy and the new lease terms essentially drove Mac’s out of business, the First Circuit held that it was reasonable for the jury to conclude that Shell constructively breached the lease component of the franchise agreement when it assigned the franchise to Motiva. See id. at 47. However, reasoning that Mac’s had the burden to prove that a nonrenewal took place, the First Circuit concluded that Mac’s could not claim there was a constructive nonrenewal of the lease under the PMPA where they did, in fact, sign the new lease renewal (“albeit ‘under protest’”) that included the objectionable terms. See id. In reaching its conclusion, the First Circuit noted that the Ninth Circuit is the only court that has recognized a claim for “constructive nonrenewal” under the PMPA where a franchisee signs a renewal, but objects to its terms. See id. at 48. In rejecting this approach, the First Circuit noted that allowing a party to “sign a contract and simultaneously challenge it”—without any risk of losing their franchise if courts subsequently rejected their challenge—was inconsistent with Congress’s intent in enacting the PMPA. See id. at 49.

Both Shell and Mac’s petitioned the Supreme Court of the United States for a writ of certiorari. Thus, in this case, both parties are petitioners and respondents. In its petition, Mac’s argued the Ninth Circuit’s interpretation of the PMPA, recognizing a claim of “constructive non-renewal,” should properly apply in this case to allow a franchise owner to continue to operate their gas station while challenging aspects of their lease renewal. See Petition for Writ of Certiorari, Mac’s Shell Service at i. Shell, on the other hand, argued that the First Circuit was incorrect to conclude that the PMPA recognized a “constructive termination” claim when service stations were in fact still operating after the alleged termination occurred. See Petition for a Writ of Certiorari, Shell Oil Products at i. The Supreme Court granted both petitions, and consolidated them for a single oral argument. See Docket Nos. 08-240, 08-372.

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Discussion

Fundamentally, this case calls on the Supreme Court to unravel Congress’s intent in enacting the Petroleum Marketing Practices Act (“PMPA”), 15 U.S.C. §§ 2801–2806. On one hand, as Mac’s asserts, the PMPA was enacted to protect the bargaining power of independent gas station owners in negotiating with multinational oil companies. See Supplemental Brief for Mac’s Shell Service at 1. As such, Mac’s argues the purpose of the Act is best effectuated by a broad interpretation that recognizes “constructive” termination or nonrenewal of franchise agreements whenever the actions of an oil company “injure” a franchisee. See id. at 4–5. On the other hand, as Shell asserts, in enacting the PMPA, Congress intended to create specific federal standards governing the termination and renewal of gas station franchises, and the act is specific on its face. See Brief for Shell Oil Products at 26–27. Allowing a franchisee to recover under the PMPA when there was no termination or nonrenewal in fact, Shell argues, would frustrate Congressional intent. See id. at 27.

Because the PMPA governs franchise agreements in the petroleum industry, its interpretation is of particular interest to both the Department of Energy and the Antitrust Division of the Department of Justice. See Brief of Amicus Curiae United States in Support of Petitioners in No. 08-372 and Respondents in No. 08-240 at 1. As such, the Supreme Court invited the Solicitor General to file an amicus brief outlining the position of the United States. See id. The United States reasons that, under the PMPA, claims for “constructive” termination should not be available when a franchisee “continues to sell the same fuel, use the same trademark, and occupy the same premises.” See id. at 10. Noting that the PMPA allows for injunctive relief and attorneys’ fees when a franchisee brings a wrongful termination claim, the United States argues that reading the statute more broadly would be inconsistent with the balance Congress struck between providing remedies for franchisees while providing clear rules for franchisors. See id. at 16–17. The United States also asserts that the First Circuit’s “constructive termination” test is based on state law, which, if adopted, would further undermine Congress’s desire in enacting the PMPA to create a “‘single, uniform set of rules.’” See id. For all the same reasons, the United States argues that the First Circuit correctly interpreted the PMPA to bar a claim for constructive nonrenewal. See id. at 22.

The American Petroleum Institute (“API”), an oil and gas industry advocacy group, has also submitted an amicus brief which echoes the arguments advanced by the United States and stresses the importance of a uniform federal statute regarding gas station leases. See Brief of Amicus Curiae American Petroleum Institute, et al. in Support of Shell Oil at 9–10. API argues that a “uniform approach” to the operation of gas station franchise agreements is “crucial to the effective operation of the national market for motor fuel distribution.” See id. at 18. Because refiners distribute their product nationwide, API argues, adopting a rule that hinges on state law would lead to increased costs and uncertainty for both franchisors and franchisees. See id. at 19.

Other commentators have noted, however, that due to rising consolidation in the petroleum industry and increasing competition from major discount retailers, independent gas station owners are increasingly vulnerable in the face of increasing pressures from distributors and decreasing profit margins. See, e.g., Joseph Rockne, Got Gas? An Introduction to the Petroleum Marketing Practices Act. In this context, it follows, the PMPA is a crucial arrow in the quiver of the independent dealer seeking to retain a fair shake in the gas business. See id.

Regardless of the outcome, this case presents the Supreme Court with an opportunity to resolve an ongoing split amongst the circuits that have interpreted the PMPA to recognize constructive claims. Some form of constructive termination claim has been recognized by the First, Fourth and Sixth Circuits. See Chestnut Hill Gulf v. Cumberland Farms, 940 F.2d 744, 750 (1st Cir. 1991); Barnes v. Gulf Oil, 795 F.2d 358, 362 (4th Cir. 1985); May-Som Gulf v. Chevron, 869 F.2d 917, 922 (6th Cir. 1989). Conversely, only the Ninth Circuit has recognized a constructive nonrenewal claim. See Pro Sales v. Texaco, 792 F.2d 1394, 1399 (9th Cir. 1986). The Supreme Court’s guidance on this issue will “benefit both franchisors and franchisees in the petroleum industry,” and further “congress’s intent to prescribe uniform standards on the matters covered by the [PMPA].” See Brief of Amicus Curiae United States in Support of Petition for a Writ of Certiorari at 7.

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Analysis

The Petroleum Marketing Protection Act (“PMPA”) prohibits oil companies that have franchise agreements with gas stations from terminating or failing to renew a franchise agreement for the purpose of bringing the franchisee gas station under the direct control of the company. See 15 U.S.C. §§ 2802(b)(2)(E), 2802(b)(3), 2802(b)(3)(D)(ii).

Mac’s Shell Service (“Mac’s”), a franchisee gas station, argues that Shell Oil Products (“Shell”) “constructively terminated” the franchise agreement by assigning it to another company which, in effect, raised the wholesale price of the oil being sold to Mac’s to a degree that made it financially impossible to stay in business. See Brief for Mac’s Shell Service at 16–18. Shell argues that this conduct cannot be construed as a “termination” because Mac’s remained operational as a part of the franchise. See Brief for Shell Oil Products at 23. However, Mac’s argues that Shell’s inclusion of more onerous terms in new franchise agreements, which a franchisee would need to accept in order to continue to operate, constitutes a constructive nonrenewal. See Brief for Mac’s Shell Service at 16–17, 44.

At issue is the specific legal question of whether Mac’s “constructive” claims are valid causes of action under the PMPA at all. See Brief for Mac’s Shell Service at 16, 17; Brief for Shell Oil Products at 21, 22. In essence, the argument is about whether a franchisee must formally go out of business before it can sue its franchisor for violations of the PMPA.

Is constructive termination a cause of action under the PMPA?

Shell contends that the PMPA requires an “actual,” rather than “constructive” termination before the franchisee has a cause of action under the PMPA, because the words of the statute are unambiguous. See Brief for Shell Oil Products at 23. Shell argues that the dictionary definition and ordinary meaning of “terminate” is to “put [to] an end,” which would require some aspect of the franchise agreement to end before the a cause of action develops under the statute. See id. at 24. However, Mac’s points out that the text of the statute indicates that “termination includes cancellation.” Brief for Mac’s Shell Service at 26–27. Mac’s reads this to mean that termination includes, but is not limited to, cancellation. See id. at 26.

Mac’s argues that the PMPA, interpreted as a whole, does not require a franchisee to actually go out of business in order to have a claim for wrongful termination, but rather, constructive termination suffices. See Brief for Mac’s Shell Service at 20. Mac’s supports its interpretation with the fact that the PMPA empowers courts to remedy wrongful termination with equitable relief or to prevent a wrongful termination with a preliminary injunction. See id. Mac’s finds the injunctive remedy provided in the statute as indication that remedies exist under the PMPA before actual termination, as an injunction against a franchisor’s conduct would have little purpose if a cause of action did not accrue until the franchisor already achieved their ends. See id. at 21. Shell counters that this is not the case, as some violations under the PMPA could occur after an actual termination, giving reasons for the PMPA to provide for equitable relief that would be available after actual termination. See Reply Brief for Shell Oil Products at 19.

Shell also argues that legislative history confirms its definition of “termination,” as Congressional records indicate that Congress was concerned about numerous occurrences of actual termination or nonrenewal of franchises. See Brief for Shell Oil Products at 27. The Congressional intent in passing the PMPA then was to create specific federal standards governing the actual termination and renewal of gas station franchises, leaving other claims to state law. See id. at 27–28. Mac’s responds that statements from legislative history, taken in isolation, are misleading, and the overarching purpose of the PMPA is to remedy the ill effects of franchisors using their bargaining power to take advantage of franchisees—a purpose that would be served by recognizing constructive termination claims. See Brief for Mac’s Shell Service at 40–41.

However, Shell contends that even if the statute allowed for constructive termination, this would still require an actual end of the franchise. See Brief for Shell Oil Products at 30. Shell supports this argument with analogies to law regarding employees or tenants, where constructive termination involves actually leaving because of oppressive conditions and the word “constructive” refers only to the lack of formal notice of termination. See id. at 30, 31. Mac’s responds that franchises are distinguishable from employment or tenant contexts because a franchise is an investment into a contractual relationship that must be preserved if the franchisee’s business is to remain viable. See Brief for Mac’s Shell Service at 38. Moreover, Mac’s notes that Congress recognized this investment interest and enacted the PMPA to protect it. See id at 38.

Shell maintains, however, that the PMPA does not allow for constructive termination as construed by Mac’s or the First Circuit in the decision below. See Brief for Shell Oil Products at 31. Shell argues that because the First Circuit recognized that “no actual termination occurred” here, it implicitly admitted that constructive termination is something other than what the statutory text actually covers. See id.

Mac’s argues that the First Circuit was correct in following Fourth Circuit precedent that finds a constructive termination whethere is an assignment of a franchise agreement that is invalid under state law, followed by a breach of a material element of the agreement, such as raising prices. See Brief for Mac’s Shell Service at 28 (citing Barnes v. Gulf Oil Corp.,795 F.2d 358, 362 (4th Cir. 1986)). Shell responds by arguing that the entirety of the precedent supporting the constructive termination argument rests on a case that “makes no sense.” See Brief for Shell Oil Products at 40. Shell points out that if the assignment of a franchise agreement is already invalid under state law, then what exists is, therefore, no longer a franchise, and the dealers would lose the protections provided by the PMPA. See id. at 40. Shell argues that this is clearly not the result Congress intended, and that the Supreme Court should reject this theory as the product of a “distorted” version of statutory construction. See id.

Shell also argues that legislative history confirms its definition of “termination,” as Congressional records indicate that Congress was concerned about numerous, actual terminations and nonrenewals of franchises. See Brief for Shell Oil at 27. Mac’s argues that statements from legislative history taken in isolation are misleading and the overarching purpose of the PMPA is to remedy the ill effects of franchisors using their bargaining power to take advantage of franchisees—a purpose that would be served by recognizing constructive termination claims. See Brief for Mac’s Shell Service at 40,– 41.

Is constructive nonrenewal a cause of action under the Act?

Although the First Circuit found it permissible to read a cause of action for constructive termination of a contract under the PMPA, it held separately that, because Mac’s had the burden to prove that a nonrenewal took place, Mac’s could not claim there was a constructive nonrenewal of the lease under the PMPA when Mac’s did, in fact, sign the objectionable new lease renewal. See Marcoux, et al. v. Shell Oil Products et al., 524 F.3d 33, 53–54 (1st Cir. 2008). On this issue, Mac’s disagrees with the First Circuit’s interpretation, arguing that signing a new lease to operate a franchise should not foreclose a franchisee from bringing a claim for constructive nonrenewal when the new lease terms were offered on a take-it-or-leave-it basis. See Brief for Mac’s Shell Service at 46, 48. Shell supports the First Circuit’s interpretation, arguing that a franchisee cannot bring a claim for nonrenewal when the franchise agreement was actually renewed. See Brief for Shell Oil Products at 48. Shell also points out that notice of nonrenewal is required under the PMPA, and that no notice of nonrenewal was provided by Mac’s here. See id. at 50.

Mac’s contends that whether it really accepted the new franchise agreement should not have been an issue on appeal, because it is a question of fact, and Shell did not raise it at the trial court. See Brief for Mac’s Shell Service at 50. Mac’s also notes clear Supreme Court precedent holding that a payment made under protest, although technically voluntary in some sense, may not be voluntary in the legal sense, as it may be the result of coercion. See id. at 48. Whether the acceptance of the franchise agreement under protest was voluntary, Mac’s continues, was an issue for the jury. See id. at 50. Shell claims that whether the lease was signed under protest is irrelevant, as Mac’s had no claim to waive, because constructive nonrenewal is not a valid claim under the PMPA. See Brief for Shell Oil Products at 53.

Mac’s endorses Ninth Circuit precedent, which follows the logic that Congress could not have possibly intended for the PMPA to functionally force franchisees to choose between accepting a bad contract and losing any chance for relief or forfeiting their business for the opportunity to seek relief in the courts. See Brief for Mac’s Shell Servicer giving 90 days notice to the franchisee, and that this notice requirement allows the franchisees to challenge terms in court before the nonrenewal takes effect. See Brief for Shell Oil Products at 52.

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Conclusion

This case presents the Court with the opportunity resolve a circuit split over whether the PMPA, 15 U.S.C. §§ 2801-2806, enables gas station franchisees to sue their franchisors when the franchisor takes actions to make the ongoing franchise agreement unprofitable. The Court’s decision may clarify the PMPA and considerably increase the bargaining power of either franchisors or franchisees.

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Authors

Prepared by: Matthew Benner and Tom Kurland

Edited by: Katie Worthington

Additional Sources

·      Wex: Statutory Construction

·      Wex: Breach of Contract

·      Gasoline & Automotive Service Dealers of America: Supreme Court to Hear Shell Case – Decision could affect “tens of thousands” of leases

SOURCE ARTICLE