Mac’s Shell Service, Inc. v. Shell Oil Products Co.

Oral argument:

January 19, 2010

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. 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.

Shell Oil Products Co. (“Shell”) maintained franchise agreements with a number of gas station owners throughout Massachusetts. In 1998, Shell transferred its interest in these franchise agreements to Motiva, a new joint venture between Shell and other oil companies. 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. Motiva instead offered the franchisees new leases that calculated rent differently. The net effect to the franchisees was that the cost of their rent increased substantially. Despite this, the franchisees all agreed to sign these new leases “under protest.”

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. In addition to a state law contract claim, Mac’s raised two claims relevant to this appeal. 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. Additionally, Mac’s alleged that Motiva had “constructively non-renewed” the franchise agreements in violation of the PMPA when it increased the rent. 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. 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. 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. 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. 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.

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. 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. The Supreme Court granted both petitions, and consolidated them for a single oral argument.

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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. 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. 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. Allowing a franchisee to recover under the PMPA when there was no termination or nonrenewal in fact, Shell argues, would frustrate Congressional intent.

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. As such, the Supreme Court invited the Solicitor General to file an amicus brief outlining the position of the United States. 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.” 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. 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.’” For all the same reasons, the United States argues that the First Circuit correctly interpreted the PMPA to bar a claim for constructive nonrenewal.

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. 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.” 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.

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. 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.

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. Conversely, only the Ninth Circuit has recognized a constructive nonrenewal claim. 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].”

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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.

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. Shell argues that this conduct cannot be construed as a “termination” because Mac’s remained operational as a part of the franchise. 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.

At issue is the specific legal question of whether Mac’s “constructive” claims are valid causes of action under the PMPA at all. 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. 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. However, Mac’s points out that the text of the statute indicates that “termination includes cancellation.” Mac’s reads this to mean that termination includes, but is not limited to, cancellation.

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. Brief for Mac's Shell ServiceMac’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. 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. 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.

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. 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. 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.

However, Shell contends that even if the statute allowed for constructive termination, this would still require an actual end of the franchise. 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. 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. Moreover, Mac’s notes that Congress recognized this investment interest and enacted the PMPA to protect it. .

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. 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.

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. Shell responds by arguing that the entirety of the precedent supporting the constructive termination argument rests on a case that “makes no sense.” 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. 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.

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. 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. Shell supports the First Circuit’s interpretation, arguing that a franchisee cannot bring a claim for nonrenewal when the franchise agreement was actually renewed. 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.

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. 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. Whether the acceptance of the franchise agreement under protest was voluntary, Mac’s continues, was an issue for the jury. 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.

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. r 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.

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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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