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Valparaiso Univ. Law School

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Tuesday, March 2, 2010

Supreme Court Rejects Franchisees' Claims for Statutory Relief for Constructive Termination of Franchise Agreements

Supreme_Court_US_2009  The U.S. Supreme Court today decided Mac's Shell Service, Inc. v. Shell Oil Products Co.  The unanimous decision was authored by Justice Alito.  The consolidated cases involved franchisees who claimed that their franchise relationship had been constructively terminated or that their franchises had not been renewed in violation of the Petroleum Marketing Practices Act, PMPA, 15 U.S.C. s. 2801 et seq.  The PMPA limits the right of the franchisor to terminate or refuse to renew petroleum franchises.  However, in these cases, the Justices held that the franchisees could not claim that either constructive termination or refusal to renew had occurred because in all cases, the franchisees retained their franchises.

The PMPA claims resulted from a change in the way rents were calculated in the franchise agreements.  Traditionally, franchisees paid a fixed rent, discounted based on a formula that incorporated the quantity of gasoline sold at their service stations.  Despite frequent assurances from Shell that the formula would be retained, Shell's managing agent, Motiva Enterprises, altered the franchise agreements to eliminate the volume-based rent subsidy.  In some but not all cases, this resulted in rent increases for the franchisees.  63 franchisees characterized the elimination of the rent subsidy as: 1) breach of contract; 2) constructive termination in violation of PMPA; and 3) constructive non-renewal in violation of PMPA.

The First Circuit denied the constructive non-renewal claims because the franchisees had signed renewal agreements and were operating the franchises.  However, the First Circuit found that there could be constructive termination claims where the terms of the new franchise agreement entailed a breach of the prior agreement.  The Supreme Court rejected the latter position, finding that termination under the PMPA requires conduct that has the effect of ending the franchise.  

This case may also be of interest to fans of the standard teaching cases in Business Associations, Humble Oil v. Martin and Hoover v. Sun Oil, which also involve petroleum franchise agreements.

[Jeremy Telman]

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