Mac’s Shell Service, Inc. v. Shell Oil Products Company; Shell Oil Products Company v. Mac’s Shell Service

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Argued January 19, 2009.

Authorship: Shira Liu of Stanford Law School

Docket: 08-240; 08-372

Issue: Under what circumstances may a service station operator bring suit against an oil refiner or distributor for “constructive termination” under the Petroleum Marketing Practices Act?

Contents

Briefs and Documents

Oral Argument

Transcript (January 19, 2010)

Merits Briefs

Amicus Briefs

Certiorari-Stage Documents

Oral Argument Recap

The following was originally written by Shira Liu for SCOTUSblog.

During oral argument in Mac’s Shell Service v. Shell Oil, the Court focused on the first question presented in the case and searched for a clear test on two issues: when can a retail gasoline franchisee claim constructive termination of a dissolved franchise relationship under the Petroleum Marketers Protection Act (PMPA), and when, if ever, can it claim constructive termination when it continues to operate?

Jeffrey Lamken, on behalf of Shell Oil Products, argued that the PMPA does not govern constructive termination, meaning that the PMPA covers only terminations initiated by the franchisor and does not apply when franchisees exit because of intolerable conditions. However, he admitted that the franchisor’s termination could be “by deed as well as by words” and allowed that implicit termination was at least possible. Mr. Lamken explained, however, that implicit termination is much narrower than constructive termination, as the former occurs only when a franchisor engages in conduct that an objectively reasonable observer understand to be a notice of termination. Justice Alito asked about two possible situations: a franchisor that refuses to supply gasoline and a franchisor that changes the open-price term in a fuel supply contract to $1000 per gallon. Mr. Lamken replied that the former implicitly terminated the franchise while the latter did not. When pressed by Justice Scalia, Mr. Lamken admitted that the line between constructive and implicit termination may sometimes be unclear, to which Justice Scalia responded “I think there is always an unclear line between the two.”

Assistant to the Solicitor General David O’Neill, appearing on behalf of the United States as an amicus curiae, suggested that constructive termination could be analogized to constructive discharge or constructive eviction: the jury finds constructive termination when the franchisor’s conduct forces the franchisee to end one of the statutory elements by franchisor’s conduct. He urged the Court to adopt a two-part test for constructive termination that would require, first, that the franchisor’s conduct be wrongful; and second, that a rational, economically motivated franchisee in those circumstances would have no alternative but to abandon the franchise. Justice Breyer pressed this point. He questioned why actual exit would be required under an objective intolerance standard, giving the example of a franchisor letting lions and tigers loose in a gas station such that “any sensible person would clear out immediately,” but an “indefatigable and daring” franchisee who “desperately needs the money” stays in operation. Mr. O’Neill replied that the franchisee must actually leave the premises to have a termination claim.

On the second issue, Justice Breyer asked John Farraher, arguing on behalf of the franchisees, to state the test for when a franchisee still in operation, like the franchisees in this case, can be said to have been constructively terminated. Justice Breyer pointed out that Shell Oil and the Solicitor General provide a simple test: “the test is he has to leave.” Mr. Farraher explained that the test is “whether or not the conduct has effectively eliminated an essential component of one of the three elements of the franchise.” Justice Alito interjected that he had “no idea what that means.” Justice Ginsburg asked whether there was any area of law in which constructive termination covered continuing operations and Mr. Farraher conceded that the vast majority of the courts held otherwise. Justice Breyer explained that because a franchisee could seek a breach of contract claim in state court, a franchisee would not be without a remedy if the Court decided to “stick[] to the clear line.”

Mr. Lamken and Mr. O’Neill did not raise the second question presented. Mr. Farraher explained the franchisees’ theory that they could sign new contracts under protest and then sue under the PMPA for non-renewal. Justice Breyer noted that the “the statute says nothing about” recovery under that theory, and Justice Sotomayor asked why the franchisees did not include an argument accepted by the Seventh Circuit, as she thought that would have been their “strongest argument.”

Pre-Argument Articles

Argument Preview

The following was originally written by Shira Liu for SCOTUSblog.

Retail gasoline stations bearing the name of an oil company like Shell or Texaco are frequently operated by franchisees, which typically contract to buy the oil company’s gasoline, license its trademark, and lease its retail premises. There are about 75,000 such franchisees in the United States. The 1976 Petroleum Marketers Protection Act (PMPA) partially governs this franchise relationship by, for example, outlining the conditions in which a franchisor may terminate a franchise and requiring it to renew franchise agreements when they expire. The PMPA allows the franchisor to change some terms in the renewed contract if it does so in good faith and without an improper purpose of coercing franchisees to give up their franchises. Finally, the PMPA also provides notification requirements for franchisor termination and nonrenewal, relatively lenient guidelines for courts to grant punitive damages, and litigation costs.

The case arose when Shell Oil and Texaco formed a joint venture, which they named Motiva Enterprises LLC, a joint venture with Texaco, to handle their domestic marketing operations. Shell assigned its franchisor responsibilities to Motiva, which subsequently phased out a rent subsidy program and offered franchisees whose contracts were expiring new agreements with more onerous terms.

A group of franchisees (which were later winnowed to a representative eight) filed suit against Shell and Motiva in federal district court under the PMPA and state law, seeking a preliminary injunction to stop termination of their franchises and asking for damages for the constructive termination and nonrenewal of their franchises. Seven of the eight franchisees had signed new franchise agreements “under protest,” and the eighth had exited the industry without renewing its contract but did not directly allege that the renewal terms caused its exit. Concluding that too much time had passed, the district court declined to issue the preliminary injunction. However, it allowed the franchisees’ suit for damages to go to the jury, which awarded the eight franchisees $3.3 million. In the jury’s view, Shell and Motiva had violated the PMPA by constructively terminating and failing to renew the franchise agreements. On appeal, the U.S. Court of Appeals for the First Circuit affirmed in part and reversed in part. It agreed that Shell and Motiva had constructively terminated the franchisees’ agreement, but it reversed the jury’s finding that the companies were liable for the constructive non-renewal of the franchise agreement on the ground that the franchisees had signed new franchise agreements.

Petitions for Certiorari

Both sides sought Supreme Court review. In No. 08-372, Shell and Motiva argued that certiorari was warranted on the question whether a franchisee that continues to operate can claim constructive termination, citing a two-to-four split among the circuits. In No. 08-240, the franchisees sought certiorari on their constructive nonrenewal theory, citing a one-to-one circuit split. Shell and Motiva agreed with the franchisees that their petition should be granted, but asked the Court to affirm the judgment below in that respect. The Court called for the views of the Solicitor General on both petitions; the United States recommended that certiorari be granted on both questions. The Court granted certiorari in both cases on June 15, 2009.

In their opening brief, Shell and Motiva agree that PMPA was enacted to protect franchisees, but they argue that PMPA is limited to actual terminations and non-renewals initiated by the franchisor. With regard to the constructive termination claim, Shell and Motiva contend that both the plain and technical meanings of the PMPA apply only if a franchisor terminates a franchise agreement. Allowing constructive terminations, by contrast, would violate the PMPA’s federal-state balance by preempting state contract law for breach of contract claims. Finally, they argue that even if the PMPA does allow constructive terminations, the Court should not find one when the relationship is ongoing.

In their brief, the franchisees attempt to draw an analogy between a termination claim brought by franchisees who are still operating and an injunctive suit brought by franchisees in response to a notice of nonrenewal – the latter of which is authorized by the PMPA. The franchisees emphasize that the statute was intended to give courts equitable power and should be read liberally to protect franchisees. Thus, a prohibited termination occurs when an assignment of a franchise is either invalid under state law or leads to a breach of one of the three statutory elements: the fuel supply contract, the trademark license, or the lease of the premises.

The Solicitor General’s brief supports Shell and Motiva in this case but provides future franchisees with a stronger theory of constructive termination. In the Solicitor General’s view, a franchisee has a cause of action for constructive termination when the franchisor creates conditions that are so intolerable that a franchisee terminates the franchise. Such a rule would ignore the assignment condition, but it would also require that the relationship be actually severed; otherwise, the rule would essentially provide a federal remedy for a mere breach of a franchise agreement.

In their supplemental brief, the franchisees attack the Solicitor General’s argument that a claim for constructive termination is sustainable only if the relationship is actually severed. It would be illogical, they argue, for Congress to require a franchisee to either obtain injunctive relief or wait for the business to actually fail, but for it to exclude the middle ground that franchisees followed in this case: proceeding to a claim for damages after failing to obtain injunctive relief.

Turning to the constructive non-renewal claim, Shell and Motiva argue that the plain language of the PMPA prevents a franchisee from claiming that its contract was constructively not renewed when it has signed a new agreement, whether “under protest” or otherwise. The PMPA allows good-faith changes to the franchise relationship in new contracts, and nonrenewal is limited by definition to “a failure to reinstate . . . the franchise relationship.” Franchisees are sufficiently protected by both the PMPA’s requirement that a franchisor give a franchisee notice of nonrenewal and the lenient standards for a preliminary injunction. These provisions would be unnecessary if a franchisee could sign a franchise agreement and then sue for nonrenewal.

The franchisees counter that these provisions do not protect franchisees from a franchisor offering a contract with bad-faith changes, because a franchisor that inserts such changes into a contract would not provide a notice of non-renewal. Requiring a franchisee in this situation to refuse to sign a contract, wait for a notice of termination, go out of business, and only then bring suit allows franchisors to coerce franchisees to sign contracts presented in bad faith.

On this point too the Solicitor General seeks a middle ground. She argues that although the PMPA allows a claim for constructive nonrenewal, a franchisee cannot claim nonrenewal after it has signed a new contract.

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