Supreme Court Limits PMPA Constructive Termination Claims

A necessary element of any constructive termination claim under the Petroleum Marketing Practices Act (PMPA) is that the complained-of conduct forced an end to the franchisee's use of the franchisor's trademark, purchase of the franchisor's fuel, or occupation of the franchisor's service station (the three elements of a typical petroleum products franchise), the U.S. Supreme Court has ruled. Because none of the gasoline station dealers in a dispute with a franchisor abandoned any element of their franchise operations in response to the franchisor's elimination of previously-provided rent subsidy, the dealers could not maintain a constructive termination claim on the basis of that conduct. Therefore, a ruling by the U.S. Court of Appeals in Boston (BUSINESS FRANCHISE GUIDE 2008-2009 New Developments Transfer Binder ¶13,890), affirming a jury's determination that the franchisor constructively terminated eight dealers in violation of the PMPA by terminating the subsidy was reversed, and the dispute was remanded for further proceedings.

Given its ordinary meaning, the text of the PMPA prohibited only franchisor conduct that had the effect of ending a franchise, according to the Court. Specifically, the PMPA declared that no franchisor may "terminate any franchise," except for an enumerated reason and after providing written notice. The Act specified that "[t]he term 'termination' includes cancellation," but it did not further define the term "terminate" or the incorporated term "cancel." Thus, those terms should be given their ordinary meanings, the Court ruled.

The word "terminate" ordinarily meant "put an end to." The term "cancel" carried a similar meaning: to "annul or destroy," the Court noted. The object of the verb "terminate" was the noun "franchise," a term the Act defined as "any contract" for the provision of one (or more) of the three elements of a franchise. Thus, when given its ordinary meaning, the PMPA was violated only if an agreement for the use of a trademark, purchase of motor fuel, or lease of a premises was "put [to] an end" or "annul[ed] or destroy[ed]." Conduct that did not force an end to the franchise, in contrast, was not prohibited by the Act's plain terms, the Court decided.

The same conclusion was reached even if Congress was using the words "terminate" and "cancel" in their technical, rather than ordinary, senses, the Court observed. When the PMPA was enacted, those terms had established meanings under the Uniform Commercial Code. Under both definitions, a "termination" or "cancellation" occurred only when a contracting party put an end to the contract. Thus, a gasoline station dealer who continued operating a franchise did not have the franchise terminated in either the ordinary or technical sense of the word.

Requiring dealers to abandon their franchises before claiming constructive termination was also consistent with the general understanding of the doctrine of constructive termination. As generally understood in employment and eviction contexts, a termination was deemed constructive because it was the plaintiff, rather than the defendant, who formally put an end to the particular legal relationship --not because there is no end to the relationship at all, according to the Court. There was no reason why a different understanding should apply to constructive termination claims under the PMPA. Allowing franchisees to obtain PMPA relief for conduct that did not force an end to a franchise would extend the reach of the Act much further than its text and structure suggested.

Coverage of Terminations and Nonrenewals

In enacting the PMPA, Congress did not regulate every aspect of the petroleum franchise relationship but instead federalized only the two parts of that relationship with which it was most concerned: the circumstances in which franchisors could terminate a franchise or decline to renew a franchise relationship. Congress left undisturbed state-law regulation of other types of disputes between petroleum franchisors and franchisees. Therefore, franchisees could still rely on state-law remedies to address wrongful franchisor conduct that did not have the effect of ending the franchise. Indeed, that happened in the instant dispute, the Court noted. The dealers argued in the district court that the franchisor's elimination of the rent subsidy not only constructively terminated their franchises in violation of the PMPA but also amounted to a breach of contract under state law. The jury found in their favor on their state-law claims and awarded them almost $1.3 million in damages.

The dealers insisted that such an interpretation of the term "terminate" would require them to go out of business before they could obtain preliminary relief, thus rendering useless the PMPA's preliminary injunction mechanism. However, the PMPA required franchisors to provide dealers with written notice of termination well in advance of the date on which the termination took effect. Thus, dealers that received notice of impending termination could invoke the protections of the Act's preliminary injunction mechanism well before having to go out of business, the Court reasoned.

Constructive Nonrenewal

The dealers could not maintain a constructive nonrenewal claim under the PMPA against the franchisor because they continued to operate under renewal agreements with the franchisor, the Supreme Court determined. Thus, a ruling by the appellate court vacating that portion of a judgment in favor of the dealers on their claims of constructive nonrenewal was affirmed.

The plain text of the PMPA left no room for a dealer to claim that a franchisor had unlawfully declined to renew a franchise relationship --constructively or otherwise --when the dealer had in fact accepted a renewal franchise agreement, the Court held. A franchisor violated the PMPA only when it "fail[s] to renew" a franchise relationship for a reason not provided for in the Act or after not providing the required notice. The Act defined the term "fail to renew," as a "failure to reinstate, continue, or extend the franchise relationship." Thus, the threshold requirement of any unlawful nonrenewal action was that the franchisor did not "reinstate, continue, or renew" the franchise relationship once a franchise agreement expired. If a dealer signed a renewal agreement, the franchisor clearly reinstated, continued, or extended the franchise relationship.

The dealers argued that several of them signed their renewal agreements "under protest," and that they thereby explicitly preserved their ability to assert a claim for unlawful nonrenewal under the PMPA. However, signing a renewal agreement did not constitute a waiver of a franchisee's legal rights --something that signing "under protest" could sometimes help avoid, the Court remarked. Instead, signing a renewal agreement negated the very possibility of a violation of the PMPA.

Mac's Shell Service, Inc. v. Shell Oil Products Co. LLC, U.S. Sup. Ct., ¶14,327