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4 March 2010

US Supreme Court Releases Opinion in Mac’s Shell Service, Inc. v. Shell Oil Products Company and Shell Oil Products Company v. Mac’s Shell Service

The Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801 et seq. (PMPA), limits the circumstances under which a franchisor of an automobile service station may terminate or decline to renew a franchise. On March 2, 2010 the Supreme Court held that the PMPA does not permit claims for “constructive termination” or “constructive nonrenewal” by franchisees that maintain their relationship with the franchisor. 

In this case, franchisees of Shell Oil Company (Shell) sued Shell under the PMPA in response to two actions taken by Shell to increase the rent paid by its franchisees. First, Shell discontinued a program of rent subsidies. Then, as each franchisee’s lease agreement expired, Shell insisted on a new formula for calculating rent that resulted in higher annual rent payments for some franchisees. After the franchisees agreed to the lease renewals under protest, they claimed that the discontinuance of the subsidies constituted a constructive termination of their franchises and that the offer of new franchise agreements constituted a constructive nonrenewal of their franchises, in violation of the PMPA. After the franchisees prevailed in a jury trial, the First Circuit affirmed the constructive termination verdict but reversed the constructive nonrenewal verdict.

In a unanimous opinion by Justice Alito, the Supreme Court affirmed in part and reversed in part. The Court held that, even assuming that the PMPA recognizes claims for constructive termination and constructive nonrenewal, those claims require that the franchisee actually sever its relationship with the franchisor. The Court explained that this interpretation is consistent with the text of the statute and with claims for constructive discharge and constructive eviction, which traditionally require an employee to quit and a tenant to vacate, respectively. The Court also noted that limiting the reach of the PMPA does not leave franchisees without remedies, both because they retain state-law remedies (such as suits for breach of contract) and because a franchisee that refuses to sign an objectionable franchise renewal agreement must receive written notice of the franchise termination well before the termination’s effective date, giving the franchisee time to seek protection under the PMPA.

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