Amicus Curiae Brief — Shell Oil Products Products Co., LLC v. Mac's Shell Service Service, Inc. (Nos. 08-372, 08-240)

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[ Supreme Court, U.S. |

FILED

OCT 24 2008

No. 08-372 | OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

SHELL OIL PRODUCTS COMPANY LLC, ET AL.,

Petitioners,

MAc’sS SHELL SERVICE, INC., ETAL..

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE AMERICAN PETROLEUM

INSTITUTE AS AMICUS CURIAE SUPPCRTING

PETITIONERS

HARRY M. NG ROBERT A. LONG, JR.

KRISTYN NOETH Counsel of Record

American Petroleum JONATHAN L. MARCUS

Institute Covington & Burling LLP

1220 L St. N.W. 1201 Pennsylvania Ave., NW

Washington, DC 20005 Washington, DC 20001

(202) 682-8000 (202) 662-6000

October 2008 Counsel for Amicus Curiae

— a

—_—

TABLE OF CONTENTS

Page

TABLE OF CONTENTS ....... Ae SF PRR Ns eM Re tO i

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INTEREST OF AMICUS CURIAE............0cc6cccccccceceeeeee |

2, FRIESE See ey ae Se ONS oR EN a 2

SUMMARY OF ARGUMENT. .........000.......0.....cccccceccecees. 7

REASONS FOR GRANTING THE PETITION ........ 10

I. Review Is Warranted To Restore The

Uniformity Congress Sought To

Establish By Enacting The PMPA................... 10

A. A Uniform Interpretation Of The

PMPA Is Of Critical Importance

er il

B. The Court Of Appeals’ Decision

Deepens A Circuit Conflict That

Prevents The Attainment Of

Uniformity. ....... DEA bs ey. laa ed oe a PIR OES 12

C. The Court Of Appeals’ Decision

Stands As An Impediment To

Uniformity Because Under Its

Approach The Viability Of A

Cause Of Action Under The

PMPA For Constructive

Termination Depends On State

Ee ETN IS Be SEA LAIR See Poa ltbieped 15

Il. Review Is Warranted Because The

PMPA Does Not Create A Cause Of

Action For Constructive Termination............. 17

CONCLUSION 23

TABLE OF AUTHORITIES

Page(s)

CASES

Abrams Shell v. Shell Oil Co., 216 F. Supp. 2d

634 (S.D. Tex. 2002), aff'd 343 F.3d 482............. 20

Abrams Shell v. Sheil Oil Co., 343 F.3d 482

SEE DUPE RN ie ge re oe ee 14, 15

Air Safety, Inc. v. Teachers Realty Corp., 706

FE EE IES NR esis ssksconcnresesnscssnnsnsensssessenes 16

April Marketing & Distributing Corp., Inc. v.

Diamond Shamrock Refining and

Marketing Co., 103 F.3d 28 (5th Cir. 1997)........ 14

Barnes v. Gulf Oil Corp., 795 F.2d 358 (4th

Rae AR ES BRIE Ra tN in dP penn R Rae Ca 4, se, &3

Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955

ER ailireent ke Maha oer EAD PAA CASE ae LSM oe, See Meee 2

Casserlte v. Shell Owl Co., 2007 WL. 1559510

(Ohio Ct. App. May 31, 2007), appeal

accepted for review, No. 2007-1408, 876

N.E.2d 968 (Ohio Nov. 21, 2007)......................... 16

Clark v. BP Oil Co., 137 F.3d 386 (6th Cir.

a a eg 7,13

Dersch Energies, Inc. v. Shell Oil Co., 314 F.3d

tg: he |. 5 ee TERRA Soe 20, 21, 22

-lll-

Hazara Enterprises, Inc. v. Motiva Enterprises,

LLC, 126 F. Supp. 2d 1365 (S.D. Fla. 2000) ....... 16

Leegin Creative Leather Products, Inc. v.

Pam, ine., 127 S. Ct. FIGS (BOO7)........00ccceccce.cce00 2

McGinnis v. Star Enterprise, 8 F.3d 20, 1993

WF is SEE CE Cam. BOBS) «gn ccccccecccsccccccessscccesces 14

Portland 76 Automobile/ Truck Plaza, Inc. v.

Union Oil Co. of Cal., 153 F.3d 938 (9th

Gy Me si cavarcanserecs Sratideniddtbadainimeaaies tines 8, 13, 14

Tangren Family Trust v. Tangren, 182 P.3d

I ciclo saapienhitsangsnanseetredaressuresvecenms 16

Texaco, Inc. v. Dagher, 547 U.S. 1 (2006)................... 2

Texaco, Inc. v. Hasbrouk, 496 U.S. 543 (1990)........... 2

STATUTES

Petroleum Marketing Practices Act, 15 U.S.C.

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Oe a ee a ac comstieges 19

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OTHER AUTHORITIES

S. Rep. No. 731, 95th Cong., 2d Sess. (1978)..... passim

INTEREST OF AMICUS CURIAE

This brief amicus curiae in support of

petitioners Shell Oil Products Company LLC, Motiva

Enterprises LLC, and Shell Oil Company, Inc., is

filed on behalf of the American Petroleum Institute.

(“API”).! API is a non-profit District of Columbia

corporation for the United States oil and natural gas

industry. API’s more than 400 members cover all

facets of the industry, including’ exploration,

production, transportation, refining, and marketing.

API's members have a significant interest in

the issue in this case. The Petroleum Marketing

Practices Act, 15 U.S.C. §§ 2801-2806 (“PMPA” or

“the Act’), establishes federal standards for the

termination or non-renewal by an oil refiner of a

service station operator’s franchise. The PMPA

provides a cause of action against oil refiners that

terminate a franchise or fail to renew it in a manner

that does not comply with the statute. Thus, many

of API’s members are subject to suit under the Act.

This case presents the question whether a

service station operator that continues to operate its

franchise may nevertheless sue the franchisor for

wrongful “termination” under the PMPA. The First

— ~~ + ee oe

! Pursuant to Rule 37.6, amicus affirms that no counse! for a

party authored this brief in whole or in part, and no party or

counsel for a party made a monetary contribution intended to

fund the preparation or submission of this brief. No person

other than amicus, its members, or its counsel made a

monetary contribution to its preparation or submission

Pursuant to Rule 37.2, counsel of record for all parties received

timely notice of amucus’s intention to file this bnef. The parties

have consented in writing to the filing of this brief.

Circuit held that a service station operator can

maintain such a suit, but the text and structure of

the statute make clear that the First Circuit erred in

according the PMPA such broad scope. Because API

members may be subjected to PMPA suits, they have

a strong interest in having the statute confined to

the circumstances to which Congress intended it to

apply.

API frequently participates in legislative,

#dministrative, and judicial proceedings that present

issues of national concern, including issues arising

under the PMPA.2 API believes that its participation

as amicus curiae in this case will offer the Court an

industry-wide perspective on the question presented.

STATEMENT

1. Congress enacted the PMPA to establish

“minimum federal standards governing’ the

termination and nonrenewal- of franchise

relationships for the sale of motor fuel by the

franchisor or supplier of such fuel.” S. Rep. No. 731,

95th Cong., 2d Sess. (1978), at 15. Congress sought

to displace “an uneven patchwork of [state] rules

governing franchise relationships” with a “single,

uniform set of rules governing the grounds for

termination...and the notice which franchisors

must provide franchisees prior to termination of a

franchise.” Jd. at 19. To promote “certainty and

2 See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,

127 S. Ct. 2705 (2007); Bell Atl. Corp. v. Twombly, 127 S. Ct.

1955 (2007); Texaco, Inc. v. Dagher, 547 U.S. 1 (2006); Texaco,

Inc. v. Hasbrouk, 496 U.S. 543 (1990).

uniformity in franchise relationships which permeate

a nationwide motor fuel distribution and marketing

network,” the PMPA “preempts state law in the

subject areas in which the federal legislation deals,

1.e., termination and non-renewal of franchise

relationships and the notice applicable thereto” if the

state law “is not the same as the applicable

provision” of the PMPA. I7d. at 16. See 15 U.S.C.

§ 2806(a)(1).

The PMPA defines a “franchise” to mean the

use by a franchisee of “a trademark which is owned

or controlled by” a refiner. 15 U.S.C. § 2801(1)(A).

The term also includes the contract for the supply of

motor fuel and the iease of the premises on which the

motor fuel is sold. Jd. § 2801(1)(B). Courts refer to

these three components of the franchise as the

“statutory element[s]” of the franchise. Pet. App.

18a. The PMPA also states that “the term

‘termination includes’ cancellation.” 15 U.S.C.

§ 2801(17).

In setting federal standards for termination of

a franchise, Congress attempted to “strike a balance

between” (S. Rep. No. 731, at 15) franchisees’

interest in avoiding “arbitrary or discriminatory

termination” (id.) and franchisors’ need for “adequate

flexibility” to “initiate changes in their marketing

activities to respond to changing market conditions

and consumer preferences” (id. at 19). Concerned

about franchisors “resort[ing] to termination of the

franchise for the most technical or minor violations

of the contract” (id. at 18), Congress enumerated the

grounds on which the franchisor may lawfully

terminate the franchise. See 15 U.S.C. § 2802(b)(2).

Those grounds include a failure by the franchisee to

-3.

comply with a franchise provision that “is both

reasonable and of material significance,” id.

§ 2802(b)(2)(A); “[a] failure by the franchisee to exert

good faith efforts to carry out” the franchise, id.

§ 2802(b)(2)(B); “[t]he occurrence of an event which 1s

relevant to the franchise relationship” and which

renders termination of the franchise “reasonable,” id.

§ 2802(b)(2)(C); a written agreement between the

franchisor and franchisee to terminate the franchise,

id. § 2802(b)(2)(D); and a “determination made by

the franchisor in good faith and in the normal course

of business to withdraw from the marketing of motor

fuel through retail outlets in the relevant geographic

market,” id. § 2802(b)(2)(E).*

Congress also sought to ensure _ that

procedural regularity attends the termination

process by imposing notification requirements on

franchisors. See 15 U.S.C. § 2804. The PMPA

requires that the franchisor notify the franchisee in

writing of the date on which termination will take

effect and the reasons for which the franchise is

being terminated. Jd. § 2804(c). That notice must

generally be provided at least 90 days before the date

termination “takes effect.” Id. § 2804(a)(2).

The PMPA provides franchisees with a cause

of action against a franchisor that fails to comply

3. The listed grounds for termination are also grounds for non-

renewal. Section 2802(b)(3) sets out additional grounds for non-

renewal, including the failure of the parties “to agree to

changes or additions to the provisions of the franchise” if the

changes or additions “are the result of determinations made by

the franchisor in good faith and in the normal course of

business.” 15 U.S.C. § 2802(b)(3)(A).

with the statute's provisions governing termination

or non-renewal. 15 U.S.C. § 2805(a). It requires a

court to grant a franchisee a preliminary injunction

“to compel continuation or renewal of the franchise

relationship” while the court considers the merits of

the franchisee’s challenge to the _ franchisor’s

termination or non-renewal, provided’ certain

specified conditions are met. TJd. § 2805(b). The

franchisee need only establish “sufficiently serious

questions going to the merits to make such questions

a fair ground for litigation” and that the balance of

hardships tips in its favor. Jd. § 2805(b)(2). The

statute authorizes prevailing franchisees to recover

actual damages and, in cases involving “willful

disregard” of the statute, punitive damages. ld.

§ 2805(d)(1)(A), (B). Finally, the court may award

franchisees “reasonable attorney and expert witness

fees” unless the franchisee recovers “only nominal!

damages.” Id. § 2805(d)(1)(C).

2. Despite the fact that the PMPA by its

terms applies only to “termination” or “non-renewal”

of the franchise, respondents sued petitioners under

the PMPA while continuing to operate’ their

franchises on the theory that petitioners’ elimination

of a rent reduction program amounted to

“constructive termination” of the franchise. Pet.

App. 4a. The jury returned a verdict in respondents’

favor, awarding them $1.3 mullion on _ their

constructive termination claim, and the district court

added $1.16 million in attorney’s fees and $209,000

in expert witness fees pursuant to the PMPA.4

3. The court of appeals affirmed the judgment

on the constructive termination claim. Pet. App.

15a-2la. The court rejected petitioners argument

that a service station operator who continues to

operate the franchise—that 1s, continues to use the

refiner's trademark, to receive motor fuel, and to

lease the premises—cannot claim that it was

“terminated” within the meaning of the PMPA. IZd.

at 17a-18a. The court concluded that the PMPA,

unlike other laws, does not “require an actual

severance of the relationship.” /d. at 18a. The court

reasoned that “requiring a franchisee to go out of

business before invoking the protections of the

PMPA” would frustrate the “congressional plan.” Jd.

Instead, the court recognized a cause of action for

wrongful termination under the PMPA where a

franchisee alleges that the franchisor breached one of

the three statutorily protected contracts——the

contract for use of the trademark, motor fuel, or the

premises—and that the breach is “such a material

change that it effectively ended the lease, even

though the [franchisees] continued to operate the

business.” Jd.

4 The PMPA fee award applied to respondents’ constructive

termination claim and a constructive non-renewal claim on

which they also prevailed. The constructive non-renewal

finding was reversed on appeal because, while the court of

appeals recognized a claim for constructive termination, it

declined to “recognize a claim for nonrenewal under the PMPA

where the franchisee has signed and operates under the

renewal agreement complained of.” Pet. App. 25a.

SUMMARY OF ARGUMENT

Recognizing that petroleum refiners operate

and distribute their fuel on a nationwide scale,

Congress enacted the PMPA to establish a uniform

standard governing the termination and non-renewal

of franchise relationships. That objective has not

been realized, however, because the federal courts of

appeals have issued conflicting decisions on the scope

of the cause of action available to remedy wrongful

termination. The court of appeals here held that a

franchisee may sue a franchisor for wrongful,

termination under the PMPA even when the

franchisor never terminates the franchise or notifies

the franchisee of an intent to terminate the

franchise. Under the court of appeals’ approach, a

franchisee need only allege that the franchisor

breached a term pertaining to one of the three

statutory elements of the franchise (the trademark

use authorization, the contract for the supply of

motor fuel, or the lease of the premises) and that the

breach “effectively ended the lease, even though the

[franchisee] continued to operate the business.” Pet.

App. 18a. In so holding, the court of appeals followed

the Fourth Circuit's decision in Barnes v. Gulf Oil

Corp., 795 F.2d 358, 359 (4th Cir. 1986), which

adopted a similarly expansive view of the cause of

action available under the Act for wrongful

“termination.”

The Sixth Circuit, on the other hand, has held

that a franchisor’s breach of a statutory element of

the franchise must be a total breach such that the

franchisee loses use of the trademark, fuel supply, or

the premises. See Clark v. BP Oil Co., 137 F.3d 386,

389 (6th Cir. 1998). The Ninth Circuit has similarly

held that the franchisee at a minimum must be

forced out of business to state a wrongful

termination claim based on a breach of one of the

three statutory elements. See Portland 76

Auto/Truck Plaza, Inc. v. Union Oil Co. of Cal., 153

F.3d 938, 942 (9th Cir. 1998). These conflicting

decisions merit this Court’s review because they

defeat one of the key purposes of the Act—to

establish a uniform, national standard for the

termination of a petroleum franchise.

In addition to the circuit conflict, the court of

appeals’ decision undermines the congressional goal

of a uniform approach to petroleum franchise

termination. Under the court of appeals’ approach,

whether a material breach of the franchise amounts

to a constructive termination turns, as it did here, on

application of state law. The material breach in this

case was the breach of an alleged oral promise to

continue the rent subsidy, despite a clause in the

lease agreement (the “integration clause”) that

provided that the lease constituted the entire

contract and that any amendments to it must be in

writing. The court of appeals concluded that under

Massachusetts law, “the question of integration is

one of fact reserved for the trial judge” (Pet. App.

13a) and that the judge did not commit clear error in

“conclud[ing] that the lease was not an integrated

agreement.’ Jd. at 14a. Thus, the very basis for

respondents’ claim that they were constructively

terminated—that petitioners breached an_ oral

promise that modified the lease—turned on an

application of state law.

In seeking to establish a “uniform” (S. Rep.

No. 731, at 19) and “federal” standard (id. at 15) for

the termination and non-renewal of petroleum

franchise relationships, Congress could not possibly

have intended to have the very determination of

whether a termination occurred turn on application

of state law. Under the court of appeals’ approach,

Congress’ goal of uniformity will be _ utterly

frustrated because the viability under the PMPA of a

claim for constructive termination will vary from

state to state depending on the application of state

law.

The court of appeals’ decision also

misconstrues the scope of the PMPA. The text of the

PMPA makes clear that a franchisor must actually

terminate a franchise or notify the franchisee of its

intent to terminate the franchise before a franchisee

has a cognizable claim for wrengful termination.

Read together, the provisions defining termination,

identifying the permissible grounds for termination,

and establishing the notification requirements that

must attend termination provide no support for the

court of appeals’ recognition of a cause of action for

alleged material breaches of the franchise that fall

short of termination.

The court of appeals justified its departure

from the text of the Act on the ground that requiring

termination of the franchise would frustrate the

“congressional plan” to protect franchisees’

investment in their businesses. Pet. App. 18a. Aside

from the fact that the text of the statute must

control, the court’s rationale ignores the remedial

scheme Congress established, under which a

franchisee threatened with actual termination may

obtain a_- preliminary injunction compelling

continuation of the franchise while a court examines

the grounds on which the franchisor intends to effect

termination. Moreover, state law causes of action

remain available (as they were here) to remedy

alleged breaches of contract that do not involve

actual termination of the franchise. By allowing

franchisees to sue for breach of contract under the

I‘MPA, the court of appeals has broadened the scope

of the federal regime well beyond what Congress

intended.

REASONS FOR GRANTING THE PETITION

I. Review Is Warranted To Restore The

Uniformity Congress Sought To Establish

By Enacting The PMPA.

Congress enacted the PMPA to establish a

uniform, federal standard to govern the termination

and non-renewal of petroleum franchise

relationships. A uniform approach is crucial to the

effective operation of the national market for motor

fuel distribution. As we explain below, a conflict

among the federal courts of appeals on the scope of

the PMPA’s cause of action for wrongful termination

has frustrated Congress’s intent to establish

uniformity. In addition, the court of appeals’

decision stands as an obstacle to achieving

uniformity because under the approach it adopted,

the determination whether a_ constructive

termination under the PMPA has occurred hinges

on the application of state law.

- 10-

A. A Uniform Interpretation Of The

PMPA Is Of Critical Importance To

Franchisors.

In enacting the PMPA, Congress stressed the

importance of establishing a “single, uniform set of

rules” governing the termination and non-renewal of

petroleum franchise relationships, which “permeate

a nationwide motor fuel distribution and marketing

network.” S. Rep. No. 731, at 16. To achieve the goal

of uniformity, Congress sought to replace the

“uneven patchwork of rules governing franchise

relationships which differ from state to state” (id. at

19) with a nationwide standard for termination and

non-renewal of franchise relationships. Because

refiners distribute their fuel nationwide, a uniform

regulatory approach permits refiners to operate

under a single set of rules, which promotes certainty

and efficiency in their franchise relationships. The

costs of dealing with unpredictable market

conditions are compounded when the legal regime

governing the termination and non-renewal of

franchise relationships varies from one jurisdiction

to another. The higher costs associated with an

uncertain and non-uniform legal regime harm both

franchisors and franchisees.

B. The Court Of Appeals’ Decision

Deepens A Circuit Conflict That

Prevents The Attainment Of

Uniformity.

Congress’ goal of uniformity is_ being

frustrated by a conflict among the federal courts of

appeals over the scope of the PMPA’s termination

provisions.® In this case, the court of appeals held

that respondents had a cause of action under the

PMPA for wrongful termination despite’ the

undisputed facts that respondents continued to

operate their franchises without interruption and

that petitioners neither terminated respondents’

franchises nor notified respondents of an intent to

terminate their franchises. Pet. App. 15a-2la.

Instead, respondents claimed that petitioners

breached oral promises to retain a rent subsidy

program, a breach that amounted to a “constructive”

termination because of the “financial hardship” it

allegedly caused them. Id. at 21a.

Without attempting to ground the concept of

constructive termination in the text of the Act, the

court held that “the breach of the statutory element

of the franchise’—be it the contract to use the

refiners trademark, the contract for the supply of

motor fuel, or the lease of the premises—‘“does not

have to be a total breach.” Jd. Rather, the court

concluded that the breach need only constitute “a

5 As petitioners note (Pet. 29), the federal circuits have also

issued conflicting decisions pertaining to the scope of the

PMPA’s non-renewal provisions, further undermining the

congressional goal of uniformity

_42-

material change that... effectively ended the lease,

even though the plaintiffs continued to operate the

business.” Jd. The court acknowledged that the

doctrine -of constructive termination typically

requires “an actual severance of the relationship” (rd.

at 18a), but reasoned that “requir[ing] an actual

abandonment of years of work and investment before

we recognize a right of action under the PMPA would

be unreasonable.” Jd.

In holding that the PMPA provides a cause of

action not only for actual termination of the

franchise but also for material changes to one of the

three agreements that comprise the franchise, the

First Circuit relied on the Fourth Circuit's decision

in Barnes v. Gulf Oil Corp., 795 F.2d 358 (4th Cir.

1986). Pet. App. 16a-17a. In Barnes, the Fourth

Circuit held that a franchisee that continued to

operate its franchise but whose fuel costs increased

when the franchisor assigned the franchise to a third

party stated a claim for constructive termination

under the Act. 795 F.2d at 362-363. The Fourth

Circuit too failed to ground its holding in the text of

the statute, relying instead on “Congress’s

purpose[]. .. to protect franchisees from overbearing,

burdensome conduct by the franchisor during the

term of the franchise.” Jd. at 362.

The Sixth Circuit rejected Barnes in Clark v.

BP Oil Co., 137 F.3d 386 (6th Cir. 1998). Observing

that “[t]he PMPA does not exist to redress every

breach of an agreement between a gasoline station

franchisee and franchisor,” 1d. at 391, the court held

that a franchisee who continued to operate his

franchise but who was charged more for fuel after

the franchisor assigned the franchise to a third party

» 28.

failed to state a claim for termination under the Act,

id. at 391-392. The court explained that “even if

[the franchisee] can establish a breach of the price

term fof the franchise], it does not trigger the

protections of the PMPA since he still retains use of

BP’s trademark, use of the Emerald-Mart premises,

and continues to receive BP-branded motor fucl.” Jd.

at 392.

The Ninth Circuit, lke the Sixth Circuit,

rejected a franchisee’s claim for constructive

termination based on an assignment that resulted in

a higher charge for motor fuel in Portland 76

Auto/Truck Plaza, Inc. v. Union Oil Co. of

California, 153 F.3d 938 (9th Cir. 1998). The Ninth

Circuit “assume[d] for purposes of discussion, but

d{id] not decide, that constructive termination may

give rise to a claim under the Act.” Jd. at 948. The

court then held that “[flor the assignment to have

amounted to a constructive termination, it would

have had to force [the franchisee] out of its business.”

Id.6

6 The Fifth Circuit “has not recognized a cause of action for

‘constructive termination.” April Mktg. & Distrib. Corp., Inc. v.

Diamond Shamrock Ref. and Mktg. Co., 103 F.3d 28, 29 (5th

Cir. 1997) (concluding that, to the extent a constructive

termination claim is cognizable under the PMPA, the franchisee

must establish a “breach [of] the franchise”). In McGinnis v.

Star Enterprise, 8 F.3d 20, 1993 WI. 455587, at *4 (5th Cir.

1993) (unpublished opinion), the Fifth Circuit stated that “!t}he

plain meaning of the [(PMPA] does not provide for ‘constructive

termination.” In Abrams Shell v. Shell Oil Co., 343 F.3d 482

(Sth Cir. 2003), the Fifth Circuit characterized the McGinnis

statement as “dicta, and thus persuasive rather than binding”

id. at 487, and, as in April Marketing, did not need to decide

whether to recognize a constructive termination claim hecause

(continued...)

Thus, under the current state of the law,

respondents have a viable claim for constructive

termination under the PMPA in the First and Fourth

Circuits, but not in the Sixth or Ninth Circuits.

Further review is warranted to resoive the circuit

conflict because it demies franchisors and franchisees

the uniform standards for termination and non-

renewal that Congress sought to establish by

enacting the PMPA.

C. The Court Of Appeals’ Decision

Stands As An Impediment To

Uniformity Because Under Its

Approach The Viability Of A Cause

Of Action Under The PMPA For

Constructive Termination Depends

On State Law.

The court of appeals’ decision undermines the

establishment of a uniform federal standard for the

termination of petroleum franchises. Under the

court's approach, the determination whether a

franchisee was constructively terminated within the

meaning of the PMPA turns on the application of

state law. This case is illustrative.

The basis for respondents’ constructive

termination claim is that petitioners breached an

alleged oral promise to maintain a rent subsidy,

notwithstanding a clause in the lease agreement

providing that the lease constituted the entire

contract and that any amendments to it must be in

a —

the franchisees failed to allege a breach of “the three core

components’ of the franchise, id. at 488.

writing. Applying Massachusetts law, the district

court permitted the jury “to consider what the

parties said and did concerning the lease” including

“actions prior to or contemporaneous with the

execution of the written lease.” Pet. App. 14a.

Because Massachusetts reserves the determination

of integration for the trial court as a question of fact,

the court of appeals affirmed the district court's

“conclu[sion] that the lease was not an integrated

agreement” under Massachusetts law. Jd. Thus,

because Massachusetts law (as applied by the federal

courts) permitted consideration of petitioners’ alleged

oral promises in the face of the integration clause,

respondents could’ establish that petitioners

committed a material breach of the franchise terms

that amounted to a constructive termination under

the PMPA. See 15 U.S.C. § 2805(c) (“[T]he

franchisee shall have the burden of proving the

termination of the franchisef.}’).

Under the laws of some other states, by

contrast, the integration clause in the lease would

have been dispositive. Indeed, courts in Ohio and

Florida, construing contract language identical to

that at issue here, have read the integration clause

as foreclosing evidence of alleged oral promises that

the rent subsidy would be permanent. See Casserlie

v. Shell Oil Co., 2007 WL 1559510, at *7-8 (Ohio Ct.

App. May 31, 2007), appeal accepted for review, No.

2007-1408, 876 N.E.2d 968 (Ohio Nov. 21, 2007);

Hazara Enterprises, Inc. v. Motiva Enterprises, LLC,

126 F. Supp. 2d 1365, 1373-1374 (S.D. Fla. 2000).

Other jurisdictions similarly give dispositive effect to

a clear integration clause. See, e.g., Tangren Family

Trust v. Tangren, 182 P.3d 326, 331 (Utah 2008)

» 2.

(“[W]e will not allow extrinsic evidence of a separate

agreement to be considered on the question of

integration in the face of a clear integration clause.”):

Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d.

882, 885 (Ill. 1999) (““[WJhere parties formally include

an integration clause in their contract, they are

explicitly manifesting their intention to protect

themselves against misinterpretations which might

arise from extrinsic evidence.”). In states applying

such a rule, respondents could not have alleged

constructive termination under the PMPA based on

petitioners’ breach of alleged oral promises made

before or contemporaneous with the execution of the

written lease.

By recognizing a cause of action under the

PMPA for constructive termination, the court of

appeals has allowed state law to determine whether

the franchisor has effected a termination under the

PMPA. Given Congress’ objective to replace the

“uneven patchwork of [state] rules” with a “single,

uniform set of rules” governing termination of

petroleum franchises, S. Rep. No. 731, at 19, that

-result could not possibly be what Congress intended.

II. Review Is Warranted Because The PMPA

Does Not Create A Cause Of Action For

Constructive Termination.

The PMPA does not provide a cause of action

for constructive termination. In recognizing a cause

of action under the PMPA for material changes to

the franchise that are harmful to the franchisee, the

court of appeals departed from the text of the Act,

which creates a cause of action for wrongful

termination only in cases where the franchisor has

actually terminated the franchisee or notified the

franchisee of its intent to do so.

To begin with, the PMPA defines the term

“termination” to include “cancellation.” 15 U.S.C.

§ 2801(17). If Congress had intended the term to

cover a much broader range of conduct that is not

commonly understood as termination, such as

material changes to the franchise terms, it is fair to

assume Congress would have said so. Moreover, the

provisions governing the grounds for termination

and the notification requirements confirm that the

PMPA provides a remedy only for actual termination

of the franchise.

The PMPA enumerates several grounds on

which a franchisor may lawfully terminate the

franchise. See 15 U.S.C. § 2802(b)(2)(A) (franchisor

may terminate franchise if franchisee fails to comply

with a reasonable and materially significant

franchise term); id. § 2802(b)(2)(B) (franchisor may

terminate franchise if franchisee does not “exert good

faith efforts to carry out the provisions of the

franchise”); td. § 2802(b)(2)(C) (franchisor may

terminate franchise based on occurrence of an event

relevant to the franchise relationship and which

renders termination reasonable, provided the event

occurred while the franchise was still in effect); id.

§ 2802(b)(2)(D) (franchisor may terminate franchise

based on written agreement between the franchisor

and franchisee to terminate the franchise); id.

§ 2802(b)(2)(E) (franchisor may terminate franchise

based on good-faith determination in the normal

course of business to withdraw from the marketing of

motor fuel through retail outlets in the relevant

geographic market). These provisions contemplate

an actual termination of the franchise relationship

and provide justifications for it.

The PMPA also contains a highly structured

notice procedure that presupposes that termination

under the Act means actual termination of the

franchise, not merely a material change in terms

that imposes financial hardship on the franchisee.

The PMPA generally requires the franchisor to

provide written notice of its intent to terminate the

franchise at least “90 days prior to the date on which

such termination or nonrenewal takes effect.” 15

U.S.C. § 2804(a)(2). If a franchisor actually

terminates the franchise without providing the

requisite notice, the franchisee may sue under the

PMPA for a violation of Section 2802. See id.

§ 2805(a); id. § 2802(b)(1)(A). Under the court of

appeals rule that a claim for constructive

termination hes where a breach of a franchise term

is serious enough to “effectively end[] the lease, even

though the plaintiffs continued to operate the

business” (Pet. App. 18a), the notice requirement

becomes unworkable, because the franchisor will not

necessarily know whether or when a change in the

franchise terms will “effectively [but not actually]

end[] the lease.” Jd. The notice provisions thus

operate together with the provisions setting out the

legitimate grounds for termination to regulate the

actual termination of a franchise, not mere changes

to the franchise that have an adverse effect on the

franchisee.

The PMPA provides a cause of action against

franchisors that “fail[}) to comply with the

- 19.

requirements of section 2802.” 15 U.S.C. § 2805(a).7

As discussed above, Section 2802 is concerned

exclusively with a decision by a franchisor to sever

its relationship with the franchisee either through

actual termination or non-renewal of the franchise

relationship. Because Section 2805(a) cross-

references Section 2802 to define the cause of action,

the scope of the remedy in Section 2805(a) for

termination or non-renewal is necessarily limited to

the scope of the requirements set out in Section 2802.

The cause of action that Section 2805(a) creates for

failure to comply with the termination provisions

thus extends only to the actual termination of a

franchise that the franchisee contends was not

justified by the grounds enumerated in Section 2802.

It does not encompass the claim here that petitioners

breached the rent term of the lease. See Abrams

Shell v. Shell Oil Co., 216 F. Supp. 2d 634, 639 (S.D.

Tex. 2002) (rejecting constructive termination theory

under the PMPA “because it conflicts with the

PMPA’s remedial scheme”), aff'd, 343 F.3d 482 (5th

Cir. 2003); cf. Dersch Energies, Inc. v. Shell Oil Co.

314 F.3d 846, 860 (7th Cir. 2002) (“Because [the

franchisee] does not argue that the defendants’

alleged violation of [the Act] resulted in the

nonrenewal of a lease of retail premises, motor fuel

supply contract, or the contract to use the Shell

trademark in connection with retail sales, it cannot

7 The PMPA also provides a cause of action against a franchisor

that fails to comply with the requirements of Section 2803.

That Section, which provides special rules for “[t]rial and

interim franchises,” 15 U.S.C. § 2803, is not at issue here

. 20 -

demonstrate the nonrenewal of the franchise

relationship within the meaning of the PMPA.”).

The court of appeals justified its atextual

reading of the statute on the ground that “[t}he

congressional plan would be frustrated by requiring

a franchisee to go out of business before invoking the

protections of the PMPA,” Pet. App. 18a (internal

quotation marks omitted). See also Petition for a

Writ of Certiorari, Mac’s Shell Service, Inc., et al. v.

Shell Oil Prods., Inc., et al., No. 08-240, 2008 WL

3919440, at *20 (plaintiffs argue that franchisees

should not be “forced to choose between accepting an

unlawful and coercive contract in order to stay in

business and rejecting it and going out of business in

order to preserve a cause of action”). But the PMPA

includes provisions that protect franchisees from

having to choose between challenging a franchisor’s

policies or continuing the franchise. Those

provisions impose notice requirements on franchisors

who intend to terminate the franchise, 15 U.S.C.

§ 2804, and permit franchisees to file suit and obtain

a preliminary injunction compelling “continuation or

renewal of the franchise relationship” while the

merits of the franchisee’s challenge are being

litigated. 15 U.S.C. § 2805(b). Congress even

relaxed the traditional equitable standards,

requiring the granting of a preliminary injunction on

a franchisee’s showing merely that “there exist

sufficiently serious questions going to the merits to

make such questions a fair ground for litigation” and

that the balance of hardships tips in its favor. Id.

§ 2805(b)(2).

As the Seventh Circuit has explained, the

PMPA’'s notice requirements, together with the

“lenient standard” for injunctive relief, “protect{}

franchisees not only from’ arbitrary = and

discriminatory termination or nonrenewal, but also

from the harmful effects of threatened termination or

nonrenewal.” Dersch, 314 F.3d at 863. That is so

because under the Act, “a district court is required to

issue an injunction to protect the franchisee’s

economic interests during the pendency of the case”

if the franchisee meets the Act’s “lenient standard.”

Id. at 865.

The remedial scheme Congress established

thus provides a means for franchisees to protect their

franchises while challenging a planned termination

or non-renewal without “creat[ing] a federal common

law for governing petroleum franchise agreements.’

Dersch, 314 F.3d at 861-862. Moreover, state law

causes of action remain available to _ protect

franchisees that allege that the franchisor committed

a breach of contract that does not amount to an

actual termination of the franchise. Indeed, in this

very case, respondents brought state law causes of

action that were duplicative of their PMPA claims.

See Pet. App. 37a (Judgment {4 2(v)) (“Because

plaintiffs claims under Count II ,Violation of the

PMPA based on Constructive Termination of the

franchise relationship) and under Count V (Breach of

the Lease) sought the same damages for loss of the

STIP subsidy and lost business value and the jury

awarded the same damages, plaintiff is entitled to

recover as to those two awards only once.”); td. at

39a; 40a; 42a; 44a; 46a; 48a; 50a; 52a. The text of

the PMPA provides no support for the court of

appea!s’ recognition of a cause of action for alleged

material breaches of the franchise that do not result

29.

in termination, a holding that federalizes ordinary

breach of contract claims that are the traditional

province of state law.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,