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

Nos. 08-240 and 08-372 [OFFICE OF THE CLERK

Jn the Supreme Court of the Anited States

MAC’S SHELL SERVICE, INC., ET AL., PETITIONERS

Vv.

SHELL OIL PRODUCTS COMPANY LLC, ET AL.

SHELL OIL PRODUCTS COMPANY LLC, ETAL..,

PETITIONERS

vz.

MAC’S SHELL SERVICE, INC., ET AL.

ON WRITS OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS IN NO. 08-372

AND RESPONDENTS IN NO. 08-240

ELENA KAGAN

Solicitor General

Counsel of Record

CHRISTINE A. VARNEY

Assistant Attorney General

MALCOLM L. STEWART

Deputy Solicitor General

PHILIP J. WEISER

Deputy Assistant Attorney

General

David A. O'NEIL

Assistant to the Solicitor

General

CATHERINE G. O’SULLIVAN

NICKOLAIG. LEVIN

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTIONS PRESENTED

The Petroleum Marketing Practices Act (PMPA or

Act), 15 U.S.C. 2801 et seq., limits the circumstances in

which petroleum refiners or distributors may “termi-

nate” a franchise or “fail to renew” a franchise relation-

ship involving the sale or supply of motor fuel.

In No. 08-372, Shell Oil Products Co. LLC v. Mac’s

Shell Service, Inc., the question presented is whether a

franchisee may recover for “constructive termination”

under the PMPA when it continues to operate the fran-

chise by purchasing the same fuel, reselling it under the

franchisor’s trademark, and occupying the leased mar-

keting premises.

In No. 08-240, Mac’s Shell Service, Inc. v. Shell Oil

Products Co. LLC, the question presented is whether a

franchisee who signs a renewal agreement “under pro-

test” and operates under the terms of the agreement

may maintain a claim for “constructive nonrenewal” un-

der the Act.

(1)

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TABLE OF CONTENTS

Page

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I. A franchisee may not recover for “constructive”

termination if it continues to sell the same fuel, use the

same trademark, and occupy the same premises ...... 10

A. The prohibition imposed by 15 U.S.C. 2802(a)(1)

is limited by its terms to franchisor conduct that

terminates the franchise .................20e005- 10

B. Extending the statutory prohibition to conduct

that does not terminate the franchise is inconsis-

tent with the history, structure, and purposes of

ris atarts a e e 5 os 12

C. The court of appeals’ decision is inconsistent with

the doctrine of “constructive termination” in

SE oun ayes eu ade veheue eNeaw an os 18

D. Because the conduct at issue here did not end the

franchises, the dealers could not recover under

Pins crus cheese ve Sake Cae RAR RE Ree Genes os 21

11. The court of appeals correctly held that a franchisee

may not recover for “constructive” nonrenewal under

the PMPA if it signs and operates under a renewed

weed ot hh0 0s 6e ee ewsbed sav den pec 22

Ps cided eid ach ceua ee ta eek V Ve Kae nae 29

TABLE OF AUTHORITIES

Cases:

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

i a eas 23

Adams v. Greenwood, 10 F.3d 568 (8th Cir. 1993) ...... 23

(III)

IV

Cases—Continued: Page

American Bus. Interiors, Inc. v. Haworth, Inc.,

708 F 20 aS6 (Gth Cir. 1086) ... cc cccccscccccccens 20

American Cas. Co. v. Baker, 22 F.3d 880 (9th Cir.

Du cieh KOdbdUORd Ab heS whe RUSS RAONS-b be 00 23

American Cas. Co. v. Continisio, 17 F.3d 62 (3d Cir.

CR a Pr re ar ee 23

American Motors Sales Corp. v. Semke, 384 F.2d 192

i cis dd ean hk awdet an dn on 600440 eee 19

Atlantic Richfield Co. v. USA Petroleum Co.,

ERE 27

Bean v. Wisconsin Bell, Inc., 366 F.3d 451 (7th Cir.

a I a ey ere ee ee 18

Brendle’s Stores Inc. v. OTR, 978 F.2d 150 (4th Cir.

DT (tee ke Gea vad che bu che ae eeeent eebncens 18

Burlington N. & Santa Fe Ry. v. United States,

NE 14

City of Riverside v. Rivera, 477 U.S. 561 (1986) ....... 28

Coast to Coast Stores (Cent. Org.), Inc. v. Gruschus,

Se GU EEE ov ve dsceevcceccnccnscces 20

Connecticut Nat'l Bank v. Germain, 503 U.S. 249

alee eet en teieawer cay ee we gee a Mediow ene 6:4 12

Dersch Energies, Inc. v. Shell Ou Co., 314 F.3d 846

ee eee teed wenbW ued 11, 14, 16, 23, 27

Esso Standard Oil Co. v. Departmeiui of Consumer

Affairs, 793 F.2d 431 (1st Cir. 1986) ................ 14

Imperial Motors, Inc. v. Chrysler Corp.,

559 F. Supp. 1312 (D. Mass. 1983) ................. 19

Kerr v. Quinn, 692 F.2d 875 (2d Cir. 1982) ............ 28

Lippo v. Mobil Oil Corp., 776 F.2d 706 (7th Cir.

ery rer ee | ere ne ree eee 16

Cases—Continued: Page

Mobil Oil Corp. v. Virginia Gasoline Marketers &

Automotive Repair Ass'n, 34 F.3d 220 (4th Cir.

1994), cert. denied, 513 U.S. 1148 (1995) ............ 17

Pennsylvania State Police v. Suders, 542 U.S. 129

ee re er he et IS 18, 20

Petereit v. S.B. Thomas, Inc., 63 F.3d 1169 (2d Cir.

1995), cert. denied, 517 U.S. 1119 (1996) ............ 20

Remus v. Amoco Oil Co., 794 F.2d 1238 (7th Cir.),

cert. dismissed, 479 U.S. 925 (1986) ................ 20

Veracka v. Shell Oil Co., 655 F.2d 445 (1st Cir. 1981) ... 14

Statutes:

Automobile Dealers Day in Court Act,

Per err ee 19

FES SEE 6s 'v-c0ceecnsausneennnebeueeeee 19

Civil Rights Act of 1964, Tit. VII,

Pe ee errr nt 18

Petroleum Marketing Practices Act,

ep PTT err er i

ie Sm | rrr 2

te rr ret 2,11

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ee Pee ee 2,22

og te reer 2,11

A ee ere rr arr 2,24

Bp SPs SED sn ad ok cane eelecen eee passim

ee 4, 22, 28

BO UA. Be 0 966k 0 0d enna nde 24

15 U.S.C. 2B02(DMSMANMI) 2.0... eee ce eee ees 25, 26

VI

Statutes—Continued: Page

re 26

ES OR 2, 24

ee Ss ca ss Uk wns dds en ceses eens 2

ee ae cia wdeeeaees eeu 25

re ce ee 25

RE a ee 2, 24

asc vod usev cs vebesecesese 2,27

ET 2, 25

oo ce cent owceccceses 3, 16, 26

ES 16

ES 2

ce cekcnekee 9, 28

ee nc. soca eben eae beceseeens 2

ee. eeeeeneesaes 3, 15

Miscellaneous:

123 Cong. Ree. (1977):

ee gcc eek ahbeccesecucseces 16, 25

EEE 13, 16

eeu wee ensecie es 13

I MOI ce ccc cc csccccess 17

I cece cc bencccccecces ]

TD on ns acs sesceccccccsesces ]

2 W. Michael Garner, Franchise and Distribution

er 27

H.R. Rep. No. 737, 103d Cong., 2d Sess. (1994) ........ 15

S. Rep. No. 731, 95th Cong, 2d Sess.

AE A rae 13, 14, 15, 17, 24, 27

VII

Miscellaneous—Continued: Page

The Compact Oxford English Dictionary (2d ed.

SE doseisuewtwanereaeknteneads geeleaecessnss

The Random House Dictionary of the English

IED 6.0 606.0066 04550002506 60K666006065

Jn the Supreme Court of the Anited States

No. 08-240

MAC’S SHELL SERVICE, INC., ET AL., PETITIONERS

v.

SHELL OIL PRODUCTS COMPANY LLC, ET AL.

No. 08-372

SHELL OIL PRODUCTS COMPANY LLC, ET AL..,

PETITIONERS

Vv.

MAC’S SHELL SERVICE, INC., ET AL.

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS IN NO. 08-372

AND RESPONDENTS IN NO. 08-240

INTEREST OF THE UNITED STATES

The questions presented in these cases concern the

scope of the restrictions on termination and nonrenewal in

the Petroleum Marketing Practices Act (PMPA or the Act),

15 U.S.C. 2801 et seg. The Department of Energy is re-

sponsible for summarizing the relevant provisions of the

PMPA in the Federal Register. See 43 Fed. Reg. 38,743

(1978); 61 Fed. Reg. 32,786 (1996). Because the scope of the

Act may affect competition in petroleum marketing, this

case is of concern to the Antitrust Division of the United

States Department of Justice. At the Court’s invitation, the

United States filed a brief as amicus curiae at the petition

stage of these cases.

(1)

2

STATEMENT

1. The Petroleum Marketing Practices Act (PMPA or

the Act), 15 U.S.C. 2801 et seq., prohibits petroleum refin-

ers and distributors from “terminat[ing]” any franchise

involving the sale or supply of motor fuel “prior to the con-

clusion of the term, or [its] expiration,” or from “failfing] to

renew any franchise relationship,” except for enumerated

reasons and after written notice. 15 U.S.C. 2801(1)(A),

2802, 2804.' The Act defines the term “franchise” to include

any contract allowing a retailer or distributor to use the

franchisor’s trademark, to purchase motor fuel for resale,

or to occupy leased marketing premises. 15 U.S.C.

2801(1)(B). These three types of agreements are commonly

described as the “statutory elements of the franchise.” Pet.

App. 3n.12 The term “franchise relationship” is defined as

the parties’ “respective motor fuel marketing or distribu-

tion obligations and responsibilities” in connection with the

franchise. 15 U.S.C. 2801(2). “‘{T]Jermination’ includes can-

cellation,” and “fail to renew” means “a failure to reinstate,

continue, or extend the franchise relationship.” 15 U.S.C.

2801(14) and (17).

If a franchisor violates specified provisions of the

PMPA, its franchisee may bring suit in federal district

court. 15 U.S.C. 2805. The Act provides for a wide range

of remedies, including compensatory damages, reasonable

attorneys’ fees and expert costs, punitive damages, and

“such equitable relief” as the court deems necessary to ad-

dress the statutory violation. 15 U.S.C. 2805(a), (b)(1), (d)

and (e). The Act also requires district courts to grant pre-

liminary injunctive relief preserving the status quo if the

franchisee shows that the franchisor has terminated the

' Special rules apply to trial and interim franchises. 15 U.S.C. 2803.

* Unless otherwise noted, all references to “Pet.” and “Pet. App.” are

to the petition and appendix in No. 08 240.

3

franchise or failed to renew the franchise relationship, that

“there exist sufficiently serious questions going to the mer-

its to make such questions a fair ground for litigation,” and

that the balance of equities favors such relief. 15 U.S.C.

2805(b)(2). The PMPA preempts state law governing ter-

mination and nonrenewal to the extent such law is inconsis-

tent with the Act. 15 U.S.C. 2806(a)(1).

2. Between 1982 and 1998, Shell Oil Products Co. LLC

(Shell) offered its franchisees a rent subsidy called the

Variable Rent Program (VRP). Pet. App. 3. That subsidy

reduced the monthly rent by a set amou:it for every gallon

of gasoline the franchisee sold above a specified threshold.

Ibid. Shell renewed the subsidy in annual notices to fran-

chisees. /bid. Although the notices “explicitly provided for

cancellation with thirty days’ notice,” various oral represen-

tations suggested that “the [subsidy or something like it

would always exist.” /d. at 3-4.

In 1998, Shell and Texaco created a joint venture, Mo-

tiva Enterprises LLC (Motiva), to conduct their domestic

gasoline marketing operations. Pet. App. 3. Shell assigned

its rights and duties under the relevant franchise contracts

to Motiva, which initially replaced the VRP with a different

rent subsidy. /bid. On January 1, 2000, however, Motiva

ended that replacement subsidy, causing the Shell stations

to pay more rent. Jd. at 4.* Motiva did not include the sub-

sidy in the new leases it offered Shell franchisees when

their franchise agreements expired. /bid.*

* The amount of the rent increase following the elimination of the

subsidy varied by dealer. Compare, e.g., J.A. 339 (annual rent for Mac’s

Shell Southbridge station increased from $61,784 to $64,893), with J.A.

336 (annual rent for Karol’s station increased from $59,447 to $99,120).

* In addition to eliminating the subsidy, the new Motiva leases

changed the way in which rent was computed (using an asset-based

methodology similar to the one that Texaco had used before the cre-

ation of Motiva). J.A. 218, 236-238. For some stations, annual rent was

A

3. On July 27, 2001, 63 Shell dealers filed suit in federal

district court, asserting state and federal claims. The deal-

ers principally alleged that their property leases had incor-

porated the rent subsidy and that the elimination of the

subsidy breached those leases. Pet. App. 5-6. In addition

to alleging violations of their state-law contract rights, the

dealers asserted that Shell’s and Motiva’s conduct had vio-

lated two provisions of the PMPA. First, the dealers al-

leged that Shell had “constructive[ly] terminat[ed]” their

franchises, in violation of 15 U.S.C. 2802(a)(1), by assigning

the contracts to Motiva and eliminating the rent subsidy.

Pet. App. 6. Second, the dealers claimed that Motiva’s offer

of new contracts without the rent subsidy amounted to a

“constructive nonrenewal” of their franchise relationships,

in violation of 15 U.S.C. 2802(a)(2). Pet. App. 6, 27. The

dealers contended that a constructive nonrenewal had oc-

curred even though they had in fact signed renewal agree-

ments, because they had done so “under protest.” /d. at 27.

On July 30, 2003, the dealers moved for a preliminary

injunction under the PMPA. The district court denied the

motion, explaining that because the dealers had “waited

years before seeking preliminary injunctive relief,” the

court was unable to “turn the clock back” and “preserve the

status quo.” Pet. App. 49-450 (citation omitted).

After a 15-day trial involving eight dealers selected by

the court, the jury found against Shell and Motiva on all

claims and awarded the dealers $3.3 million, including $1.3

million on the constructive termination claim and $1.2 mil-

lion on the constructive nonrenewal claim. J.A. 376-386.

less under the new Motiva leases than under the preexisting leases af-

ter elimination of the subsidy. See, ¢.g., J.A. 316-318, 339 (Mae’s Shell

Southbridge signed a new Motiva lease in October 2001; its annual rent

decreased to $56,600 in 2002); J.-A. 414-315, 336 (Karol signed a new

Motiva lease in December 2000; her station's annual rent decreased to

$66,371 in 2001).

5

Both before and after the verdict, the defendants moved for

judgment as a matter of law on the dealers’ constructive

termination and constructive nonrenewal claims, noting

that seven of the eight dealers had signed and operated

under renewal agreements and that four of the eight deal-

ers were still operating their stations at the time of trial.

J.A. 212-213, 391-396. ‘ihe district court denied the mo-

tions, 08-372 Pet. App. 34a-54a, 58a-59a, and the defendants

appealed, Pet. App. 2.

4. The court of appeals affirmed in part and reversed

in part. Pet. App. 1-41. On the PMPA claims, the court af-

firmed the judgment on the constructive termination claim

but reversed the judgment on the constructive nonrenewal

claim. /d. at 20-32.

a. In sustaining the jury verdict on the constructive

termination claim, the court of appeals explained that a

franchisee may establish a violation of Section 2802(a)(1) by

showing that, as a result of assigning the franchise, “the

franchisor breached one of the three statutory components

of the franchise agreement (the contract to use the refiner’s

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

lease of the premises).” Pet. App. 20-21 (citation omitted).

The court concluded that the dealers had made that show-

ing because they had “prove|d] to the jury’s satisfaction”

that, by eliminating the rent subsidy, “Motiva breached the

lease component of the franchise agreements.” /d. at 21.

The court of appeals rejected the defendants’ argument

that, to constitute a constructive termination under the

PMPA, any “breach must amount to a total deprivation of

one of the three elements of the franchise.” Pet. App. 22;

see id. at 24. The court held that the “appropriate thresh-

old” for a constructive termination claim was reflected in the

jury instructions given in this case, which stated that the

breach must constitute “such a materia! change that it effec-

tively ended the lease, even though the plaintiffs continued

6

to operate the business.” /d. at 23. The court acknowledged

that the doctrines of constructive discharge in employment

law and constructive eviction in landlord-tenant law “require

an actual severance of the relationship: [t]he employee must

leave the workplace; the tenant must move out.” /d. at 22-

23. The court concluded, however, that such a rule should

not apply under the PMPA because “sunk costs, optimism,

and the habit of years might lead franchisees to try to make

the new arrangements work, even when the terms have

changed so materially as to make success impossible,” and

the “congressional plan would be frustrated by requiring a

franchisee to go out of business before invoking the

protections of the PMPA.” /d. at 23 (citation omitted).

b. The court of appeals reversed the judgment of liabil-

ity on the constructive nonrenewal claim, concluding that

the PMPA does not encompass such a claim “where the

franchisee has signed and operates under the renewal

agreement complained of.” Pet. App. 27-32. Citing the

structure of the PMPA, which requires notice of nonrenewal

and permits the franchisee to seek preliminary injunctive

relief under a relaxed standard, the court explained that

“Congress intended to limit the reach of the PMPA to cases

where either a notice is given or an actual nonrenewal has

taken place.” /d. at 28. The court therefore concluded that

the Act “requires that franchisees faced with objectionable

contract terms refrain from ratifying those terms by execut-

ing the contracts (even ‘under protest’).” /d. at 30.

Because in this case “the Dealers signed the new agree-

ments ‘under protest’ and continued in operation under the

new agreements,” Pet. App. 30, the court of appeals held

that they could not claim constructive nonrenewal. Were

the rule otherwise, the court explained, a “franchisee [could |

sign the contract and simultaneously challenge it,” giving

the franchisee the benefit of the contract with nothing to

lose “{i]f its claims were rejected by the courts.” /btd. In

7

the court’s view, that result would violate “the balance Con-

gress has struck” in the PMPA. /d. at 30-31.

SUMMARY OF ARGUMENT

I. The court of appeals erred in upholding the jury ver-

dict in the dealers’ favor on their “constructive termination”

claim.

A. Under any usual understanding of the PMPA’s lan-

guage, a franchisor does not “terminate” a franchise (15

U.S.C. 2802(a)(1)) unless it brings at least one statutory

element of the franchise to an end. A franchisor may termi-

nate the franchise explicitly by formally ending the agree-

ment, or it may do so “constructively” by engaging in con-

duct that effectively forces the franchisee to abandon the

franchise. In either case, however, the franchisor’s conduct

must actually cause the franchise to come to an end. The

text of the Act leaves no room for the court of appeals’ ex-

pansive conception of “constructive termination,” under

which a franchise is “treated” as “terminated” even though

the challenged conduct does not prevent the franchisee from

continuing to exercise all three prerogatives the franchise

entails.

Bb. The court of appeals viewed its interpretation as nec-

essary to effectuate the Act’s overarching purposes. Be-

cause the statutory text is unambiguous, that type of analy-

sis was unwarranted. In any event, the purpose, structure,

and history of the PMPA do not support the court of ap-

peals’ holding.

The Act is a compromise measure that reflects a delicate

accommodation of the competing interests of franchisors

and franchisees. Expanding the Act’s coverage to conduct

that does not “terminate” the franchise would upset that

balance. The court of appeals’ concern that a literal reading

would leave franchisees without adequate recourse to chal

lenge unlawful conduct ignores the availability of both pre-

8

liminary injunctive relief under the Act and state-law reme-

dies that Congress deliberately left in place. And the court

of appeals’ indeterminate, internally contradictory, and un-

workable standard, under which a franchise that is ongoing

in each of its basic components nevertheless can be declared

“effectively ended,” runs contrary to Congress’s goal of pro-

viding franchisees with predictable and nationally uniform

results.

C. The court of appeals’ approach is also inconsistent

with the understanding of “constructive termination” that

courts have developed in other contexts. As the court of

appeals recognized, the common-law analogues of that doc-

trine have traditionally “require{d] an actual severance of

the relationship.” Pet. App. 23. Courts have generally ap-

plied the concept of “constructive termination” to encom-

pass conduct that forces an actual end to the relationship,

even though it does not take the form of an express or for-

mal termination. The court of appeals offered no sound ba-

sis for applying a more expansive understanding of that

concept to the PMPA.

D. The dealers failed to establish that their franchises

were “terminated” within the meaning of the Act. All eight

dealers continued to avail themselves of the statutory ele-

ments of the franchises long after the rent subsidy was elim-

inated. That continued operation precluded any reasonable

finding that the withdrawal of the subsidy effectively com-

pelled the dealers to abandon their businesses.

II. The court of appeals correctly held that a franchisee

cannot assert a claim for “nonrenewal” under the Act after

it has signed and operated under a renewal agreement. As

a matter of plain language, there is no “failure to renew”

when the franchisor has in fact continued the franchise rela-

tionship by offering a new agreement that the franchisee

has accepted. The dealers contend that they preserved their

nights under the PMPA by signing the renewed agreements

9

“under protest.” But a dealer who enters into a new fran-

chise agreement despite dissatisfaction with its terms has

nonetheless “renewed” the franchise relationship and there-

fore has no cause of action for “nonrenewal” to preserve.

The structure and purpose of the Act confirm that un-

derstanding of the term “fail to renew.” As part of Con-

gress’s accommodation of the interests of franchisors and

franchisees, the Act permits franchisors to make efficient

marketing and distribution changes at the time of renewal,

while affording franchisees that object to such modified

terms a procedural mechanism to obtain preliminary injunc-

tive relief preserving the status quo while the dispute is in

litigation. That balance would be seriously undermined if

franchisees could sign a renewal agreement “under protest,”

continue operating the franchise under the new terms, and

then later challenge the renewal agreement as a “construc-

tive nonrenewal.”

Contrary to the dealers’ contention, a franchisee pre-

sented with a coercive offer to renew has options beyond

agreeing to the franchisor’s proposed terms or going out of

business. A franchisee in those circumstances may reject

the offer and obtain injunctive relief preventing a threat-

ened nonrenewal from taking effect. There is no merit to

the dealers’ argument that the PMPA’s injunctive remedy is

inadequate because franchisees lack the resources promptly

to seek such relief. The Act allows successful dealers to

recover attorneys’ fees, expert costs, compensatory dam-

ages, and, in some circumstances, punitive damages. 15

U.S.C. 2805(d)(1). Such provisions are normally considered

sufficient to encourage suit.

The evidence at trial showed that seven dealers signed

renewal agreements, and that the eighth sold his franchise

before the existing agreement expired. The dealers there-

fore did not establish that the defendants “failjed| to renew”

their franchise relationships, and the court of appeals cor-

10

rectly granted judgment in the defendants’ favor on the

constructive nonrenewal claims.

ARGUMENT

I. A FRANCHISEE MAY NOT RECOVER FOR “CONSTRUC-

TIVE” TERMINATION IF IT CONTINUES TO SELL THE

SAME FUEL, USE THE SAME TRADEMARK, AND OCCUPY

THE SAME PREMISES

The court of appeals held that “a breach of the franchise

agreement need not result in complete deprivation of a statu-

tory element of the franchise to support a constructive termi-

nation” claim under 15 U.S.C. 2802(a)(1). Pet. App. 24. That

conclusion was incorrect. Under any usual understanding of

the statutory language, a franchisor can be said to “termi-

nate” an existing franchise, “constructively” or otherwise,

only when it forces an end to the franchisee’s purchase of the

franchisor’s fuel, its use of the franchisor’s trademark, or its

occupation of the leased marketing premises. Because the

dealers in this case continued to exercise each of those three

prerogatives long after the defendants withdrew the rent

subsidy, the defendants did not “terminate” the franchises in

violation of the PMPA.

A. The Prohibition Imposed By 15 U.S.C. 2802(a)(1) Is Limited

By Its Terms To Franchisor Conduct That Terminates The

Franchise

The PMPA does not federalize all contract disputes be-

tween petroleum companies and their franchisees or estab-

lish general federal standards of fair dealing in petroleum

marketing. Rather, it addresses only a narrow category of

conduct. /nter alia, the Act provides that, except for speci-

fied reasons, a motor-fuel franchisor may not “terminate any

franchise” before its expiration date. 15 U.S.C. 2802(a)(1).

The Act defines the term “franchise” to encompass “a set of

definite agreements” concerning the lease of the marketing

11

premises, the supply of the franchisor’s motor fuel, and the

use of the franchisor’s trademark. Pet. App. 7-8; 15 U.S.C.

2801(1)(B).

1. The scope of the prohibition on unlawful terminations

is evident from the plain language of the PMPA. “Termi-

nate” is a well-understood term that had the same meaning

when Congress enacted the PMPA in 1978 as it has now:

“bring to an end.” The Random House Dictionary of the

English Language 1465 (1st ed. 1966). Consistent with that

common understanding, Congress provided in the PMPA

that “[t]he term ‘termination’ includes cancellation,” 15

U.S.C. 2801(17), a word that similarly denotes an end or nul-

lification. Thus, a franchisor “terminate[s]” a “franchise”

under the PMPA only by engaging in conduct that brings to

an end at least one of the three statutory components of the

franchise.

A franchisor typically terminates a franchise by explicitly

ending one or more of the franchise elements prior to the

expiration date. Even without such an explicit abrogation,

however, the franchisor could “terminate” the franchise

within the meaning of Section 2:°°’a)(1) by engaging in con-

duct that effectively forces an ena to one of the statutory

elements. Thus, a franchisor could terminate a franchise by

offering the franchisee fuel only on terms so disadvantageous

as to amount to a refusal to supply, or by taking actions that,

as a practical matter, prevent the franchisee from continuing

to occupy the leased premises. In those circumstances, the

“termination” might be termed “constructive,” although the

term “informa!” is more accurate. See Dersch Energies, Inc.

v. Shell Oil Co., 314 F.3d 846, 864 n.17 (7th Cir. 2002) (“In the

context of the PMPA, constructive means ‘not directly ex-

pressed, but inferred,’ 7he Compact Oxford English Dictio-

nary 322 (2d ed. 1989), i.e., an indirect or informal termina-

tion or nonrenewal.”). Under any circumstances, however,

the franchisor’s conduct does not fall within the statutory

12

prohibition unless it has the effect of ending at least one of

the three prerogatives that the franchise entails.

2. The court of appeals adopted an expansive conception

of “constructive termination” that cannot be reconciled with

the plain meaning of the Act. The court of appeals held that

a “constructive termination” occurs when a contractual

breach is so “material” that it should be “treatjed]” as a “ter-

mination of the franchise,” Pet. App. 23, 26, even though

there is neither an “actual abandonment” of the franchise nor

an end of any of its elements, id. at 23. Thus, although the

court purported to apply a standard requiring conduct that

“effectively ended” the franchise, it upheld a verdict in the

dealers’ favor “even though the [dealers] continued to oper-

ate the business[es]” long after the rent subsidy had been

withdrawn. /bid. By holding that the elimination of the rent

subsidy could violate Section 2802(a)(1) even though the deal-

ers continued to occupy the leased premises, use Shell’s

trademark, and purchase Shell gasoline for resale, the court

of appeals effectively expanded the scope of the statutory

prohibition to encompass conduct that is unfavorable to the

franchisee but does not “terminate” the franchise in any

meaningful sense.

B. Extending The Statutory Prohibition To Conduct That Does

Not Terminate The Franchise Is Inconsistent With The His-

tury, Structure, And Purposes Of The PMPA

The court of appeals viewed its interpretation of Section

2802(a)(1) as necessary to further Congress’s goals in enact-

ing the PMPA. Pet. App. 22-24. Even if the court’s under-

standing of Congress’s overall objectives in enacting the stat-

ute were correct, it would provide no sound basis for giving

Section 2802(a)(1) a reading broader than its text will bear.

See, e.g., Connecticut Nat'l Bank v. Germain, 503 U.S. 249,

253-254 (1992). In any event, the court of appeals’ analysis of

Congress’s aims was erroneous. Properly understood, the

13

purpose, history, and structure of the PMPA support the

construction compelled by Section 2802(a)(1)’s text.

1. The court of appeals proceeded on an incomplete un-

derstanding of the PMPA’s purpose and history. In the

court’s view, the Act was intended “to ensure that franchi-

sees benefit from successful investment in their franchises.”

Pet. App. 24. The legislative history makes clear, however,

that the PMPA was a compromise measure designed to

“strike a balance between the at times conflicting interests of

[franchisors and franchisees].” S. Rep. No. 731, 95th Cong.

2d Sess. 15 (1978) (Senate Report); see 123 Cong. Rec. 10,384

(1977) (statement of Rep. Brown) (the Act “represent[s] a

delicate and effective compromise”); zd. at 10,387 (statement

of Rep. Dingell) (“{TJhis bill is in a delicate state of bal-

ance.”). Although Congress sought to redress “the disparity

of bargaining power which exists between the franchisor and

the franchisee,” Senate Report 17, it also “recognize[d] the

importance of providing adequate flexibility so that

franchisors may initiate changes in their marketing activities

to respond to changing market conditions and consumer pref-

erences,” id. at 19.

Section 2802(a)(1) reflects that balance. Congress sought

to provide some protection for franchisees by limiting the

circumstances in which franchisors can use or threaten the

“extreme remedy” of ending the franchise. See Senate Re-

port 18; id. at 15 (“The purpose of [the Act] is the establish-

ment of minimum Federal standards governing the termina-

tion and nonrenewal of franchise relationships for the sale of

motor fuel.”); 7d. at 29 (suggesting that a franchisee could

bring a claim under the PMPA where “the real estate lease

or motor fuel supply agreement” was “terminat{ed]” or the

trademark license was rendered “valueless”). At the same

time, Congress declined “to create a federal common law for

governing petroleum franchise agreements” or “to provide

franchisees with a federal forum” to challenge conduct that,

14

although unfavorable to the franchisee, does not bring the

franchise to an end. Dersch Energies, 314 F.3d at 861-862;

see id. at 856 (“[T]he PMPA strikes a balance between the

rights of franchisors and the rights of franchisees, by afford-

ing franchisees important but limited procedural rights,

while at the same time providing franchisors with significant

latitude to respond to changing market conditions.”); Esso

Standard Oil Co. v. Department of Consumer Affairs, 793

F.2d 431, 435 (1st Cir. 1986) (“Congress did not choose to use

the PMPA to regulate the reasonableness of rents”).°

The court of appeals emphasized the goal of franchisee

protection to the exclusion of the countervailing goal of

franchisor flexibility. As a result, the court stretched the

prohibition on “termination” of franchises beyond the limited

category of conduct, involving an actual end of the franchise,

that Congress intended the Act to address. The decision

below therefore upsets the delicate balance Congress struck.

See Burlington N. & Santa Fe Ry. v. United States, 129 S.

Ct. 1870, 1879 (2009) (“[L}iability may not extend beyond the

limits of the statute itself.”).

2. The court of appeals also misapprehended the reme-

dies available to an aggrieved franchisee under the statutory

scheme. The court concluded that franchisees must be per-

* The dealers cite a portion of then-Judge Breyer’s decision in Ver-

acka v. Shell Oul Co., 655 F.2d 445, 448 (1st Cir. 1981), stating that

“(t]he legislative history of the [PMPA] shows thatit[ ] * * * [sought]

to prevent coercive or unfair franchisor practices.” Pet. 11. But the

legislative history the court cited in Verucka for that point, see Senate

Report 17, 18, discussed Congress's efforts to limit “unfair terminations

|and| nonrenewals.” Nothing in that history reasonably suggests that

Congress sought to prohibit other sorts of “unfair franchisor practices”

or to treat those practices as terminations and nonrenewals, contrary

to the most natural reading of the statute. In Veracka itself, the

franchisor expressly indicated that it was not renewing the franchise,

so these questions did not arise. See 655 F.2d at 447.

15

mitted to assert “constructive termination” even when the

challenged conduct does not force an actual end to the fran-

chise because “the congressional plan would be frustrated by

requiring a franchisee to go out of business before invoking

the protections of the PMPA.” Pet. App. 23 (internal quota-

tion marks and citation omitted). But that analysis ignores

the existence of state-law remedies. The PMPA preempts

any inconsistent state or local “law or regulation” govern-

ing the “termination” of a petroleum marketing franchise or

the “nonrenewal” of a franchise relationship. 15 U.S.C.

2806(a)(1). Outside of those specific areas, however, Con-

gress neither provided a federal remedy for breaches of fran-

chise agreements nor limited States’ authority to do so. See

H.R. Rep. No. 737, 108d Cong., 2d Sess. 2-3 (1994) (“PMPA

preemption does not extend to state regulation of underlying

contract provisions.”); Senate Report 42 (“State laws dealing

with [other] aspects of the relationship are not preempted.”).

Thus, although Congress limited Section 2802(a)(1) of the

PMPA to conduct that “terminate[s]” an existing franchise,

state-law mechanisms remain available for breaches of con-

tract that have less extreme consequences. The dealers’ con-

tinued operations under the three essential elements of the

franchise did not (as the jury’s verdict on their state-law

claims makes clear) prevent them from obtaining meaningful

redress for the contract breaches that were found to have

occurred. That continuing relationship simply remitted the

dealers to state law to obtain relief on their contractual

claims.

In any event, the court of appeals was simply incorrect in

concluding that, if the word “terminate” in Section 2802(a)(1)

is given its usual meaning, a franchisee must “abandon| }

years of work and investment” before bringing a federal

claim. Pet. App. 23. A franchisee who receives a notice of

termination, or of imminent conduct that would effectively

16

force an end to a franchise element, can seek a preliminary

injunction under 15 U.S.C. 2805(b)(2), enabling it to continue

operating the franchise under the preexisting terms while

the dispute is in litigation. Congress directed district courts

to grant such relief if the franchisee demonstrates that

“there exist sufficiently serious questions going to the merits

to make such questions a fair ground for litigation,” and that

the balance of equities favors such relief. /bid. In an appro-

priate case, a franchisee therefore can make out a claim of

constructive or informal termination without abandoning any

of the basic components of its operation. This is not such a

case, however, because the dealers “waited years before seek-

ing” injunctive relief, “and at that point the court was obvi-

ously unable to “turn the clock back” and “preserve the sta-

tus quo.” Pet. App. 49-50 (quoting Dersch Energies, 314 F.3d

at 863).

* Section 2805(b)(2) also states that, to obtain injunctive relief, the

franchisee must show that “the franchise of which he is a party has been

terminated.” 15 U.S.C. 2805(b)(2)(A)(i) (emphasis added). In common

parlance, a franchisee who receives notice of an impending termination,

or of conduct that would cause such a termination, “has been termi-

nated” within the meaning of Section 2805(b)(2)(A)(i), just as an em-

ployee who has received a notice of termination that will be effective as

of a date certain “has been terminated” from his employment. The re-

quirement in Section 2805(b)(2) that the franchisee must show that its

franchise “has been terminated” is therefore consistent with Congress's

evident intent to permit franchisees to secure an injunction preventing

a threatened termination from taking effect. See 123 Cong. Rec. at

10,383 (statement of Rep. Dingell); id. at 10.384 (statement of Rep.

Long). It would make little sense for Congress to provide expressly for

preliminary injunctive relief but require that the injury actually occur

before such relief can be granted. Cf. Lippo v. Mobil Oil Corp., 776

F.2d 706, 720 (7th Cir. 1985) (noting that “[i}n an action brought under

section 2805(a) the franchisee has the burden of proving termination of

the franchise” and that “[t]his must really mean attempted termination

if the injunctive relief is to be of any use”).

17

3. The decision below contravenes Congress’s intent in

an additional respect. The PMPA reflects Congress’s effort

to establish “a single, uniform set of rules” governing the

termination of petroleum franchises so that refiners, many of

whom operate nationwide, can organize their affairs with-

out facing a “patchwork” of standards. Senate Report 16, 19;

124 Cong. Rec. 12,764 (1978) (statement of Sen. Jackson)

(“The patchwork of these State laws has become a serious

encumbrance on the franchisor-gasoline suppliers, so much

so that [franchisors] are willing to accept the restrictions

* * * in return for uniformity of laws across the nation.”);

Mobil Oil Corp. v. Virginia Gasoline Marketers & Auto.

Repair Ass'n, 34 F.3d 220, 225 (4th Cir. 1994) (“Most petro-

leum franchisors do business in a number of states and Con-

gress has provided [a nationwide standard] to ensure unifor-

mity.”), cert. denied, 513 U.S. 1148 (1995).

Contrary to that goal, the court of appeals prescribed a

confusing and indeterminate test for deciding whether a

franchisor has “terminate[d]” a franchise. The court of ap-

peals disavowed a holding that “any material breach of the

lease would necessarily be sufficient to sustain the construc-

tive termination claim.” Pet. App. 23. It indicated instead

that the relevant contract breach must constitute “such a

material change that it effectively ended the lease, even

though the plaintiffs continued to operate the business.”

Ibid. But the court offered no workable standard for deter-

mining whether a particular contract breach has “effectively

ended” the franchise when the franchisee is able and willing

to continue its operations for a sustained period. Nor could

the court have done so, given the essential contradiction in-

volved in declaring “effectively ended” a franchise that is

ongoing in each of its basic components. Application of the

test articulated in the decision below would not lead to na-

tionally uniform standards governing termination.

18

C. The Court Of Appeals’ Decision Is Inconsistent With The

Doctrine Of “Constructive Termination” In Other Contexts

The court of appeals’ expansive reading of the word “ter-

minate” in Section 2802(a)(1) is not supported by the general

understanding of “constructive termination” doctrine in

other contexts. As the court of appeals recognized, analo-

gous common-law doctrines have traditionally “require[d] an

actual severance of the relationship.” Pet. App. 23. Consis-

tent with that understanding, courts have applied the “con-

structive termination” concept to situations in which the chal-

lenged conduct has the practical effect of forcing an end to a

particular legal relationship, even though the defendant has

not formally or expressly severed his ties with the plaintiff.

In the field of employment law, for example, “{t}he em-

ployee must leave the workplace” to recover on a “construc-

tive termination” theory. Pet. App. 23; see Pennsylvania

State Police v. Suders, 542 U.S. 129, 134, 141 (2004) (to claim

“constructive discharge” under Title VII of the Civil Rights

Act of 1964, 42 U.S.C. 2000e et seg., the employee must quit

and “show that the abusive working environment became so

intolerable that her resignation qualified as a fitting re-

sponse”). “The inquiry is objective: Did working conditions

become so intolerable that a reasonable person in the em-

ployee’s position would have felt compelled to resign?” /d. at

141; see Bean v. Wisconsin Bell, Inc., 366 F.3d 451, 454 (7th

Cir. 2004) (Posner, J.) (Constructive termination “refers to

the situation in which an employer precipitates an employee’s

resignation by making the employee’s working conditions

unbearable.”). Courts have also required an “actual sever-

ance of the relationship” to establish “constructive eviction in

landlord-tenant law”: “the tenant must move out.” Pet. App.

22-23; Brendle’s Stores Inc. v. OTR, 978 F.2d 150, 155 (4th

Cir. 1992) (applying South Carolina law).

19

Courts have adopted a similar understanding of construc-

tive termination under the Automobile Dealers Day in Court

Act (ADDCA), 15 U.S.C. 1221 et seg., which resembles the

PMPA to the extent it limits the circumstances in which auto-

mobile manufacturers may “terminat(e]” a dealer franchise.

15 U.S.C. 1222 (providing that an automobile dealer may

recover damages caused by “the failure of [an automobile

manufacturer] to act in good faith in performing or comply-

ing with any of the terms or provisions of the franchise, or in

terminating, canceling, or not renewing the franchise with

said dealer”). As one court of appeals has explained, the

ADDCA’s restrictions on termination apply “where the man-

ufacturer forces a termination by a dealer under circum-

stances which would warrant a court in concluding that even

though in appearance the termination was voluntary it was

in fact coerced by the manufacturer.” American Motors

Sales Corp. v. Semke, 384 F.2d 192, 195 (10th Cir. 1967). See

Imperial Motors, Inc. v. Chrysler Corp., 559 F. Supp. 1312,

1315 (D. Mass. 1983) (following Semke and describing the

situation as a “constructive termination”).

The court of appeals reasoned that comparison of the

“constructive termination” concept in the PMPA context to

the treatments of such claims elsewhere is “misleading” be-

cause “sunk costs, optimism, and the habit of years might

lead franchisees to try to make the new arrangements work.”

Pet. App. 22-23. That is not, however, a meaningful distinc-

tion. “{[S]unk costs, optimism, and the habit of years” are by

no means unique to petroleum franchises and do not provide

a sound basis for differentiating the PMPA from other con-

* Courts have not specifieally addressed whether the dealership must

end before a dealer claims “constructive termination” under the

ADDCA. In both Semke and Imperial Motors, the dealer ceased its

operations before bringing suit. See Semke, 384 F.2d at 194-195; /m-

perial Motors, 559 F. Supp. at 1314.

20)

texts in which the “constructive termination” theory has been

applied.”

The rationale for recognizing a claim of “constructive ter-

mination” under the PMPA is not that courts may add to the

prohibitions that Congress imposed in the text of the Act.

Rather, it is that the word “terminate” in Section 2802(a)(1)

is properly construed to encompass franchisor conduct that,

as a practical matter, forces an end to at least one element of

the franchise relationship, even though the franchisor does

not expressly abrogate the parties’ agreement. The sound-

ness of that interpretation, however, depends in large mea-

sure on the longstanding recognition of the concept of “con-

structive termination” in analogous contexts. Cf. Suders, 542

* Few decisions address the question whether a dealer that remains

in business may claim constructive termination under state franchise

laws, and those decisions do not establish a consistent rule. Compare,

e.g., Coast to Coast Stores (Cent. Org.), Inc. v. Gruschus, 667 P.2d 619,

623 (Wash. 1983) (holding that a franchise is terminated under the

Washington Franchise Investment Protection Act “only when the

agreement between the franchisee and franchisor is brought to an end,

terminating the franchisee’s right to use the franchisor's trade name,

service mark, or the like”), with Petereitv. SB. Thomas, Inc., 63 F 3d

1169, 1183 (2d Cir. 1995) (holding that the franchisee did not need to be

driven “out of business * * * in order to justify a finding of construc-

tive termination” under the Connecticut Franchise Act), cert. denied,

517 U.S. 1119 (1996). Courts applying state franchise laws, however,

generally describe constructive termination in terms of franchisor

conduct that precludes continued operations by the franchisee. See,

e.g., American Bus. Interiors, Inc. v. Haworth, Inc., 798 F.2d 1135,

1141 (8th Cir. 1986) (concluding that constructive termination occurred

under Missouri franchise law when franchisor “refuse[d] to do business

with [its] franchisee”); Remus v. Amoco Oil Co , 794 F.2d $238, 1240

(7th Cir.) (Posner, J.) (suggesting that there could be a claim for

constructive termination under Section 135.03 of the Wisconsin Fair

Dealership Law when the franchisor’s conduct “ma[de] the dealer's

competitive circumstances so desperate that the dealer ‘voluntarily

gives up the franchise”), cert. dismissed, 479 U.S. 925 (1986)

21

U.S. at 142 (noting that “[b]y 1964, the year Title VII was

enacted, the [constructive discharge] doctrine was solidly

established in the federal courts”). The dealers in this case

seek to use that history as a basis for reading the word “ter-

minate” in Section 2802(a)(1) to encompass non-explicit ter-

minations, while treating as irrelevant the limitations that

courts have traditionally placed on the “constructive termina-

tion” doctrine. There is no warrant for that approach.

D. Because The Conduct At Issue Here Did Not End The Fran-

chises, The Dealers Could Not Recover Under the Act

The dealers in these cases failed to establish that their

franchises were “terminate[d}” within the meaning of Section

2802(a)(1). Where, as here, a franchisor does not explicitly

terminate any of the three elements of a petroleum market-

ing franchise, its conduct can properly be said to “terminate”

the franchise in a “constructive” sense only if a reasonable

franchisee in the circumstances would be effectively com-

pelled to abandon one (or more) of the franchise elements, as

when the franchisor’s conduct forecloses any reasonable pos-

sibility that the business could be operated profitably. And

a franchisee cannot reasonably claim to have been subjected

to such effective compulsion unless it either (a) actually

ceases that aspect of its operations or (b) promptly seeks

preliminary injunctive relief preventing the franchisor from

carrying out its announced intent to engage in conduct that

would leave the franchisee no reasonable alternative but to

abandon that aspect of its operations.

None of the eight dealers in this case satisfied that stan-

dard. The withdrawal of the rent subsidy did not force an

end to any element of their franchise operations. All of the

dealers continued to operate their franchises for a prolonged

period—in most cases, for several years—after the rent sub-

sidy was withdrawn. And all of the dealers either signed new

22

agreements, or agreed to extend existing agreements, that

did not include the rent subsidy. See J.A. 268-331. That con-

tinued operation precluded any reasonable finding that the

withdrawal of the subsidy effectively compelled the dealers

to abandon their businesses. The defendants were therefore

entitled to judgment as a matter of law with respect to the

dealers’ constructive termination claims.

il. THE COURT OF APPEALS CORRECTLY HELD THAT A

FRANCHISEE MAY NOT RECOVER FOR “CONSTRUCTIVE”

NONRENEWAL UNDER THE PMPA IF IT SIGNS AND OPER-

ATES UNDER A RENEWED FRANCHISE AGREEMENT

The court of appeals’ rejection of the dealers’ “construc

tive nonrenewal” claims was compelled by Section

2802(a)(2)’s unambiguous text, and the soundness of that

ruling is confirmed by the structure and purpose of other

PMPA provisions governing the nonrenewal process. Be-

cause all eight dealers in this case either signed renewed

agreements or sold their businesses before the previous

agreements expired, the court of appeals correctly reversed

the jury verdicts in their favor on their constructive nonre-

newal claims.

1. Under the PMPA, a franchisor may not “fail to renew

any franchise relationship” except for specified reasons. 15

U.S.C. 2802(a)(2). The Act defines the terms “fail to renew”

and “nonrenewal” as the “failure to reinstate, continue, or

extend” the relationship with the franchisee. 15 U.S.C.

2801(14). A franchisor cannot reasonably be said te have

“faill[ed| to renew” within the meaning of the Act if it has in

fact reinstated, continued, and extended the franchise rela-

tionship by offering a renewed agreement that the franchisee

has accepted. See Pet. App. 32 (rejecting the dealers’ con-

structive nonrenewal claim because the dealers had “signed

23

and operete{d| under the renewal agreement complained

of”).

A franchisor might explicitly fail to renew a franchise

relationship by advising the franchisee that it will not be of-

fered a new agreement when the current agreement expires.

The franchisor might also indirectly or “constructively” fail

to renew the relationship by insisting on changes that a fran-

chisee would be forced to reject because continued operation

under such terms would not be reasonably possible. See

Abrams Shell v. Shell Oil Co., 343 F.3d 482, 488 (5th Cir.

2003); Dersch Energies, 314 F.3d at 864. But in either cir-

cumstance, there must be a nonrenewal; the plain terms of

the Act leave no room for a claim that a franchise relation-

ship was “constructively” nonrenewed even though the par-

ties entered into a new franchise agreement.”

The dealers assert (Pet. 24-25) that they “reserve[d]”

their rights under the PMPA by signing the renewal agree-

ments “under protest.” The significance of the signed re-

newal agreements, however, is not that they constituted

waivers of the dealers’ legal rights, but that they negated the

possibility of actionable PMPA violations. The PMPA af-

fords franchisees the right to sue only to challenge an unlaw-

* There is relatively little statutory or common-law history for “con-

structive nonrenewal” claims. The concept has arisen primarily in the

insurance context where a new insurance contract modified the terms

of a prior contract. See, e.g., American Cas. Co. v. Baker, 22 F.3d 880,

893-894 (Sth Cir. 1994), American Cas. Co. v. Continisio, 17 F.3d 62, 65-

67 (3d Cir. 1994); Adams v. Greenwood, 10 F.3d 568, 572 (8th Cir. 1993).

In accord with the position taken here, these cases indicate that signing

a modified contract “is inconsistent with [an] assertion of constructive

nonrenewal.” Baker, 22 F.3d at 893 (quoting Adams, 10 F.3d at 572);

see Contoisio, 17 F.3d at 66 ("Even ina state where renewal is strictly

defined as continuation of coverage on the same, or nearly the same,

terms as the policy being renewed, acceptance of new terms constitutes

a renewal.”) (citation and internal quotation marks omitted).

24

ful termination or nonrenewal of the franchise. See 15 U.S.C.

2805 (providing a civil action to redress noncompliance only

with Section 2802, prohibiting unlawful terminations or non-

renewals, and Section 2803, governing trial and interim fran-

chises). The Act does not furnish a dealer whose franchise is

in fact renewed with a claim for other grievances about the

negotiation process or the manner in which a renewal oc-

curred. A dealer that chooses to sign an agreement with its

franchisor despite dissatisfaction with its terms has nonethe-

less renewed the franchise relationship and has no “failure to

renew” cause of action to preserve.

2. The structure and purposes of the Act confirm that an

actual renewal of the franchise relationship precludes a “non-

renewal” claim. As noted earlier, the PMPA represents a

delicate balance between the goal of protecting the reason-

able expectations of franchisees in the continuation of their

businesses and the goai of preserving “adequate flexibility”

for franchisors to “initiate changes in their marketing activi-

ties to respond to changing market conditions and consumer

preferences.” Senate Report 18-19. Congress designed the

Act’s nonrenewal provisions specifically to address those

competing concerns. The dealers’ theory of “constructive

nonrenewal” is incompatible with the balance that Congress

struck.

a. The PMPA provisions governing nonrenewal contain

two key features. First, to preserve the franchisor’s flexibil-

ity to respond to market demands, the Act permits a fran-

chisor to propose new and different contractual terms at the

expiration of a franchise agreement. See Senate Report 32

(noting that the Act allows “renewal of the franchise relation-

ship [to] be on different terms”). To that end, the Act pro-

vides a broader range of justifications for failing to renew a

franchise relationship than for terminating an existing fran-

chise. See 15 U.S.C. 2802(b)(3) (setting forth additional

25

grounds for nonrenewal). Those additional lawful grounds

for nonrenewal include “[tjhe failure of the franchisor and

the franchisee to agree to changes or additions to the provi-

sions of the franchise,” as long as the franchisor proposed the

new terms “in good faith and in the normal course of busi-

ness.” 15 U.S.C. 2802(b)(3)(A)(i).

Second, the Act establishes a special procedural mecha-

nism for resolving disputes about the legality of changes or

additions to the terms of the previous agreement. 123 Cong.

Rec. at 10,383 (statement of Rep. Dingell) (“[T]o assure that

franchisees * * * receive the meaningful protections which

this Federal legislation is intended to provide and to assure

that [the Act’s] flexibility does not frustrate the purposes of

this legislation, the bill utilizes very special enforcement

mechanisms.”). When the franchisor offers a renewal agree-

ment containing new terms, the franchisee may decide to

accept those terms or to reject them. If the franchisee re-

jects the proposed agreement, the franchisor may then

choose whether to modify the terms or instead to end the

franchise relationship.

A franchisor that elects not to renew a franchise relation-

ship in these circumstances must notify the franchisee of that

decision, generally 90 days before the nonrenewal will take

effect. 15 U.S.C. 2804(a). The notification must be in writing,

must identify the reasons for the nonrenewal and the effec-

tive date, and must include a summary of the remedies avail-

able under the PMPA. 15 U.S.C. 2804(c). Upon receipt of

that notice, the franchisee may seek preliminary injunctive

relief permitting it to continue operating under the preexist-

ing agreement while it challenges the legality of the franchis-

or’s decision. 15 U.S.C. 2805(b)(1)."" Congress specifically

" The franchisee might allege, for example, that the parties’ failure

to agree to changed franchise terms did not constitute a lawtul basis for

26

prescribed a relaxed showing for obtaining such relief and

required district courts to grant an injunction if that showing

is made. 15 U.S.C. 2805(b)(2); see pp. 2-3, supra.

b. The “constructive nonrenewal” theory the dealers

espouse, under which a franchisee may enter into a renewed

agreement “under protest” and later allege a “nonrenewal,”

would seriously undermine this scheme in at least three re-

spects. First, as suggested above, that theory would expand

the Act’s coverage to encompass a broad range of conduct

that does not actually result in the end of the franchise rela-

tionship. Second, the dealers’ argument would replace the

procedural mechanism Congress created with a fundamen-

tally different scheme. Under the balance struck by Con-

gress, the franchisee must either sign or reject a proposed

renewal agreement, and a franchisor faced with a rejection

may then choose either to modify the objectionable terms or

give notice of nonrenewal. The procedure the dealers pro-

pose would invert that system. It would permit a dealer to

execute a new agreement “under protest,” thereby granting

the franchisee the option either to continue operating under

the new agreement or, if the terms later proved unfavorable,

to challenge it as a “constructive nonrenewal.” As the court

of appeals observed, the franchisee would gain the benefit of

the contract with nothing to lose, even if it later sued and “its

claims were rejected by the courts.” Pet. App. 30.

Third, the dealers’ theory would frustrate Congress’s

intent that renewal disputes be resolved before any new

agreement takes effect. That scheme furthers Congress’s

nonrenewal hecause the proposed changes were not “the result of de-

terminations made by the franchisor in good faith and in the normal

course of business,” 15 U.S.C. 2802(b)(3)(A\(i), or because the proposed

changes were made “for the purpose of converting the leased marketing

premises to operation by employees or agents of the franchisor for the

benefit of the franchisor,” 15 U.S.C. 2802(b)(3)(A)().

27

goal of giving franchisors flexibility to implement efficient

marketing changes, Senate Report 19, by providing certainty

about the validity of a renewed agreement containing modi-

fied terms. Allowing a franchisee to challenge such an ayree-

ment after executing it would destroy that certainty. And

because the PMPA has a one-year statute of limitations, 15

U.S.C. 2805(a), the prospect of a “constructive nonrenewal”

claim would “extend the period of uncertainty through the

entire first year of a [renewal] contract,” which in many cases

is only a few years in duration. Pet. App. 30. Franchisors

might respond by refraining from proposing new terms that

reflect a more efficient strategy, or by “abandon{ing] the

[franchise] model entirely.” /d. at 31. In the long term, that

result could cause considerable harm to consumers who may

absorb the increased distribution costs through higher fuel

prices. See generally Atlantic Richfield Co. v. USA Petro-

leum Co., 495 U.S. 328, 343 n.13 (1990) (“T]he public is not

served by forcing |a] manufacturer to abandon [the most

efficient means of distribution].”).

ce. The dealers contend that, by prohibiting the franchi-

see from claiming nonrenewal after it has signed a renewal

agreement, the decision below forces franchisees “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.” Pet. 20 (citation omit-

ted). That contention ignores Congress's provision of a re-

medial mechanism tailored to the situation the dealers de-

scribe. As explained above, see pp. 25-26, supra, a franchisee

need not go out of business in order to challenge a

franchisor’s “take it or leave it” offer to renew on modified

terms. Rather, the franchisee may refuse the offer and seek

a preliminary injunction allowing it to continue operating on

the terms of the previous agreement while the litigation pro-

ceeds. See Dersch Energies, 314 F.3d at 863; 2 W. Michael

28

Garner, Franchise and Distribution Law and Practice

§ 15:10, at 15-87 to 15-38 (Sept. 2003) (“The plain language of

the PMPA contemplates an actual ending of the franchise

relationship * * * . A franchisee who is presented with a

new agreement that is so coercive that it suggests that the

franchisor has an ulterior motive to prevent renewal can re-

fuse the agreement and then move for a preliminary injunc-

tion under the Act.”’).

There is also no merit to the dealers’ argument (Pet. 21)

that the PMPA’s remedial scheme is ineffective because few

franchisees have the financial resources to bring suit to fore-

stall an unlawful nonrenewal. The PMPA allows successful

dealers to recover attorneys’ fees, expert costs, compensa-

tory damages, and, in some circumstances, punitive damages.

15 U.S.C. 2805(d)(1). Such provisions are normally consid-

ered sufficient to encourage suit. Cf. City of Riverside v.

Rivera, 477 U.S. 561, 578 (1986) (“The function of an award

of attorney’s fees is to encourage the bringing of meritorious

civil rights claims which might otherwise be abandoned be-

cause of the financial imperatives surrounding the hiring of

competent counsel.”) (quoting Kerr v. Quinn, 692 F.2d 875,

877 (2d Cir. 1982)). And even if some dealers face economic

difficulty in pursuing the remedies that the PMPA provides,

that fact cannot justify holding the franchisor liable for

“failling] to renew [the] franchise relationship,” 15 U.S.C.

2802(a)(2), when no failure to renew has actually taken place.

Dealers in these circumstances may have a claim against the

franchisors under state law, but not under the explicit terms

of the PMPA.

3. The dealers in this case did not establish that the de-

fendants “failled] to renew” their franchise relationships

within the meaning of the PMPA. The evidence at trial

showed that seven of the eight dealers signed and operated

under renewal agreements, and that the eighth dealer sold

29

his franchise before the franchise term expired. See Shell

Br. 10-11. The court of appeals therefore correctly granted

judgment to the defendants on the dealers’ “constructive

nonrenewal” claims.

CONCLUSION

The judgment of the court of appeals should be reversed

with respect to the dealers’ “termination” claims and af-

firmed with respect to the dealers’ “nonrenewal” claims.

Respectfully submitted.

ELENA KAGAN

Solicitor General

CHRISTINE A. VARNEY

Assistant Attorney General

MALCOLM L. STEWART

Deputy Solicitor General

PHILIP J. WEISER

Deputy Assistant Attorney

General

DAVID A. O’NEIL

Assistant to the Solicitor

General

CATHERINE G. O'SULLIVAN

NICKOLAI G. LEVIN

Attorneys

AUGUST 2009