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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AUG 27 208

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—

——

IN THE

Supreme Court of the United States

—- —

MAC’S SHELL SERVICE, INC., ET AL.,

Petitioners,

Vv

SHELL OIL PRODUCTS COMPANY LLC, ET AL.,

Respondents.

SHELL OIL PRODUCTS COMPANY LLC, ET AL.,

Petitioners,

v.

MAC’S SHELL SERVICE, INC., ET AL.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE FIRST CIRCUIT

BRIEF FOR THE AMERICAN PETROLEUM

INSTITUTE AS AMICUS CURIAE SUPPORTING

SHELL OIL PRODUCTS COMPANY LLC, MOTIVA

ENTERPRISES LLC AND SHELL OIL COMPANY, INC.

HARRY M. NG ROBERT A. LONG, JR.

JANICE K. /{ABURN Counsel of Record

American / etroleum JONATHAN L. MARCUS

Institute ELIZABETH ARENS

1220 LSt. N.W. Covington & Burling LLP

Washington, DC 20005 1201 Pennsylvania Ave.,

(202) 682-8000 NW

Washington, DC 20004

(202) 662-6000

August 2009 Counsel for Amicus Curiae

boTe 4ZONTY

TABLE OF CONTENTS

Page

TE Ge CI aoc ccscnccesccscesnersvesésidussorsecnciantons i

A CP FARE EE I ccncenceeencccccceccnssccccsscscesscescees iii

INTEREST OF AMICUS CURIAE..........cccccccccccccceeeeeees l

RETRIEVE vat es De a Rr or Pe EOE 2

bp FS 9 ee we clk) | | 4. y See s

ETE MaaP SADT GMa NOAA te ADA He EARN ne 11

I. The PMPA Does Not Create A Cause Of

Action For Constructive Termination............. 11

A. The Text and Structure of the

PMPA Do Not Allow a Cause of

Action for Constructive

I a 8 12

B. The PMPA’s Remedial Provisions

Allow Franchisees to Protect

Their Franchise When

Threatened With Termination.............. 16

IT. Permitting A Claim For Constructive

Termination Based On A Material

Breach Of Franchise Terms Frustrates

The Uniformity Congress Sought To

Establish By Enacting The PMPA................... 18

A. Congress Enacted the PMPA to

Create a National Standard for

the Termination and Nonrenewal

of Petroleum Franchises. ....................... 18

B. The Court of Appeals’ Decision

Precludes Uniformity Because

the Viability of a Constructive

Termination Claim Depends on

i aici neicineaiidcalaicinidiaainisaliniciiniewnes 19

Ill. An Assignment Does Not Constitute

Termination Of A Franchise Under The

PMPA Merely Because The Assignee

Breaches The Contract Or Because The

Assignment Violates State Law. ..................6.:. 22

IV. The PMPA Does Not Create A Cause Of

Action For Constructive Nonrenewal.............. 27

SN siiicnnisrucndesiecibnuvsiniedarssesiniinenniienamentenniseian 29

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............. 15

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

REL SEES SE Sie aah eae te 8, 15, 28

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

eT EE SEs TE ict seiicicccacenidnsedstsnecdsccavseoonionts 21

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

BN iaiisninkcidersinidgnasinabiaunnabteibeedtnebiesteneter’ passim

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

IIE Laila oasis Bekele daelen a danandeheneapaenmenaannnénatiens 2

Casserlie v. Shell Oil Co., 2007 WL. 1559510

(Ohio Ct. App. May 31, 2007), aff'd, 902

ae I I ccesaonscusdeasaenocbaies 21

Cedar Brook Serv. Station, Inc. v. Chevron

U.S.A., Inc., 746 F. Supp. 278 (E.D.N.Y.

1990), aff'd, 930 F.2d 908 (2d Cir. 1991)...... ...... 25

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

ART a as OE ea ht A bes oR AT EEE ee ae ao 24

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

SU I HII secisa caticy ceidsnsiteldtiekauaidoes 8, 16, 17, 28

- ill -

Hazara Enterprises, Inc. v. Motiva Enterprises,

LLC, 126 F. Supp. 2d 1365 (S.D. Fla. 2000) ....... 21

Leegin Creative Leather Products, Inc. v.

PSKS, Inc., 127 S. Ct. 2705 (2007)...............:sseere08 2

Portland 76 Automobile/Truck Plaza, Inc. v.

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

REE RS ST SEES rant aE AEE A 25

Pro Sales, Inc. v. Texaco, U.S.A., 792 F.2d 1394

i ahnweeenanes 8

Sawhney v. Mobil Oil Corp., 970 F. Supp. 366

(D. N.J. 1997), rev'd, 173 F.3d 421 (3d Cir.

RE aaa The EBERT Oe ie Ee oa 25

Shukla v. BP Exploration & Oil, 115 F.3d 849

a Sc oscnaninnaniilanici 24

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

SE NEN eae eer 21

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

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

West Virginia University Hospitals., Inc. v.

Casey, 499 U.S. 83 (1991) ...............ccccccscccccccrovses 16

STATUTES

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

i occa grea aal canecsweardbenntanenta passim

-1V-

Mass. Gen Laws ch. 106, § 2-210 (2009) .................. 24

Ohio Rev. Code Ann. § 1302.13(B) (2009) ............... 24

Or. Rev. Stat. § 72.2100(2) (2007) .................cceccceeees 24

Tenn. Code Ann. § 47-2-210 (2009) .............00.0.ccccee, 24

Va. Code Ann. § 8.2-210(2) (2009) .............00. cc. 24

OTHER AUTHORITIES

E. Allen Farnsworth, Farnsworth on Contracts

BLE T. __ : RRR Deer reER en 25

Restatement (Second) of Contracts

BD BET CRIED 0:10: cicsscccrninntasueteniindieeatemaaaaee 25

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

Uniform Commercial Code § 2-210 (2004) ........... 24, 25

Webster's Third New International! Dictionary

CID keccnesisnicnnsecucoovecssennensinnsusaieianeaeenanaannannannn 12

INTEREST OF AMICUS CURIAE

. The American Petroleum Institute (“API”) is a

non-profit District of Columbia corporation that

represents 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. §§ 2801-2807 (““PMPA” or

“the Act”), establishes federal standards for the

termination or non-renewal by an oil refiner of a

service station dealer’s franchise. The PMPA

provides dealers with a cause of action against oil

refiners that terminate a franchise or fail to renew it

in a manner that violates the statute. Thus, many of

API's members are subject to suit under the Act.

This case presents the question whether a

service station dealer that continues to operate its

franchise may nevertheless sue the franchisor for

wrongful “termination” or “nonrenewal’” under the

PMPA. The First Circuit held that a service station

operator can maintain a _ suit for constructive

termination, but the text, structure, and purpose of

the statute make clear that the First Circuit erred in

' Pursuant to Rule 37.6, amicus affirms that no counsel! 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 bnef. No person

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

monetary contribution to its preparation or submission. The

parties have consented 1n writing to the filing of this bref

according the PMPA such broad scope. Because API

members may be subjected to PMPA suits, they have

a strong interest in limiting the statute to the

circumstances in which Congress intended it to

apply.

API frequently participates in legislative,

administrative, and judicial proceedings that present

issues of national concern, including issues arising

under the PMPA.? 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. at 15 (1978). 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 non-renewal...and the notice

which franchisors must provide franchisees prior to

termination of a franchise or non-renewal.” Jd. at 19.

To promote “certainty and uniformity in franchise

relationships which permeate a nationwide motor

fuel distribution and marketing network,” the PMPA

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

551 U.S. 877 (2007); Bell Atl. Corp. v. Twombly, 550 U.S. 544

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

Hasbrouck, 496 U.S. 543 (1990)

“preempts state law in the subject areas in which the

federal legislation deals, i.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. Id. 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 “in connection with the

sale, consignment, or distribution of motor fuel.” 15

U.S.C. § 2801(1)(A). “Franchise” is also defined to

include a contract for the supply of motor fuel or a

lease of the premises on which the motor fuel is sold

“under a trademark which is owned or controlled by”

the refiner. Jd. § 2801(1)(B). Courts refer to these

three components of the franchise as the “statutory

element{s]” of the franchise. Pet. App. 18a.

“Franchise” is further defined to include “the

unexpired portion of any franchise,...which is

transferred or assigned as authorized by the

provisions of such franchise or by any applicable

provision of State law which permits such transfer or

assignment without regard to any provision of the

franchise.” 15 U.S.C. § 2801(1)(B)(iil).

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

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, td.

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

relevant to the franchise relationship” and which

renders termination of the franchise “reasonable,” rd.

§ 2802%)(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. /d. § 2804(c). That notice must

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

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

renewal, inciuding 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)

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

with the statute’s provisions governing termination

or non-renewal. 15 U.S.C. § 2805(a). It directs 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. Id. § 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. /d.

§ 2805(d)(1)(A), (B). Franchisees are also entitled to

“reasonable attorney and expert witness fees” unless

the franchisee recovers “only nominal damages,” in

which case such fees may be awarded in the court’s

discretion. Id. § 2805(d)(1)(C).

The PMPA contains two provisions addressing

the statute’s relationship with state law. The first

provision provides that “no State or any political

subdivision thereof may adopt, enforce, or continue

in effect any provision of any law_- or

regulation... with respect to termination... of any

such franchise or to the nonrenewal... of any such

franchise relationship unless such provision of such

law or regulation is the same as the applicable

provision of this subchapter.” 15 U.S.C. § 2806(a)(1).

-o)-

The second provision addresses assignments of the

franchise and provides that “(njothing in this

subchapter authorizes any transfer or assignment of

any franchise or prohibits any transfer or

assignment of any franchise as authorized by the

provisions of such franchise or by any applicable

provision of State law which permits such transfer or

assignment without regard to any provision of the

franchise.” Id. § 2806(b)(1).

2. Despite the fact that the PMPA by its

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

of the franchise, the plaintiffs, Shell service station

operators in Massachusetts (the “dealers’), sued

Shell Oil Company, Inc., and its assignee, Motiva

Enterprises LLC (collectively, “Shell’) under the

PMPA while signing new agreements and continuing

to operate their franchises. They did so on the

theory that Shell’s elimination of a rent reduction

program and other changes to the manner of

computing rent amounted to “constructive

termination” and “constructive[] nonrenew[al]’of the

franchises. Pet. App. 4a.4 The jury returned a

verdict in the dealers’ favor, awarding them $1.3

million on their constructive termination claim and

$1.2 million on their constructive nonrenewal claim.

The district court added $1.16 million in attorney's

fees and $209,000 in expert witness fees pursuant to

the PMPA.

* Specifically, the dealers alleged that Shell Oil Company

constructively terminated their franchises by assigning the

franchises to Motiva Enterprises LILC, which canceled the rent

subsidy. Pet. App. 4a

3. The court of appeals affirmed in part and

reversed in part. Pet. App. 15a-25a. The court held

that the PMPA provides a cause of action for

constructive termination but not for constructive

nonrenewal.

On the constructive termination claim, the

court held that a dealer that continues to operate the

franchise—that is, continues to use the refiner’s

trademark, to receive motor fuel, and to lease the

premises—can nevertheless claim that it was

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

App. 17a-18a. In so holding, the court relied on the

Fourth Circuit’s decision in Barnes v. Gulf Oil Corp.,

795 F.2d 358 (4th Cir. 1986), which held that a

constructive termination claim under the PMPA is

available even when the franchisee continues to

operate its business if an assignment of the franchise

either (1) violates state law or (2) results in a breach

of one of the three statutory elements of the

franchise. Pet. App. 15a-18a.

The court of appeals’ concluded that

constructive termination under the PMPA, unlike

constructive termination in several other contexts,

does not “require an actual severance of the

relationship.” Jd. 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. (internal

quotation marks omitted). Instead, the court held

that the PMPA provides a cause of action for

constructive termination where a franchisee alieges

both that the franchisor (or its assignee) breached

one of the three statutorily protected contracts—the

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

—

- i -

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. (internal quotation marks omitted).

The court of appeals agreed with Shell,

however, that the PMPA does not provide a cause of

action for constructive nonrenewal. Pet. App. 21a-

25a. The court noted that while the Ninth Circuit

recognized such a claim in Pro Sales, Inc. v. Texaco,

U.S.A., 792 F.2d 1394 (9th Cir. 1986), that decision

“has been rejected by the other circuits to consider

the issue.” Pet. App. 22a. The court observed that a

constructive nonrenewal theory is inconsistent with

the text of the PMPA, which “after all, requires a

franchisor to provide a notice of nonrenewal, 15

U.S.C. § 2805(c), and then provides a framework for

the franchisee to seek preliminary relief on receipt of

that notice, id. § 2805(b)(2).”. Pet. App. 22a. The

court further observed that the Fifth and Seventh

Circuits have held that the PMPA’s “notice-and-

preliminary-relief structure” reflects Congress’s

intent “to limit the reach of the PMPA to cases where

either a notice is given or an actual nonrenewal has

taken place.” Jd. (citing Abrams Shell v. Shell Oil

Co., 343 F.3d 482, 489 & n.16 (5th Cir. 2003), and

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

865-66 (7th Cir. 2002)). The court thus declined to

“recognize a claim for nonrenewal under the PMPA

where the franchisee has signed and operates under

the renewal agreement complained of.” Jd. at 25a.

SUMMARY OF ARGUMENT

The court of appeals’ decision to recognize a

cause of action for constructive termination

& «

misconstrues the scope of the PMPA. The PMPA

defines a franchise to include the contracts between

the refiner and the dealer that authorize the dealer

to use the refiner’s trademark, sell the refiner’s

motor fuel, and occupy leased marketing premises.

15 U.S.C. § 2801(B)(Q), Gi). The text of the PMPA

makes clear that a franchisor must terminate a

franchise, or notify the franchisee of its intent to

terminate the franchise, before a franchisee has a

cognizable claim for wrongful termination. Read

together, the substantive and procedural provisions

governing termination do not support 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 franchisces’

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

court’s reasoning lacks merit. First, the best

evidence of Congress’s intent is the text of the

statute, which does not authorize causes of action

challenging a franchisor’s decision merely to change

the terms of the franchise. Second, the remedial

plan Congress adopted allows a_ franchisee

threatened with termination to 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 to remedy

alleged breaches of contract that do not involve

termination of the franchise. By allowing

franchisees to sue for breach of contract under the

PMPA, the court of appeals has broadened the scope

of the federal regime well beyond what Congress

intended.

The court of appeals’ approach frustrates the

uniform national regime that Congress sought to

establish for the termination and nonrenewal of

petroleum franchises. Under-the court of appeals’

decision, determining whether a_ constructive

termination occurred will often turn on_ the

application of state law, as it did here. The court of

appeals upheld a decision that Shell breached an oral

promise to continue the rent subsidy despite a clause

in the lease agreement (the “integration clause”)

providing that the lease constituted the entire

contract and could be amended only 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.” Zd.

at 14a. Having determined that the oral agreement

was enforceable, the court of appeals held that by

breaching it, Shell effected a constructive

termination under the PMPA. Thus, the success of

the dealers’ claim that they were constructively

terminated turned on an application of state law, an

outcome contrary to Congress's desire to establish a

“uniform” (S. Rep. No. 731, at 19) and “federal”

standard (id. at 15) for the termination of petroleum

franchise relationships.

The court of appeals’ flawed approach can be

traced to the Fourth Circuit’s opinion in Barnes |

Gulf Oil Corp., 795 F.2d 358 (4th Cir. 1986) Tha

lecision recognized two grounds for

10 -

wrongful termination where, as in this case, there

has been an assignment of the franchise. The Barnes

court held that the franchisee could establish that

her franchise had been terminated under the PMPA

by showing either that the price term in the contract

for gasoline supply was breached or that the

franchise was assigned in violation of state law. 795

F.2d at 362-64. Neither ground has support in the

text of the Act; both expand the PMPA well beyond

its intended scope and destroy uniformity in the law

governing the termination of petroleum franchises.

For the same reasons that the court of appeals

erred in recognizing a cause of action for constructive

termination, the court of appeals correctly rejected

the dealers’ claims for constructive nonrenewal. The

substantive, procedural, and remedial provisions of

the PMPA governing nonrenewal are parallel to the

provisions governing’ termination. Properly

construed, those provisions provide a cause of action

for nonrenewal only where “a notice [of nonrenewal]

is given or an actual nonrenewal has taken place.”

Pet. App. 22a.

ARGUMENT

1. 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 adverse to the franchisee, the

court of appeals deviated from the language and

structure of the Act, which creates a cause of action

for wrongful! termination only when the franchisor

} 7

has actually terminated the franchise or notified the

franchisee of its intent to do so.

A. The Text and Structure of the

PMPA Do Not Allow a Cause of

Action for Constructive

Termination.

The PMPA defines a franchise to mean the use

by a franchisee of “a trademark which is owned or

controlled by” a refiner “in connection with the sale,

consignment, or distribution of motor fuel.” 15

U.S.C. § 2801(1)(A). “Franchise” is also defined to

include a contract for the supply of motor fuel or a

lease of the premises on which the motor fuel is sold

“under a trademark which is owned or controlled by”

the refiner. Jd. § 2801(1)(B). The PMPA does not

define the term “termination,” other than to state

that the term includes “cancellation.” 15 U.S.C.

§ 2801(17). “Termination” is ordinarily understood

to mean “end in time or existence: close, cessation,

conclusion.” Webster's Third New International

Dictionary 2359 (1993). If Congress had intended

the term to cover a much broader range of conduct

that is not commonly understood as “termination,” it

is fair to assume Congress would have said so.

Moreover, the PMPA's provisions governing the

grounds for termination and its _ notification

requirements confirm that the Act provides a remedy

only tor a franchisor’s decision to terminate the

franchise.

The PMPA enumerates several grounds on

which a franchisor may lawfully terminate the

franchise, all of which presuppose that termination

involves an end to the franchise (i.e., to the use of the

trademark, to the supply of motor fuel, or to the

lease of the premises, see 15 U.S.C. § 2801(B)), and

not merely a change to the franchise terms that has

adverse financial consequences for the franchisee.

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 if franchisor knew about failure in specified

time period preceding notification of termination); id.

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

if franchisee fails to “exert good faith efforts to carry

out the provisions of the franchise” if failure

continues into specified time period preceding

notification of termination); id. § 2802(b)(2)(C)

(franchisor may terminate franchise based on

occurrence of an event relevant to the franchise

relationship and that renders’ termination

reasonable, provided the event occurred while the

franchise was still in effect and franchisor knew of

the event in specified time period preceding

notification of termination); 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 a

termination of the franchise, initiated by the

franchisor, and set out acceptable reasons for it.5

5 As explained in note 3, supra, a franchisor may refuse to

renew a franchise relationship on the same grounds, and

(continued...)

=:

The PMPA also contains a highly structured

notice procedure that reinforces the conclusion that

termination under the Act means a decision by the

franchisor to terminate the franchise, not merely a

decision to change the terms of the franchise in a

manner adverse to 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 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 lies 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.” /d.

The notice provisions thus operate together with the

provisions sctting out the legitimate grounds for

termination to regulate the franchisor’s decision to

terminate the franchise, not merely to change the

franchise terms in a manner that has an adverse

effect on the franchisce.

Section 2802(b)(3) provides additional grounds for nonrenewal.

.14-

The PMPA provides a cause of action against

franchisors that “failf} to comply with the

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

As discussed above, Section 2802 is concerned

exclusively with a decision by a franchisor to sever

its relationship with the franchisee either through

termination or non-renewal of the franchise

relationship. Because Section 2805(a) cross-

references Section 2802 to define the cause of action,

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

failure to comply with the termination provisions

extends only to termination or threatened

termination of a franchise that the franchisee

contends is not justified by the grounds enumerated

in Section 2802. It does not encompass the dealers’

claim that Shell 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,

343 F.3d 482 (5th Cir. 2003).

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

that fails to comply with the requirements of Section 2803,

which provides special rules for the nonrenewal of “[t}rial and

interim franchises,” 15 U.S.C. § 2803, or with the requirements

of Section 2807, which prohibits franchisors from imposing

certain restrictions relating to the installation of a renewable

fucl pump or the sale of renewable fuel.

B. The PMPA’s Remedial Provisions

Allow Franchisees to Protect Their

Franchise When Threatened With

Termination.

The court of appeals justified its ruling 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). But the best evidence of Congress’s intent

is the text of the statute, see West Virginia Univ.

Hosps., Inc. v. Casey, 499 U.S. 83, 98 (1991), which

provides no support for the theory that changes to

terms of the franchise short of termination are

governed by the PMPA. Moreover, the PMPA

includes provisions that permit a franchisee to

challenge a franchisor’s decision to terminate the

franchise without relinquishing 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. Jd. § 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. /d. § 2805(b)(2).

- ee.

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 Energies, Inc. v. Shell Oil Co.,

314 F.3d 846, 863 (7th Cir. 2002). That is so because

under the Act, “the 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.

Moreover, state law causes of action remain

available to protect franchisees that allege that the

franchisor committed a breach of contract short of

termination of the franchise. Indeed, in this very

case the dealers 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.”); id. at

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

structure of the PMPA provide no support for the

court of appeals’ recognition of a cause of action for

alleged material breaches of the franchise that do not

oie «

result in termination, a holding that federalizes

ordinary breach of contract claims that are the

traditional province of state law.

Il. Permitting A Claim For Constructive

Termination Based On A Material Breach

Of Franchise Terms Frustrates 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. The court of appeals’ recognition of

a cause of action under the PMPA for constructive

termination is not compatible with the congressional

goal of uniformity because the determination of

whether such a termination occurred hinges on the

application of state law.

A. Congress Enacted the PMPA to

Create a National Standard for the

Termination and Nonrenewal of

Petroleum Franchises.

In enacting the PMPA, Congress established 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, 19. To achieve the goal of uniformity,

Congress replaced 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. To ensure uniformity, Congress

preempted any state laws or regulations governing

termination or nonrenewal that are different from

the PMPA. 15 U.S.C. § 2806(a)(1).

The uniformity Congress sought serves

important goals. 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

Precludes Uniformity Because the

Viability of a Constructive

Termination Claim Depends on

State Law.

In this case, the court of appeals held that the

dealers had a cause of action under the PMPA for

wrongful termination despite the undisputed facts

that the dealers continued to operate their franchises

without interruption and that Shel) neither

terminated the dealers’ franchises nor notified the

dealers of an intent to terminate their franchises.

Pet. App. 15a-21la. In particular, the court held that

Shell’s alleged breach of oral promises to retain a

rent subsidy program amounted to a “constructive”

. 3

termination of the dealers’ franchises because of the

“financial hardship” it allegedly caused them. Zd. at

2la.

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”—i.e., the contract to use the

refiner’'s trademark, the contract for the supply of

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

have to be a total breach.” Pet. App. 18a. Rather,

the court held the breach need only constitute “a

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”

(id.), 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.” 7d.

Under the court of appeals’ approach, the

determination of whether a franchisee was

constructively terminated within the meaning of the

PMPA turns on the application of state law. The

basis for the dealers’ constructive termination claim

is that Shell 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 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

. 20 -

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. Id. Thus, because

Massachusetts law (as applied by the federal courts)

permitted consideration of Shell’s alleged prior or

‘contemporaneous oral promises in the face of the

integration clause, the dealers could establish that

Shell 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 franchise[.]”).

In other states, this question would have been

resolved differently. 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., No. 88361, 2007 WL 1559510, at *7-8

(Ohio Ct. App. May 31, 2007), affd, 902 N.E.2d 1

(Ohio 2009); 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) (“[Wje will not allow extrinsic

evidence of a separate agreement to be cunsidered 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)

(“(W]jhere 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,

the dealers here could not have succeeded in

establishing constructive termination under the

PMPA based on Shell’s breach of alleged oral

promises made before or contemporaneous with the

execution of the written lease.

By allowing a cause of action under the PMPA

for constructive termination based on a material

breach of one of the franchise terms, the court of

appeals allowed state law to determine whether the

franchisor has effected a termination under the

PMPA. Given Congress’ goal of replacing 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.

Ill. An Assignment Does Not Constitute

Termination Of A Franchise Under The

PMPA Merely Because The Assignee

Breaches The Contract Or Because The

Assignment Violates State Law.

In recognizing a cause of action under the

PMPA for constructive termination, the court of

appeals relied on the Fourth Circuit's decision in

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

1986). See Pet. App. 15a-18a (citing and quoting

Barnes). Barnes set out two theories to justify relief

for franchisees claiming, as the dealers did here, that

an assignment of their franchises violated their

tw

te

rights under the PMPA. Neither theory is properly

cognizable under the PMPA.

First, Barnes held that a “franchisee can

obtain relief under the Act if the franchisee [by

virtue of an assignment of the franchise] can no

longer obtain gasoline at the stipulated franchise

price.” Jd. at 362. Barnes is incorrect. As explained

above, the text, structure, and purpose of the PMPA

preclude a cause of action for constructive

termination predicated on a breach of contract by the

franchisor that does not effect a termination of the

franchise. It follows that, contrary to Barnes and the

court of appeals’ decision here, a cause of action does

not lie “against the assignor of a franchise when the

assignee breaches the franchise.” Pet. App. 17a

(citing Barnes, 795 F.2d at 362). The court of

appeals reasoned that permitting a franchisee to

pursue a PMPA claim against the assignor when the

assignee commits a breach “prevents’ the

assignor/franchisor from shielding itself against

liability through the use of another corporation.” I/d.

This rationale lacks merit because its premise is

flawed: even absent an assignment, the franchisor

would not be liable for wrongful termination under

the PMPA for a mere breach of contract that did not

constitute a termination of the franchise.

Second, Barnes held that an assignment that

is invalid under state law “is tantamount to a

constructive termination of the franchise” in

violation of the PMPA. 795 F.2d at 363. The court of

appeals embraced that theory in dicta here, stating

that “an assignment that is violative of state

law,...gives rise to a claim under the PMPA

against the original franchisor/assignor.” Pet. App.

. 23 -

15a-16a. This Court should make clear that the

PMPA does not permit a cause of action based on

this theory either. Absent such clarification,

franchisees may simply recast material-breach

claims under the PMPA as termination claims based

on assignments in violation of state law. These two

assignment-based claims go hand-in-hand because

many states, including Massachusetts, see Mass. Gen

Laws ch. 106, § 2-210 (2009), have incorporated into

their statutory schemes language from the Uniform

Commercial Code declaring that an assignment that

“increase[s] materially the burden or risk” imposed

by the contract is invalid. See UCC § 2-210 (2004);

see, e.g., Tenn. Code Ann. § 47-2-210 (2009); Ohio

Rev. Code Ann. § 1302.13(B) (2009); Va. Code Ann.

§ 8.2-210(2) (2009); Or. Rev. Stat. § 72.2100(2)

(2007). Thus, when an assignment results in a

change to the gasoline price, or to another statutory

element, that is unfavorable to the franchisee, the

franchisee will usually proceed under both theories,

arguing that a constructive termination has occurred

both because the assignment breached a statutory

element and because the assignment violated state

law.

For example, the plaintiff in Clark v. BP Oil

Co., 137 F.3d 386, 390-91 (6th Cir. 1998), argued

both that the franchisor constructively terminated

his franchise by breaching the supply and lease

agreements and that the franchisor assigned the

franchise in violation of Tennessee law. Both

arguments were based on the same underlying facts:

the franchisor’s assignment of the franchise to a

third party that charged a higher price for gasoline.

Similarly, in Shukla v. BP Exploration & Oil, Inc.,

. 24 -

115 F.3d 849, 852-53 (11th Cir. 1997), the plaintiff

argued that the franchisor constructively terminated

his franchise on the theories that “the assignment

increased his burdens under the franchise agreement

and was therefore invalid under Florida law” and

that the assignee’s “pricing practices constituted a

breach of the supply component of his franchise

agreement, resulting in a termination of the

franchise.” See also, e.g., Portland 76 Auto/Truck

Plaza, Inc. v. Union Oil Co. of Cal., 153 F.3d 938, 948

(9th Cir. 1998); Sawhney v. Mobil Oil Corp., 970 F.

Supp. 366, 371-72 (D. N.J. 1997), rev'd, 173 F.3d 421

(3d Cir. 1998); Cedar Brook Serv. Station, Inc. v.

Chevron U.S.A., Inc., 746 F. Supp. 278, 282

(E.D.N.Y. 1990), aff'd, 930 F.2d 908 (2d Cir. 1991).

Barnes’ conclusion that a _ franchise

assignment in violation of state law terminates the

franchise rests on a faulty understanding of the law

of assignments. An assignment that violates state

law is invalid, but an invalid assignment does not

dissolve the original contract between franchisor and

franchisee. Rather, the assignment is simply

ineffective, and the original contractual obligations

between franchisor and franchisee remain. See, e.g.,

U.C.C. § 2-210 cmt. 3; E. Allen Farnsworth,

Farnsworth on Contracts § 11.4 (2001); Restatement

(Second) of Contracts § 317 cmt. a & illus. 2 (1981).?

7 If the contract prohibits assignments, then the franchisee

would have a state-law claim against the franchisor for breach

of contract. If the original franchisor no longer exists, then the

rules of successor liability would apply.

25 -

Because the franchise agreement between the

franchisor-assignor and franchisee would remain in

force, the Barnes court was wrong to conclude that

an invalid assignment would terminate the

franchise. Barnes sought to support its holding by

reference to one part of the statutory definition of a

franchise. Under that definition, a franchise

includes “the unexpired portion of any franchise .. .

which is transferred or assigned as authorized

by any applicable provision of state law.” 795 F.2d at

363 (quoting 15 U.S.C. § 2801(1)(B)Qiu)). That

definition makes clear that the PMPA governs a

franchise that is assigned in accordance with state

law, but it does not address franchise assignments

that violate state law. Where an assignment is

ineffective, the assignor remains bound by the

contract, and the agreement between the dealer and

the franchisor is thus still a “franchise” within the

more general definitions of 15 U.S.C. § 2801(1)(A),

(B)(@)-(1).

The Barnes court also relied on Section

2806(b)(1) of the Act, which states:

Nothing in this subchapter authorizes

any transfer or assignment of any

franchise or prohibits any transfer or

assignment of any franchise as

authorized by the provisions of such

franchise or by any _ applicable

provision of state law which permits

such transfer or assignment without

regard to any provision of the

franchise.

Barnes, 795 F.2d at 363. The Barnes court inferred

from this provision that “an assignment that is

. 26 -

unauthorized by state law is prohibited” by the

PMPA. Id. But Section 2806(b)(1) is an expression

of neutrality toward state law on assignments.

Contrary to Barnes, it cannot be read to provide that

an assignment prohibited by state law is itself a

violation of the PMPA. Nothing in the provision

suggests, much less provides, that the PMPA

incorporates state law on assignments. If Congress

had intended to provide that an assignment in

violation of state law constitutes an unlawful

termination under the PMPA, it easily could have

said so. This Court should thus reject as misguided

the Barnes court’s attempt to infer such intent from

various provisions of the PMPA that do not address

termination.®

IV. The PMPA Does Not Create A Cause Of

Action For Constructive Nonrenewal.

For the very reasons that the court of appeals

erred in allowing a cause of action for constructive

termination, it correctly decided that the PMPA does

not provide a cause of action for constructive

nonrenewal. Pet. App. 2la-25a (relying on the text

and structure of the Act to reject the dealers’

constructive nonrenewal claim). Because the PMPA

8 Moreover, the Barnes court's view that an assignment in

violation of state law amounts to a termination under the

PMPA is entirely at odds with the PMPA’s text and structure,

which require actual termination or nonrenewal of the

franchise to trigger the protections of the Act. See Part I,

supra. A PMPA cause of action for assignments that violate

state law would also undercut the PMPA's goal of national

uniformity by expressly resting recovery under the Act on state

law. See Part II, supra.

97.

defines “nonrenewal” as the “failure to reinstate,

continue, or extend the franchise relationship,” 15

U.S.C. § 2801(14), a franchisee who has signed a

renewal agreement cannot claim that a nonrenewal

within the meaning of the Act has occurred.

Moreover, as it does for franchise termination, the

PMPA establishes a_ detailed set of notice

requirements and preliminary relief provisions

governing the nonrenewal of petroleum franchises

that are nonsensical unless nonrenewal is

understood to mean what it says—a severance of the

relationship between franchisor and franchisee. See

15 U.S.C. §§ 2804 and 2805(b); Pet. App. 22a (“This

notice-and-preliminary-relief structure is evidence

that Congress intended to limit the reach of the

PMPA to cases where either a notice [of nonrenewal]

is given or an actual nonrenewal has taken place.”)

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

489 n.16 (5th Cir. 2003), and Dersch Energies, 314

F.3d at 865)). The sections of the Act providing the

permissible grounds for nonrenewal likewise

presume that an actual nonrenewal will take place.

See 15 U.S.C. § 2802(b).

The dealers have argued that the court of

appeals’ rejection of constructive nonrenewal will

force 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.” 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 (U.S. Aug. 21, 2008). This

contention ignores the provisions of the PMPA that

protect franchisees from having to make such a

- 28 -

choice. A franchisor that intends not to renew

usually must give the franchisee 90 days notice prior

to nonrenewal. 15 U.S.C. § 2804(a). Franchisees

may then seek a preliminary injunction under the

lenient standards set forth in 15 U.S.C. § 2805,

which allow them to continue to operate under the

preexisting terms while the court decides the merits

of their claims. See Part I(B), supra.

CONCLUSION

The judgment of the court of appeals with

respect to the dealers’ constructive termination

claims should be reversed, and the judgment with

respect to the dealers’ constructive nonrenewal

claims should be affirmed.

Respectfully submitted,

HARRY M. NG ROBERT A. LONG, JR.

JANICE K. RABURN Counsel of Record

American Petroleum JONATHAN L. MARCUS

Institute ELIZABETH ARENS

1220 L Street N.W. Covington & Burling LLP

Washington, DC 20005 1201 Pennsylvania Ave., NW

(202) 682-8000 Washington, DC 20004

(202) 662-6000

August 2009 Counsel for Amicus Curiae

- 29.