Gas Station Franchise Lease Dispute Heading to Supreme Court

June 23, 2009
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A group of franchise gas station owners will be facing off against Shell Oil Company in the U.S. Supreme Court next year. The eight owners are alleging that Shell Oil changed their lease terms and increased their rents to the point that Shell could take over ownership of their stations.

According to the brief, between 1982 and 1998, Shell Oil offered its franchisees a rent subsidy, called the Variable Rent Program (VRP), which reduced their monthly rent by a set amount for every gallon of gasoline a franchisee sold above a specific threshold. Although Shell renewed the subsidy in annual notices, the notices explicitly provided for cancellation with 30 days’ notice. In 1998, Shell and Texaco created a joint venture, Motiva Enterprises, to conduct their domestic gasoline marketing operations. As part of the venture, Shell assigned its rights and duties under the relevant franchise contracts to Motiva, which initially replaced the VRP with a different rent subsidy. However, Motiva ended that replacement subsidy at the beginning of 2000, causing the Shell franchise owners to pay “much more rent.”

In 2001, 63 Shell dealers filed suit in federal district court, alleging that their property leases had incorporated the rent subsidy and that the elimination of the subsidy breached those leases. The dealers also alleged that Shell’s and Motiva’s actions had violated two provisions of the Petroleum Marketing Practices Act (PMPA) of 1978, which limited the circumstances in which petroleum refiners or distributors may “terminate” a franchise or “fail to renew” a franchise relationship.

After a 15-day trial involving a group of eight dealers selected by the court, a jury awarded the dealers $3.3 million, including $1.3 million on a constructive termination claim and $1.2 million on a constructive renewal claim, as well as attorneys’ fees and expert witness fees. The court denied the dealers’ request for punitive damages, observing that the elimination of the rent subsidy was partly attributable to changes in the industry and efforts to harmonize Shell’s and Texaco’s rent structures.

Shell and Motiva appealed. On the PMPA claims, the court affirmed the judgment on the constructive termination claim but reversed the judgment of liability on the constructive nonrenewal claim. Because the dealers signed the new agreements “under protest” and continued to operate their franchises, the court of appeals held that they could not claim constructive nonrenewal.

The case is now going to the Supreme Court in order to clarify the scope of the PMPA. In Shell Oil Products Co. LLC vs. Mac’s Shell Service, Inc. (No. 08-372), the question presented is whether a franchisee may asset a claim of “constructive termination” under the PMPA when it continues to operate the franchise by purchasing the same fuel, reselling it under the franchisor’s trademark, and occupying the leased marketing premises.

In Mac’s Shell Service, Inc. v. Shell Oil Products Co. LLC (No. 08-240), the question is whether a franchisee who signs a renewal agreement “under protest” and operates under the terms of the agreement may maintain a claim for “constructive nonrenewal” under the Act.