WASHINGTON (CN) – The Supreme Court heard arguments Tuesday over whether Shell Oil terminated a contract with franchise gas stations – in violation of a Petroleum Market Practices Act – when it raised fees.
Justices appeared reluctant to say a contract is ended if the franchise continues. “Is there any area of the law in which a termination includes a non-termination?” Justice Ruth Bader Ginsburg asked the gas stations’ lawyer.
The Petroleum Market Practices Act generally forbids franchisors from terminating or failing to renew a contract with franchisees. The case marks the first time the Supreme Court addresses the act.
Sixty-three Massachusetts gas stations sued Shell Oil Products after it allowed its contracts to change, increasing its fees on franchisees. Mac’s Shell Service, representing the gas stations, maintains that Shell had promised to continue with the lower fees except if there were a war or major oil embargo.
Jeffrey Lamken of MoloLamken represented Shell. He argued simply that because the gas stations continued as franchises and signed onto a new contract after the fee increases, they could not claim that their franchises were terminated or that they were not renewed. He said that in order for the gas stations to claim the contract was terminated, the franchisor would have to expressly end it.
Justice Antonin Scalia appeared skeptical. “I thought that if you had a lease and the landlord fails to provide heat that you can move out and he will be deemed to have constructively evicted you,” he said.
Ginsburg probed Lamken’s insistence that there is only a violation of the act if the franchisor, not the franchisee, ends the contract “So the franchisor can do outrageous things – triple the rent, double the price of the fuel – and you would say that doesn’t count as a termination because the franchisor hasn’t terminated?”
Justice Samuel Alito followed up. “So if the franchisor completely refuses to supply gas, that’s an implicit termination? But if he charges $1,000 a gallon, that’s not a termination?” he asked skeptically.
Lamken also argued that Shell could cancel one of the two independent contracts it made with gas station managers, and said this would not count as terminating the contract because part would still be left in tact.
Scalia asked, “Do you really think that that’s how those contracts should be interpreted?”
John Farraher from Greenberg Traurig represented Mac’s and other gas stations. He claimed that Shell and Motiva terminated an essential portion of the franchise- the rent calculation. He said that if Shell’s argument were upheld, franchisors would be able to circumvent the petroleum act to end a contract by simply increasing the burden on their franchisees.
Alito pressed Farraher on whether the contact changes really amounted to a termination of the contract. “All but one remained in business, isn’t that correct?,” he asked in reference to the gas stations.
Justice Stephen Breyer appeared to share Alito’s skepticism. “One thing we know, the conduct wasn’t so bad that this person left, because he didn’t leave,” he said, in reference to the gas stations that stayed in business.
The justices jumped on what they said was an unclear rule on how to determine if a franchisor effectively terminates a contract without directly ending it.
Breyer appeared to prefer the clarity of Shell’s argument over Mac’s. “The other side is saying, ‘I know what the test is. The test is he has to leave.'” But he said he didn’t understand how courts could determine that a franchisor terminated a contract if the franchise continues.
Farraher replied that if a franchisor’s conduct has “effectively eliminated” the essential components of the franchise, then the franchisor has violated the act.
Alito asked, “What does it mean to effectively end the lease even though the lease continues?”
Ginsburg likewise appeared skeptical of Ferraher’s definition of a terminated contract. “Is there any area of the law, other than this one, if you are right, in which a termination includes a non-termination?” she asked.
But Justice Sonia Sotomayor seemed to jump to Farraher’s defense. “I’m going to assume that if a franchisor changes a rent term and the franchisee refuses to pay,” she said. “Wouldn’t the franchisor at some point give a notice of termination? What franchisor is going to sit through months and months and years of waiting for payment before kicking someone out?”
“Why do we need to make a constructive eviction theory when on a practical basis, there always in this situation has to be a notice of termination?” she said.
Since 1982, Shell’s franchise contracts had reduced the rent each gas station paid based on how much gasoline the station sold. But when Shell combined with Texaco and Star Enterprises in 1998, it handed the franchise management to Motiva Enterprises, which ended the subsidy program so that the franchises paid higher fees.
While filing suit, however, the gas stations signed onto new contracts with Shell and Motiva.
In the district court, the jury found in Mac’s favor, and awarded $3.3 million in damages for termination of the contract and for its non-renewal.
Upon appeal, the 1st Circuit agreed that Shell and Motiva terminated the contract, but rejected the claim that they failed to renew. Both sides appealed to the Supreme Court.
The Obama administration argued in support of Shell.