Shell Oil Franchisees Lose Appeal in Supreme Court

(CN) - Shell Oil dealers in Massachusetts can't sue the company under the Petroleum Marketing Practices Act, the Supreme Court ruled Tuesday, because the franchisees never abandoned their gas stations after the oil company hiked their rent.

"We hold that a franchisee cannot recover for constructive termination under the (Act) if the franchisor's allegedly wrongful conduct did not compel the franchisee to abandon its franchise," Justice Samuel Alito wrote for the unanimous court.

"Additionally, we conclude that a franchisee who signs and operates under a renewal agreement with a franchisor may not maintain a claim for constructive nonrenewal."

The decision is a victory for Shell Oil, which pointed out that none of the dealers abandoned their franchises in response to its elimination of rent subsidies or the terms of its new franchise agreements.

Shell had raised the rent in 2000, after forming a joint venture called Motiva Enterprises, with two other oil companies, to manage its East Coast petroleum-marketing operations.

The dealers sued Shell and Motiva in federal court, and a jury ruled against the oil companies after a two-week trial.

The district court affirmed, and the 1st Circuit partially reversed, saying a franchisee can't sue for unlawful nonrenewal if it "has signed and operates under a renewal agreement complained of."

The Supreme Court agreed with that part of the 1st Circuit ruling and took it a step further, saying a franchisee must abandon its franchise in order to recover for constructive termination under the Act.

"Reading the Act to prohibit simple breaches of contract ... would be inconsistent with the Act's limited purpose and would further expand federal law into a domain traditionally reserved for the states," Justice Alito wrote. "Without a clearer indication that Congress intended to federalize such a broad swath of the law governing petroleum franchise agreements, we decline to adopt an interpretation of the Act that would have such sweeping consequences.

"We therefore hold that a necessary element of any constructive termination claim under the PMPA is that the complained-of conduct forced an end to a franchisee's use of the franchisor's trademark, purchase of the franchisor's fuel, or occupation of the franchisor's service station," the court concluded.

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