LEGAL TRENDS

U.S. Supreme Court Rejects Most "Constructive"
Claims Under the PMPA

By David M. Rodi

In March, the United States Supreme Court issued its first-ever decision construing the Petroleum Marketing Practices Act ("PMPA"), which was enacted in 1978. Mac's Shell Serv., Inc. v. Shell Oil Prods. Co., 130 S. Ct. 1251 (2010). In a unanimous ruling, the Court rejected most claims for "constructive termination" and "constructive nonrenewal" under the PMPA. This decision will benefit refiners and marketers who distribute gasoline through franchised dealers by adding certainty to the contract renewal process and limiting franchisees' ability to assert claims for wrongful termination.

The Scope of the PMPA and the Dealers' "Constructive" Claims
The PMPA regulates the termination and nonrenewal of motor fuel franchise agreements. Under the Act, a franchisor may only "terminate" a franchise agreement during its term or "fail to renew" a franchise relationship at the end of the term based on statutorily approved grounds. Franchisees may bring suit in federal court when a franchisor violates the PMPA, and the Act empowers courts to award injunctive relief, actual and punitive damages, and attorneys' fees.
Although the language of the PMPA indicates that Congress intended only to regulate actual terminations and nonrenewals of service station franchises, over the last 30 years some courts have allowed franchisees to pursue claims for "constructive termination" or "constructive nonrenewal."

In Mac's Shell, a group of Shell-branded service station dealers asserted such constructive claims against Shell Oil Company and Motiva Enterprises LLC, a joint venture company to which Shell assigned the dealers' franchise agreement in 1998. The plaintiffs asserted that their franchise agreements had been "constructively terminated" when Motiva ended a long-standing, voluntary rent rebate program that had enabled dealers to reduce their effective monthly rents by increasing their sales of gasoline. The plaintiffs alleged that termination of the rebate program had the effect of raising their actual rent each month—even though their written leases contained a provision setting forth the maximum rent.

The plaintiffs also asserted that Motiva had "constructively nonrenewed" their franchise relationships as each dealer's contract came up for renewal. The plaintiffs argued that Motiva had used bad faith in adopting a new formula for calculating rent, and that the change in formulas was intended to drive the dealers out of business. Testimony at trial indicated that Motiva's new formula was consistent with prevailing industry practice at the time. Moreover, all of the plaintiffs had signed renewal contracts based on the new formula, although some plaintiffs signed "under protest."

A federal jury in Boston found for the plaintiffs on both the constructive termination and constructive nonrenewal theories. The First Circuit affirmed the judgment on constructive termination, but reversed on the dealers' constructive nonrenewal claim.

"Constructive" Termination Requires an Actual End to One of the Franchise Elements
Overturning the judgment with respect to constructive termination, the Supreme Court held that, at the very least, "a franchisee cannot recover for constructive termination under the [PMPA] if the franchisor's allegedly wrongful conduct did not compel the franchisee to abandon its franchise." Id. at 1253. Considering both the ordinary and the technical meaning of the word "terminate" in the PMPA, the Court concluded that the "Act is violated only if an agreement for the use of a trademark, purchase of motor fuel, or a lease of premises is 'put to an end.'" Id. at 1257. By contrast, "[c]onduct that does not force an end to the franchise... is not prohibited by the Act's plain terms." Id. at 1257–58.

All of the plaintiffs in Mac's Shell remained in business through the end of the franchise term or abandoned the franchise for other reasons. Accordingly, the Court concluded that none had been "terminated" within the meaning of the PMPA. Id. at 1262 & n.10. Because that principle was sufficient to resolve the issues before it, the Court reserved for another day Shell and Motiva's argument that the PMPA does not create a cause of action for "constructive termination" under any circumstances. Id. at 1257 n.4, 1260 n.8.

The Court's holding effectively destroys the ability of franchisees to pursue a claim for constructive termination while remaining in operation of their service stations, as has become increasingly common in some circuits. Moreover, because the Court reserved the issue of whether "constructive" termination claims exist at all, franchisors remain free to advance the argument that no such claim exists under the PMPA.

A Franchisee Who Signs Renewal Paper Cannot Claim "Constructive" Nonrenewal
On the constructive nonrenewal claim, the Court adopted a bright-line rule that "a franchisee that chooses to accept a renewal agreement cannot thereafter assert a claim for unlawful nonrenewal" under the PMPA, even if the franchisee signs the renewal agreement "under protest." Id. at 1262, 1263. Where a franchisee signs "under protest," the Court reasoned, there has been no "failure to renew" the franchise relationship on the part of the franchisor. Therefore, no claim will lie under these circumstances. Id. at 1263–64.

This bright-line holding will eliminate a great deal of the confusion that was created by Pro Sales, Inc. v. Texaco USA, 792 F.2d 1394 (9th Cir. 1986) and similar cases, which had allowed dealers to sign renewal agreements "under protest" and thereafter file suit alleging "constructive" nonrenewal while continuing to operate their stations.

The Court's ruling will reduce franchisees' ability to manipulate the renewal process by trying to have things both ways, simultaneously challenging renewal terms in court while proceeding to operate under them. Franchisors will benefit greatly from this increased certainty in the statutory renewal process.

David M. Rodi is a partner at Baker Botts L.L.P., who practices in the areas of antitrust and energy litigation. Along with co-counsel, Baker Botts represented Shell and Motiva in the appeal of the Mac's Shell case.



On Credit Card Cons Beware:
Your Sentence May Be Based on What Could Have Been Fraudulently Charged,
Not What Was Actually Charged

By N. Jill Yaziji

In U.S. v. Harris, _____ F.3d _____, No. 08-11121, and U.S. v. William, _____ F.3d _____, No. 08-11151, Harris and Williams pled guilty to bank fraud and conspiracy to use unauthorized access devices, respectively. Both defendants, however, challenged their sentences claiming the district courts wrongly interpreted the Sentencing Guidelines. The Guidelines base the offense level of a crime involving fraud on the amount of loss inflicted by a defendant—the bigger that loss, the longer the sentence. "Loss," in turn, is defined as "the greater of actual or intended loss." Therefore, how a court interprets "intended loss" is highly consequential. Indeed, both district courts interpreted the "intended loss" as the aggregate limits of the credit cards compromised instead of the aggregate amounts fraudulently charged to these cards.[1]

The Fifth Circuit Court of Appeals affirmed the district courts' decisions,[2] holding Harris and Williams accountable for the aggregate limits of the compromised credit cards. However, it provided important caveats on the use of aggregate limits as a measure of intended loss.

First, the Court considered whether the "intended loss" calculation by the district courts was a question of law subject to de novo review, or one of fact accorded far more deference by the Court of Appeals. Naturally, both defendants argued it was the former; the Fifth Circuit agreed. It held that while the amount of loss incurred by the victims of fraud was a factual issue, the method of determining that amount involved a question of law. Second, while the Court ultimately agreed with the district courts' method of determining the amount of intended loss in this instance, it cautioned against using the aggregate limit calculation as a bright-line formula and a misapplication of the holding in U.S. v. Sowels, 998 F.2d 249 (5th Cir. 1993) and other precedents.

The inquiry must be specific: Did the defendant control the fraudulently accessed credit cards or did he transfer it to a third party whom he did not control, hence potentially jeopardizing the entire face value of the card? Was the offense complete when he was apprehended, or did he intend to charge the compromised cards further? Since both Harris and Williams transferred the cards to third parties whom they did not control, the Court of Appeals held that the district courts may infer the defendants intended the loss to be the entire aggregate limits of the credit cards and determine their sentences accordingly.

N. Jill Yaziji is the Principal of Yaziji Law Firm, a downtown firm specializing in business litigation and personal injury, and a member of the editorial board of The Houston Lawyer.

Endnotes
1. In both cases, the difference between the aggregate limits and the aggregate amounts was substantial. In Harris, for instance, the total amount fraudulently charged was less than $12,000, while the total credit limit of all cards fraudulently accessed was almost $90,000. 2. The Court of Appeals affirmed Harris' sentence in its entirety and affirmed the district court's determination that Williams should be held accountable for the entire aggregate limit of the credit cards he compromised but reversed his sentencing on procedural grounds.

< BACK TO TOP >