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U.S. Supreme Court Listens to Gas Station Franchisees

On January 19, franchisees had a rare opportunity to be heard by the U.S. Supreme Court. In Mac’s Shell Service, Inc. v. Shell Oil Products, Inc., 63 Shell gas station dealers claimed that their franchisor essentially terminated or did not renew their franchise agreement, an action prohibited by the thirty-year old Petroleum Marketing Practices Act.

Franchisee attorney Robert Salkowski wrote on Blue MauMau in November that the dealers felt Shell Oil " 'embarked on a secret plan to transform their gasoline distribution network' by squeezing the dealers out of the business in order to capture profits then being earned by the independent dealers.” The Miami-based attorney explains that Shell “ . . . began offering the dealers new leases on a take-it-or-leave-it basis that eliminated the rent subsidies, thus dramatically increasing the dealers’ rents.”

Courthouse News reports the Supreme Court Justices’ line of questioning in Tuesday’s hour-long hearing (pdf). The journal summarizes, “Justices appeared reluctant to say a contract is ended if the franchise continues.”

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 [the franchisor attorney] 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.

…  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.

But Justice Sonia Sotomayor seemed to jump to Farraher's [attorney for the franchisees] 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.

The Gasoline and Automotive Service Dealers of America reported in June of 2009 that the Obama administration had asked the Supreme court to overturn the $3.3 million ruling that was awarded to the franchisees and rule in favor of the franchisor instead.

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.