Constructive Termination and Constructive Nonrenewal Claims

The Court held that a franchisee cannot recover for constructive termination under the Act if the allegedly wrongful conduct by the franchisor did not compel the franchisee to abandon the franchise. The decision was based on the plain reading of the Act, bolstered by the analogous legal contexts of constructive termination in employment cases and constructive eviction in landlord-tenant law cases. An alternative construct, which would allow a “termination” while the franchisee continues in business, would be indeterminate and unworkable; courts would
be unable to discern whether a simple breach of franchise agreement case would be so threatening as to constitute constructive termination, and trigger federal
jurisdiction under the Act. The Court determined that the franchisees had adequate state law remedies to redress wrongful acts that did not put an end to their business and did not need to resort to federal jurisdiction under the Act.

The Court did not decide whether a cause of action exists under the Act for constructive termination at all. The Court merely decided that constructive termination did not exist in this case. For this reason, the decision will be very persuasive in evaluating whether franchisees are constructively terminated under state law.

The Court also was asked “to decide whether a franchisee who is offered and signs a renewal agreement can nonetheless maintain a claim for 'constructive nonrenewal' under the Act.” For similar reasons, the Court decided that such a claim could not be maintained because the Act only covers the termination or cancellation of a franchise. In effect, the Court decided the franchisees did not have standing under the Act. A renewal, even under protest, defeats the argument that the franchise was not renewed. The Court suggested that where a franchisor would renew only under “unlawful and coercive terms” prohibited by the Act, the relaxed preliminary injunction standard under the Act would be available to resume the continuation of the franchise relationship during the litigation.

The Court chose to impose a bright-line test to constructive termination and nonrenewal claims. By analogy, the Court's decision may provide persuasive precedent for claims under other state franchise relationship statutes. The Court's decision allows franchisors to have greater flexibility to modify the terms of their franchise agreements at the time of renewal because the franchisee may be required to elect between ceasing operation and accepting more-stringent economic terms as a condition of renewal. The decision also discusses common law remedies for franchisees confronting potential constructive termination and nonrenewal claims. The case provides important lessons in critical thinking and strategy for all franchise termination and nonrenewal decisions.

Craig R. Tractenberg is a partner in the New York and Philadelphia offices of Nixon Peabody. He is a former editor of the ABA Franchise Law Journal. He can be reached by e-mail at [email protected].

On March 2, 2010, the U.S. Supreme Court unanimously held that a franchisee that stays in business cannot sue for constructive eviction under the Petroleum Marketing Practices Act (the “Act”). The Court also decided that a franchisee waives its constructive nonrenewal claim when it enters into a renewal agreement.

In Mac's Shell Service, Inc. v. Shell Oil Products Co. LLC, service station franchisees sued their franchisor, Motiva Enterprises LLC (a joint venture of Shell Oil and two other companies) for withdrawing a volume-based rent subsidy, thereby effectively raising the franchisees' rent when they were up for renewal. As each franchise agreement expired, Motiva offered new agreements that contained a new rent formula for calculating rent, which resulted in higher rent. The franchisees sued both for constructive termination and for constructive nonrenewal, while continuing in operation. The theme of the franchisees' case at trial was that the franchisor sought to drive the franchisees out of business for the purpose of taking over their service station locations.

No Abandonment

The Court held that a franchisee cannot recover for constructive termination under the Act if the allegedly wrongful conduct by the franchisor did not compel the franchisee to abandon the franchise. The decision was based on the plain reading of the Act, bolstered by the analogous legal contexts of constructive termination in employment cases and constructive eviction in landlord-tenant law cases. An alternative construct, which would allow a “termination” while the franchisee continues in business, would be indeterminate and unworkable; courts would
be unable to discern whether a simple breach of franchise agreement case would be so threatening as to constitute constructive termination, and trigger federal
jurisdiction under the Act. The Court determined that the franchisees had adequate state law remedies to redress wrongful acts that did not put an end to their business and did not need to resort to federal jurisdiction under the Act.

The Court did not decide whether a cause of action exists under the Act for constructive termination at all. The Court merely decided that constructive termination did not exist in this case. For this reason, the decision will be very persuasive in evaluating whether franchisees are constructively terminated under state law.

The Court also was asked “to decide whether a franchisee who is offered and signs a renewal agreement can nonetheless maintain a claim for 'constructive nonrenewal' under the Act.” For similar reasons, the Court decided that such a claim could not be maintained because the Act only covers the termination or cancellation of a franchise. In effect, the Court decided the franchisees did not have standing under the Act. A renewal, even under protest, defeats the argument that the franchise was not renewed. The Court suggested that where a franchisor would renew only under “unlawful and coercive terms” prohibited by the Act, the relaxed preliminary injunction standard under the Act would be available to resume the continuation of the franchise relationship during the litigation.

The Court chose to impose a bright-line test to constructive termination and nonrenewal claims. By analogy, the Court's decision may provide persuasive precedent for claims under other state franchise relationship statutes. The Court's decision allows franchisors to have greater flexibility to modify the terms of their franchise agreements at the time of renewal because the franchisee may be required to elect between ceasing operation and accepting more-stringent economic terms as a condition of renewal. The decision also discusses common law remedies for franchisees confronting potential constructive termination and nonrenewal claims. The case provides important lessons in critical thinking and strategy for all franchise termination and nonrenewal decisions.

Craig R. Tractenberg is a partner in the New York and Philadelphia offices of Nixon Peabody. He is a former editor of the ABA Franchise Law Journal. He can be reached by e-mail at [email protected].