Of lions and tigers and contract terminations

By Anna Christensen
on Jan 25, 2010 at 2:24 pm

Below, Shira Liu, a student at Stanford Law School, recaps last week’s oral argument in Mac’s Shell Service v. Shell Oil Products Co. and Shell Oil Products Co. v. Mac’s Shell Service. Shira’s earlier coverage of the case is available here. Check the Mac’s Shell Service (08-240 and 08-372) SCOTUSwiki page for additional updates.

During oral argument on January 19 in Mac’s Shell Service v. Shell Oil, the Court focused on the first question presented in the case and searched for a clear test on two issues: when can a retail gasoline franchisee claim constructive termination of a dissolved franchise relationship under the Petroleum Marketers Protection Act (PMPA), and when, if ever, can it claim constructive termination when it continues to operate?

Jeffrey Lamken, on behalf of Shell Oil Products, argued that the PMPA does not govern constructive termination, meaning that the PMPA covers only terminations initiated by the franchisor and does not apply when franchisees exit because of intolerable conditions.  However, he admitted that the franchisor’s termination could be “by deed as well as by words” and allowed that implicit termination was at least possible.  Mr. Lamken explained, however, that implicit termination is much narrower than constructive termination, as the former occurs only when a franchisor engages in conduct that an objectively reasonable observer understand to be a notice of termination.  Justice Alito asked about two possible situations: a franchisor that refuses to supply gasoline and a franchisor that changes the open-price term in a fuel supply contract to $1000 per gallon.  Mr. Lamken replied that the former implicitly terminated the franchise while the latter did not.  When pressed by Justice Scalia, Mr. Lamken admitted that the line between constructive and implicit termination may sometimes be unclear, to which Justice Scalia responded “I think there is always an unclear line between the two.”

Assistant to the Solicitor General David O’Neill, appearing on behalf of the United States as an amicus curiae, suggested that constructive termination could be analogized to constructive discharge or constructive eviction: the jury finds constructive termination when the franchisor’s conduct forces the franchisee to end one of the statutory elements by franchisor’s conduct.  He urged the Court to adopt a two-part test for constructive termination that would require, first, that the franchisor’s conduct be wrongful; and second, that a rational, economically motivated franchisee in those circumstances would have no alternative but to abandon the franchise.  Justice Breyer pressed this point.  He questioned why actual exit would be required under an objective intolerance standard, giving the example of a franchisor letting lions and tigers loose in a gas station such that “any sensible person would clear out immediately,” but an “indefatigable and daring” franchisee who “desperately needs the money” stays in operation.  Mr. O’Neill replied that the franchisee must actually leave the premises to have a termination claim.

On the second issue, Justice Breyer asked John Farraher, arguing on behalf of the franchisees, to state the test for when a franchisee still in operation, like the franchisees in this case, can be said to have been constructively terminated.  Justice Breyer pointed out that Shell Oil and the Solicitor General provide a simple test: “the test is he has to leave.”  Mr. Farraher explained that the test is “whether or not the conduct has effectively eliminated an essential component of one of the three elements of the franchise.”  Justice Alito interjected that he had “no idea what that means.”  Justice Ginsburg asked whether there was any area of law in which constructive termination covered continuing operations and Mr. Farraher conceded that the vast majority of the courts held otherwise.  Justice Breyer explained that because a franchisee could seek a breach of contract claim in state court, a franchisee would not be without a remedy if the Court decided to “stick[] to the clear line.”

Mr. Lamken and Mr. O’Neill did not raise the second question presented.  Mr. Farraher explained the franchisees’ theory that they could sign new contracts under protest and then sue under the PMPA for non-renewal.  Justice Breyer noted that the “the statute says nothing about” recovery under that theory, and Justice Sotomayor asked why the franchisees did not include an argument accepted by the Seventh Circuit, as she thought that would have been their “strongest argument.”