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Shell Gas Stations Argue Franchise Fees in Supreme Court

WASHINGTON -- The Supreme Court heard arguments earlier this week on whether or not Shell Oil terminated a contract with franchise gas stations when it raised fees in violation of a Petroleum Market Practices Act, according to a report by Courthouse News.

"Is there any area of the law in which a termination includes a non-termination?" Justice Ruth Bader Ginsburg asked the gas stations' lawyer, according to the report.

The Petroleum Market Practices Act generally forbids franchisors from terminating or failing to renew a contract with franchisees. The case marks the first time the Supreme Court addresses the act, according to Courthouse News.

A total of 63 Massachusetts gas stations sued Shell Oil Products after contracts were changed to increase their franchise fees. Mac's Shell Service, representing the gas stations, maintained Shell had promised to continue with the lower fees, except if there were a war or major oil embargo.

Jeffrey Lamken, representing Shell, argued by continuing as franchisees and signing a new contract after the fee increases, the gas stations could not claim their franchises were terminated or not renewed. To claim the contract was terminated, he argued, the franchisor would have to expressly end it.

Justice Antonin Scalia appeared skeptical, according to the report. "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 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.

Lamken also argued Shell could cancel one of the two independent contracts it made with gas station managers and said this would not count as terminating the contract because part would still be left. Scalia asked: "Do you really think that that's how those contracts should be interpreted?"

John Farraher, representing Mac's and other retail fuel stations, claimed Shell and Motiva terminated an essential portion of the franchise: the rent calculation, according to the report. Farraher said if Shell's argument were upheld, franchisors would be able to circumvent the petroleum act to end a contract by simply increasing the burden on their franchisees.

Alito pressed Farraher on whether the contact changes really amounted to a termination of the contract. "All but one remained in business, isn't that correct?" he asked in reference to the gas stations and convenience stores.

Justice Stephen Breyer added: "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.

Breyer appeared to prefer the clarity of Shell's argument over Mac's, according to Courtroom News. "The other side is saying, 'I know what the test is. The test is he has to leave,'" he said, adding he didn't understand how courts could determine that a franchisor terminated a contract if the franchise continues.

Since 1982, Shell's franchise contracts had reduced the rent each gas station paid based on how much gasoline the station sold, the report noted. But when Shell combined with Texaco and Star Enterprises in 1998, it handed the franchise management to Motiva Enterprises, which ended the subsidy program so that the franchises paid higher fees. While filing suit, however, the gas stations signed onto new contracts with Shell and Motiva.

In the district court, the jury found in Mac's favor, and awarded $3.3 million in damages for termination of the contract and for its non-renewal. Upon appeal, the 1st Circuit agreed that Shell and Motiva terminated the contract, but rejected the claim that they failed to renew. Both sides appealed to the Supreme Court.

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