Since its enactment in 1978, the Petroleum Marketing Practices Act (PMPA) has been extensively litigated. The litigation process is complex, and courts have the important responsibility of determining the extent of the PMPA’s application, interpreting its substantive provisions, deliberating the scope of federal preemption of efforts by state legislation, and regulating franchise petroleum relationships and state common law claims. Below, we’ll discuss the PMPA in greater detail in relation to franchises and identify the grounds for franchise termination and franchise non-renewal.
The Petroleum Marketing Practices Act governs the sale of motor fuel branded with the trademark of the refiner. It does not pertain to the sale of unbranded motor fuel.
The PMPA established requirements for the franchise termination and franchise non-renewal of contracts between gasoline refiners and their distributors. While the FTC Rule governs pre-sale disclosures associated with franchise sales, the PMPA only applies to terminations and non-renewals of franchise agreements. The PMPA addresses the imbalanced bargaining power between refiners, oil companies, and fuel purchasers, and aims to level the playing field and protect dealers and distributors from termination or non-renewal.
The PMPA only applies to three aspects of a contractual agreement between the petroleum franchisor and the franchisee.
Besides these three central components, the PMPA does not restrict or impair a franchisor’s contractual or state law right to terminate any part of the franchisor relationship.
In some cases, the PMPA stops suppliers from terminating or nonrenewing a franchise for reasons other than those listed in the statute, including franchisee misconduct, changes in the supplier’s marketing strategy, or the marketing environment.
Many cases over the years have questioned whether relationships constituted a franchise under the PMPA. Most commonly, situations arose where the dealer did not purchase motor fuel from the supplier but did sell the fuel for the supplier on commission (“commission marketers”). The leading case on this subject, Farm Stores, Inc. v. Texaco, Inc., concluded that the operator was not a “retailer” under the PMPA because the operator “did not: (i) pay for the gasoline inventory until it was sold; (ii) take title; (iii) pay ad valorem taxes on the gasoline inventory; (iv) bear the risk of loss of the gasoline (except for its own carelessness); (v) retain any funds from the sale of the gasoline to motorists; (vi) set the price or assume the market risk in fluctuations in gasoline prices; (vii) pay sales taxes or extend credit to motorists on resale; and (viii) hold a gasoline retailers business license.”
Similarly, in Checkrite Petroleum, Inc. v. Amoco Oil Co., the court explained that because Checkrite did not purchase motor fuel, it was “neither a ‘distributor’ nor a ‘retailer,’ subject to the PMPA.
As discussed above, the PMPA does not govern all aspects of the franchise relationship. It only affects the circumstances under which the franchisor can end the franchise relationship. These two options are franchise termination and franchise non-renewal.
A franchise termination is a termination of the franchise relationship during the franchise agreements, which typically run for three years.
A non-renewal of a franchise termination is the termination of the franchise relationship at the franchise term’s expiration date.
The PMPA allows a supplier to terminate or renew a franchise for the following reasons:
Commonly litigated grounds for franchise termination and non-renewal include breach of reasonable and material significant provisions, failure to show good faith efforts, market withdrawal, and a few other particular relevant events. All are discussed below.
While the PMPA doesn’t prohibit franchise termination based on a franchisee’s breach of contract, it does specify that the provision be reasonable and of material significance to the franchise relationship.
In Chevron U.S.A., Inc. v. El-Khoury, a question of fact regarding whether El-Khoury’s failure to pay state sales tax was materially significant enough to the franchise relationship to allow for termination was addressed by the court. Because of this question of fact, the Ninth Circuit reversed and remanded the district court’s grant of summary judgment. The Ninth Circuit held that the district court erred because the statutory definition of “failure” necessarily requires an inquiry into the significance of the violation.
When a franchise has not made good faith efforts to perform contractual requirements, the PMPA allows termination. Courts have required that this relevant provision is material to the franchise relationship. In N.I. Petroleum Ventures Corp. v. Sweet Oil Co., the district court considered various statutory grounds for termination or non-renewal when denying the plaintiff and
franchisee’s request for a preliminary injunction. Because of the failure by the franchisee to give a good faith effort to carry out the provisions of the franchise, the franchisee was told of the failure by the franchisor in writing, and was afforded a reasonable opportunity to exert good faith efforts to carry out such provisions. This is a basis for termination or non-renewal.
When marketing ceases through retail outlets in a geographic region, a franchisor can terminate or not renew the franchise agreement. This allows the franchisor to determine business decisions regarding its marketing and distribution strategy. The specific requirements are very complex, but the court has almost always upheld franchisor’s market withdrawal determinations.
Other events in which termination of a franchise agreement would be considered reasonable are 1) fraud or criminal misconduct related to the operation; 2) loss of operation lease; 3) condemnation of the marketing premises under eminent domain; 4) Franchisor’s loss of trademark rights; 5) destruction of premises; 6) franchisee’s failure to pay franchisor legally entitled sums on time; 7) failure to comply with laws.
In addition to the grounds identified above for termination and non-renewal, there are a few grounds specific to strictly non-renewal.
When a franchise agreement is about to expire, the franchisor can either issue a notice of non-renewal based on grounds or offer a new franchise agreement for a new set timeframe. A proper grounds for non-renewal is when the franchisee fails to agree to changes to the franchise, which the franchisor made in good faith and during the normal course of business. An excellent example of this was Kevorkyan v. Texaco Refining and Marketing, Inc., when Texaco didn’t renew the franchise relationship with Kevorkyan because he failed to agree to changes proposed in a new franchise agreement. Since changes were made in good faith and within the normal
course of business, non-renewal was permissible. Additionally, the Ninth Circuit affirmed the district court’s grant of summary judgment to Texaco.
The PMPA does not require a franchisor to continue a franchise relationship with a franchisee when bona fide complaints have been made. A good example of this is seen in Early v. Texaco Ref. & Mktg. In this case, a franchisor sent a non-renewal notice to the franchisee because of 12 bona fide customer complaints about the franchisee’s operation. The Ninth Circuit considered Robertson v. Mobil Oil Corp., in which the Third Circuit held that to qualify as bona fide, “a customer’s complaint must be sincere, and the circumstances complained of must, in fact, exist and be one[s] for which the franchisee can reasonably be held accountable.”
Trying to exclude implausible or sincere yet baseless complaints from “bona fide” complaints, “Robertson modified the definition of ‘bona fide’ to require not only that the complaint be sincere but that it also have a ‘reasonable basis in fact.’” Id. (citing Robertson, 778 F.2d at 1005). Using Robertson as its standard, the Ninth Circuit held that ten out of twelve of the complaints against Early were sincere, as well as a reasonable basis in fact.
If the franchisee has failed to operate the station in a clean, safe, and healthful manner, the PMPA allows for non-renewal. In Weisenburger v. Amoco Oil Co., the franchisor, Amoco, notified the franchisee that his lease was non-renewal due to his failure to operate the station in a clean, safe, and healthful manner. Over the years, on several occasions, Amoco informed Weisenburger of the deficiencies and required him to remedy the same. This was all documented. The court held that Amoco was entitled to non-renewal of the lease for the failure of the franchisee “to comply with the clean and attractive appearance requirements of the lease . . .and for a 2802(b)(3)(C) failure to operate marketing premises in a clean, safe and healthful manner.” Id. at 675-76.
Normal business practices dictate a company can withdraw from a particular market. Similarly, the PMPA states that a franchisor cannot renew based on a business decision to convert, sell, or materially alter the premises. In BP W. Coast Products v. May, the plaintiff and franchisor, BP, decided to sell two of its retail gas facilities, not renewing the franchise and lease agreements associated with each. BP obtained third-party offers via bidding of $1.4 million and $890,000.
Each offer included an estimated value of the goodwill established by the functioning businesses. The Ninth Circuit held that BP made the determination to sell the facilities in good faith notwithstanding the possibility that its “bid process encouraged bidders to include goodwill value . . . .” Id. at 664.
The litigation process associated with the Petroleum Marketing Practices Act is complicated. Hiring an experienced franchise attorney can help you understand its complexity as well as its effect on your franchise. Contact us to schedule a consultation.
