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Constructive Termination and Constructive Nonrenewal Claims

By Craig R. Tractenberg

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.

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