Gas Station Dealers: A Review of the Petroleum Marketing Practices Act
So far in 2017 no federal or state court in California issued a published decision under the Petroleum Marketing Practices Act (“PMPA”) – despite the fact gasoline demand and consumption continue to rise. The reason for fewer cases may be the ongoing decline in number of gas stations and dealers. For dealers who operate as franchisees, it is useful to be aware of the PMPA.
The PMPA was passed nearly 40 years ago, in 1978. Congress sought to protect gas station franchisees from being unfairly terminated or not renewed by their oil company franchisors.
Its basic rule is that a franchisor cannot terminate a dealer or refuse to renew a dealer’s franchise at the end of the term. The law then states exceptions. For a franchisor to lawfully terminate or not renew a franchisee, it must fit the circumstances into one of the law’s exceptions.
A franchisor may terminate or not renew a franchisee dealer in the following circumstances:
- If the franchise dealer does not perform the franchise agreement, or try in good faith to carry out its terms.
- If the franchisor withdraws from the market area where the dealer is located.
- The franchisee fails to pay the franchisor on time.
- The franchisee fails to operate for 7 days.
- The franchisee commits fraud, criminal conduct or files for bankruptcy.
- The franchisee becomes severely disabled, physical or mental.
- The franchisor loses its lease for the location.
Nonrenewal by the franchisor is allowed if:
- The franchisee did not operate in a clean, safe and healthful manner.
- The franchisee did not correct problems identified in customer complaints.
- The parties cannot agree on renewal terms.
- The franchisor decides to convert the location to a different use or to sell or replace the location.
- The franchisor decides the location is not economical.
The above circumstances for termination or nonrenewal are summaries. The actual statutory grounds include additional restrictions and conditions on the franchisor.
For example, some of the grounds apply only if the franchisor’s decision was made close in time to when the situation occurred. Franchisor decisions must be made in good faith. In some cases, the franchisor is required to offer to sell the premises to the franchisee.
A franchisor seeking to terminate or not renew a dealer must provide written notice under the rules of PMPA.
For example, if the franchisor’s action is due to breach or misconduct by the franchisee, the franchisee must be allowed an opportunity to correct the breach. A franchisor must provide notice at least 90 days before the termination or nonrenewal date. The notice must meet requirements as to form. It must state the date of termination or nonrenewal and provide a summary statement specified by the PMPA.
For a dealer whose rights are being violated, the PMPA allows an action in federal court. The PMPA provides a relaxed standard for the court to grant an injunction against wrongful termination or nonrenewal. The PMPA directs the court to grant a preliminary injunction if the franchisee shows: the franchise is being terminated or not renewed; there are serious questions to be litigated; and the hardship to the franchisor from an injunction is less than the hardship to the franchisee if no injunction is granted.
A dealer who wins PMPA litigation can recover damages, punitive damages, expert fees and attorney fees. In one case, $2.5 million of damages was awarded against a franchisor (Sun Oil) that stopped selling product to its dealer on credit and told the dealer to stop using its trademark.
A jury agreed that the franchisor had not followed the PMPA’s requirement to give an advance notice of termination. A franchisee whose claim is frivolous could be ordered to pay the franchisor’s attorney and expert fees.
David Gurnick is a business litigation attorney and a Certified Specialist in Franchise & Distribution Law.