Franchisee 101: Over Supply of Gasoline Burns Potential Sale

Lewitt HackmanA gasoline franchisee defeated a motion to dismiss brought by its franchisor, seeking to avoid a claim under the federal Petroleum Marketing Practices Act (PMPA). In 2018, Global Companies (Global) sent the franchisee a Notice of Non-Renewal. Global entered into a purchase and sale agreement (PSA) with a buyer for the underlying property of the franchisee. The notice informed the franchisee of its right of first refusal under PMPA to buy the property on the same terms as the proposed buyer.

At issue was a PSA clause that said if the buyer stored petroleum products on its property in the next fifty years, then Global had to supply such petroleum products. Global knew the third-party buyer was not in the petroleum industry and did not intend to use the property to store gasoline. So this provision applied only to the franchisee. Though the franchisee timely exercised its first refusal right, the franchisee sued Global for violating PMPA. In the franchisee’s view, its actual purchase price was much higher than the third-party’s due to the gasoline supplier requirement that applied only to the franchisee.

Global argued that it complied with PMPA because the franchisee was given a right of first refusal on the exact terms as the third-party buyer. The court sided with the franchisee. Under PMPA, a franchisor cannot force a substantial change in the franchise relationship, in this case conversion to a franchisee-owned property, using the threat of non-renewal. The court held that “making a supply agreement a term of the offer to sell the premises” did what was not allowed, by potentially requiring the franchisee to be tied to a fifty-year gasoline supply term.

Gasoline franchisees with a right of first refusal on the purchase of property should look for any terms in the purchase agreement that may require the franchisee to become a supplier to the franchisor, or terms that affect their purchase price and/or obligations and not those of a third-party buyer. Franchisees have relationship protections under PMPA and should consult a franchise and distribution attorney before moving forward on exercising or declining a right of first refusal.

See: Abe & Nahed, Inc. v. Glob. Companies LLC, No. 18-12425-FDS (D. Mass. May 28, 2019)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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