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Lawletter No. 157 Shell's rent program upheld A federal appeals court has rejected a legal challenge to Shell’s rent rebate program in the recent case of Hinkleman v. Shell Oil Co. (4th Cir., May 6, 1992) CCH Bus. Fran. Guide, Para. 10,001. The case illustrates some important aspects of payment disputes and price discrimination claims. Facts: Francis Hinkleman was a Shell dealer in Pasadena, Maryland. He paid rent to Shell according to a Variable Rent Program. Dealer's rent structure: The VRP grants rent reductions if a dealer's monthly purchases exceed a specified "threshold volume." Shell calculated threshold volume based on: (1) the business value of the location to the dealer and to Shell; (2) the occupancy costs incurred by Shell; and (3) the fair market value of Shell’s investment in the property. Shell does not disclose the exact method for determining the threshold. If a dealer’s gasoline purchases exceeded the threshold, he qualified for a rent reduction in the amount of 3.5 cents per gallon purchased over the threshold level. The average rent reduction for all Shell dealers was approximately 32% in 1987, 52% in 1988 and 49% in 1989. Hinkleman's rent reductions for those years were 0%, 0% and 10% respectively. During this period, Shell increased Hinkleman's threshold volume from 160,000 per month to 170,000 gallons. But his volume declined during this period. The dealer attributed the volume loss to the installation of a median strip in front of his station, thereby blocking access by certain traffic, and to the opening of a state-of-the-art Exxon station in the immediate area. Payment problems: In late 1988, a dispute arose regarding certain items on his monthly statement. As a result, an outstanding balance of about $1,500 was carried from January through October 1989. In September, 1989, Hinkleman bounced a $9,448 check because of a bank error. Nevertheless, Shell refused to accept a replacement check unless it was certified. Hinkleman failed to come up with a certified check. A few days later, Shell tried to collect its October rent payment via electronic funds transfer, but Hinkleman's account lacked sufficient funds. The dealer and his lawyer met with Shell. It was agreed that Hinkleman would pay all amounts overdue by November 6, which he did. On November 30, Shell sent Hinkleman a letter warning him that he would receive a termination notice if he missed any further payments. A month later, the dealer bounced another check. Shell immediately issued a termination notice. The dealer filed suit. dealer’s legal claims: In his suit, the dealer claimed that: (1) Shell violated the PMPA by imposing a discriminatory rent structure on the him. The high threshold, coupled with the problems in the market area, made it difficult or impossible for the dealer to make all his payments to Shell on time. Therefore, the court should issue an injunction against the termination; and (2) Shell violated the Maryland State price discrimination law by in effect charging him a discriminatory rent. Therefore, he should be awarded damages. Ruling: The Court of Appeals ruled in favor of Shell and against the dealer on both claims, holding that: (1) The issue of discriminatory rents is not relevant to the question of whether the dealer failed to make timely payments of amounts due the franchisor. Under the PMPA, the franchisor is entitled to terminate the franchise on this grounds; and (2) The Maryland State price discrimination law prohibits only price discrimination with respect to commodities, not real estate. Analysis and recommended procedures: We suggest the following: (1) Effect of past practices: As we have repeatedly stated in these pages, the fact that a franchisor has tolerated violation of the franchise agreement in the past does not necessarily mean it has given up its right to enforce it in the future. The contrary is true only in exceptional cases. If you believe that you have a legal right to continue violating your franchise, do not persist in the violation in the face of franchisor demands for compliance without first obtaining legal advice. (2) 120-day rule: In most cases, a the PMPA requires a franchisor to act within 120 days after it has grounds for termination or nonrenewal. But several courts have held that a franchisor may terminate within 120 days after it receives a late payment. Therefore, do not assume that the franchisor has given up its right to terminate at the time it accepts a late payment. (3) Dispute situations: Be especially careful in dispute situations. It will seldom, if ever, be wise to withhold payment from your franchisor. You certainly will not want to do so without legal advice. If you have a separate claim against your franchisor, you may have to file a lawsuit to assert it. (4) Discrimination claims: This case illustrates the accounting problems that can arise with respect to price discrimination claims. Not all courts apply the same theories of price discrimination. In this case, the dealer apparently did not present evidence of the actual real estate value of his and other Shell stations. Such evidence might have made a difference. |
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