Mass. Court Sides With Dealers

Decision upholds '04 verdict citing Shell pricing practices

Published in CSP Daily News

By  Steve Dwyer, CSP Reporter

BOSTON -- Upholding a December 2004 jury decision, a Massachusetts appeals court ruled on April 18 that Shell Oil Co. and its partner Motiva Enterprises intentionally overcharged Shell-branded franchised dealers on fuel and rent earlier this decade. The First Circuit Court of Appeals for Massachusetts affirmed the 2004 jury verdict that sided with eight New England retailers, who claimed Shell and Motiva charged them "unreasonable" wholesale fuel prices, an economic burden that forced several to go out of business.

The circuit court upheld the jury's decision to award $4.5 million in damages [image-nocss] and fees to the eight lessee dealers. The claims of the remaining dealers—there were more than 60 in all—have yet to proceed to trial.

"This is a precedent-setting decision," said Jay Farraher, an attorney with Greenberg Traurig Boston, which represented the plaintiffs. "The First Circuit Court of Appeals is one of the only appellate courts in the country to have held that dealers have the right to challenge the wholesale price where dealers feel there is evidence that the oil company may not be acting in good faith," he said.

Under the terms of the parties' franchise agreement, the circuit court affirmed that Shell unilaterally set the wholesale price for gasoline delivered to 60 Shell-branded franchise operators based in Massachusetts, New Hampshire and Rhode Island. The dealers claimed Shell and Motiva, a joint venture between Shell and Saudi Refining Inc., charged wholesale prices that would make dealers uncompetitive in their local markets. Motiva refines, distributes and markets oil products in the eastern and southern U.S. regions.

Shell, which appealed the jury verdict to the U.S. Court of Appeals for the First Circuit, did not respond to a request for comment by press time; however, in a prepared statement, Motiva said thatit is"considering its options to seek further review of the court of appeals'decision to correct errors that led the court to affirm, in part, the jury verdict."

One of the 60 Shell dealers told CSP Daily News that throughout a period from 2001 to 2003, Shell engaged in "back-pricing" tactics whereby the oil company identified a "primary competitive station" in a local market area and used the retail fuel prices of those units to determine what they would charge franchised dealers, said Mike Corbett, a former Boston-area dealer.

"They 'back into' a wholesale price," said Corbett. "Shell never identified who these competitive local stations in the area were. But they assumed the competition was making a certain amount on fuel margins, like 10 cents a gallon. The price we paid for fuel was then based on the retail price of the competition. Say the price was $1.50 a gallon back then. Shell would subtract a dime—the assumed profit margin for that location—and that's the price we would pay—$1.40 a gallon; however, in the discovery phase, we found that these competitors' margins were higher than a dime—they were more like 11.5 cents a gallon."

Ultimately, Corbett said, the street price the Shell dealers were forced to post were inevitably higher than that of local competitors. "Shell said they wanted to make us competitive, but the gasoline pricing was very suspect. In actuality they were putting us behind the eight ball and making us uncompetitive," he said.

Corbett, who is no longer involved in convenience retailing but remains part of a group called the New England Shell Dealers Franchise Litigation LLC, which was formulated to help organize the case against Shell, said Shell's intention was to get around bylaws in the Petroleum Marketing Practices Act (PMPA) doctrine that states that dealers have the right of first refusal in relinquishing control of a retail unit.

"The purpose [of the pricing strategy] was to put us out of business. Instead of buying out our leases, putting us out of business through economic pressure was the route to go," said Corbett.

Corbett said that because of the economic hardship, many New England dealers were forced to cease operating their locations. "Back in 1998, there were 250 Shell locations and all but three of them were franchise-dealer operated. Now there might be less than 30% that are dealer operated, and that number is going down as we speak. It's my belief that Shell gained control of these locations so they could eventually sell them to local jobbers."

According to the lawsuit, the language in a Shell-sponsored "Special Temporary Incentive Program" provided for the reduction of dealer rents based on the volume of gasoline sold. "Once a specified threshold gallonage was sold in a given month, the contract rent for the next month would be discounted by a certain amount for every gallon sold in excess of that threshold," the court brief stated.

"The threshold amount and the discount amount changed from time to time. The subsidy had been in effect since 1982; it was renewed in an annual notice to franchisees, although its terms explicitly provided for cancellation within 30-days' notice."

Dealers were informed that the subsidy "or something like it would always exist, the contract rent was to be disregarded, and the cancellation provision was only intended to be invoked in a situation like a war or an oil embargo. Nevertheless, having given the required notice, Motiva ended the STIP on Jan. 1, 2000, terminating the subsidy. Without the subsidy, dealers paid much more rent," according to the court brief.

"Motiva also offered new leases as the old leases expired. The new leases calculated rent differently than the old leases, resulting in a further increase in rent," the court brief said.Clickthe Download Nowbutton below to view the court documents.