The United States Court of Appeals for the Seventh Circuit in Rao v. BP Products North America, Inc. (Case No. 07-2065) recently found that a franchisee had been given appropriate notice of termination under the Petroleum Marketing Practices Act (PMPA) after he engaged in bribery and fraud.
The reasons for the termination were straightforward: Among other things, Rao, the franchisee, had paid a BP regional sales manager approximately $100,000 in cash and gifts in an effort to influence BP franchising decisions. When it came to light - for reasons unexplained in the decision, Rao actually raised the issue with BP - Rao claimed that he had been extorted by the manager. BP opened up an investigation and, initially, Rao cooperated. But when Rao ceased cooperating, BP management made the decision to end the franchise relationship.
There was no question that acts of fraud permitted an early termination of the franchise agreement. Rao claimed, however, that the notice given by BP was untimely under the PMPA. The court of appeals noted:
Pursuant to the PMPA provisions applicable here, a franchisor must give notice of early termination within 120 days of when it 'first acquired actual or constructive knowledge' of the failure to comply with a material franchise provision. *** This time limitation aims to prevent franchisors from basing termination upon 'old and long forgotten events' while still giving the franchisor adequate time to evaluate the events or to work with the franchisee to correct the situation.
Rao argued that BP had first learned of his fraud well over the time period required for the notice. BP disagreed, contending that it acted reasonably when it undertook the investigation and in continuing it while Rao was cooperating rather than terminating the relationship.
The court of appeals agreed with BP, reasoning in part:
In passing the PMPA, Congress intended to promote, if not mandate, this type of careful approach to termination by franchisors. The practice of such discretion, restraint, and prudence goes a long way toward the prevention of arbitrary terminations . . . based on idle rumor and baseless allegations (quoting the Second Circuit).
Finding that BP was faced with conflicting stories, the court concluded that BP acted reasonably to continue the investigation before it made the decision to terminate the franchise relationship. And while recognizing that there could be a time when the investigation lasts an unreasonable amount of time, the court also found that this situation did not exist here. Accordingly, it found that BP had acquired the requisite knowledge when Rao said that he would no longer cooperate with the investigation, making BP's notice timely.