March 31, 2026|Franchise Frontlines
March 31, 2026 | U.S. District Court for the District of Puerto Rico | Judge Aida M. Delgado-Colón | Opinion and Order
Executive Summary
In a significant decision addressing the intersection of federal franchise law and state regulatory authority, the District of Puerto Rico granted summary judgment in favor of the Commonwealth and rejected franchisors’ attempt to invalidate local legislation under the Petroleum Marketing Practices Act (“PMPA”). The plaintiffs, petroleum franchisors, argued that Puerto Rico’s statutory amendments regulating convenience store operations at fuel stations were preempted by federal law because they interfered with their ability to structure and enforce franchise relationships. The court rejected that argument, holding that the PMPA’s preemptive scope is narrowly limited to termination and nonrenewal of petroleum franchise relationships and does not extend to broader operational or economic aspects of the franchise system. The decision reinforces the continued role of state law in regulating substantive franchise terms and cautions against expansive readings of federal preemption in the franchise context.
Relevant Background
The plaintiffs operate petroleum franchise systems in Puerto Rico under agreements that grant franchisees the right to sell motor fuel using the franchisors’ trademarks, occupy leased premises, and purchase fuel for resale. In addition to these core agreements, the parties also entered into separate arrangements governing convenience store operations and other ancillary services at the retail locations.
Puerto Rico enacted amendments to its existing regulatory framework that extended restrictions on vertical integration—commonly referred to as “divorcement” laws—to include convenience store operations. These amendments limited the ability of franchisors to control or operate non-fuel retail components of the business and created a private right of action for affected parties.
The franchisors challenged the statute, arguing that these restrictions interfered with their federally protected rights under the PMPA, particularly their ability to structure franchise relationships and enforce contractual provisions tied to termination and nonrenewal. They contended that the convenience store agreements were “essential” components of the petroleum franchise and therefore fell within the scope of federal protection.
Decision
The court rejected the franchisors’ preemption arguments and entered judgment in favor of the defendants. The analysis centered on the scope of the PMPA’s express preemption provision, which governs state laws “with respect to” the termination or nonrenewal of petroleum franchise relationships.
The court emphasized that the PMPA is a targeted statute designed to regulate a specific aspect of franchise relationships—namely, the grounds and procedures for termination and nonrenewal. It does not, by its terms or purpose, regulate the broader substantive terms of franchise agreements or the economic structure of franchise systems.
In addressing the plaintiffs’ argument that convenience store agreements should be treated as part of the protected franchise relationship, the court acknowledged that certain “secondary agreements” may, in limited circumstances, be sufficiently integrated with core franchise components. However, the court declined to extend that reasoning to the facts at issue, noting that the challenged statute did not regulate termination rights or interfere with the franchisors’ ability to terminate or decline to renew franchise agreements under the PMPA.
The court also rejected the plaintiffs’ broader theory that federal law provides franchisors with a right to structure franchise relationships free from state regulation. It characterized this position as an improper expansion of the PMPA beyond its intended scope, explaining that the statute functions primarily as a protection for franchisees rather than as a source of affirmative rights for franchisors.
Turning to implied preemption, the court found no basis for either field or conflict preemption. The regulatory scheme did not occupy the field of franchise regulation, nor did it create an obstacle to the objectives of the PMPA. The court observed that franchisors remained free to exercise their federally defined termination rights and that the challenged statute merely regulated aspects of the business that fall within traditional state authority.
The court further concluded that compliance with both federal and state law was not impossible. While the statute limited franchisors’ control over certain non-fuel operations, it did not prevent them from terminating franchise agreements or withdrawing from the market under the conditions permitted by federal law.
Finally, the court addressed the statute’s private right of action and determined that it did not conflict with the PMPA because it did not create remedies inconsistent with federal termination provisions. Instead, it served a distinct purpose related to state regulatory goals.
Looking Forward
This decision provides an important reminder that federal franchise statutes—particularly the PMPA—operate within defined boundaries and do not displace the broader role of state law in regulating franchise relationships. For franchisors, the case underscores that federal protection is generally limited to termination and nonrenewal issues and does not extend to all aspects of system design or operational control.
The court’s treatment of ancillary agreements is particularly instructive. While franchise systems often rely on integrated business models that include multiple revenue streams, not all components of those systems will be treated as part of the protected franchise relationship for purposes of federal law. Efforts to characterize additional agreements as “essential” may face scrutiny, especially where the connection to core franchise rights is attenuated.
At the same time, the decision reinforces the continued importance of state regulatory frameworks in shaping franchise operations. Areas such as vertical integration, competition policy, and ancillary business activities remain subject to state oversight, even where they intersect with franchised systems.
From a strategic perspective, the case highlights the importance of distinguishing between rights expressly protected under federal law and broader business practices that may be subject to state regulation. Franchisors evaluating system structure or responding to regulatory changes may benefit from carefully assessing whether a particular issue falls within the narrow scope of federal protection or remains governed by state law.
Finally, the opinion reflects a judicial reluctance to expand federal preemption beyond its intended purpose. Courts may be cautious in accepting arguments that transform targeted statutory protections into broader shields against state regulation, particularly in areas traditionally governed by local law.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Partner at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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