logo

Restrictive Covenants in Commercial Leases – Recent 11th Circuit Decision

This is not your standard non-compete case:  Just days ago, the Eleventh Circuit handed down its opinion in an extremely complex dispute related to shopping plazas, anchor tenants and restrictive covenants in commercial leases.  Let’s take a look:

Winn-Dixie is a regional grocery store chain based in Jacksonville, Florida.  It has hundreds of supermarkets throughout the Southeast.  In 2011, Winn Dixie (actually, several affiliated Winn-Dixie entities) sued Dollar Tree, Inc., the massive, Virginia-based discount variety dollar store chain.  The case in brief:  Winn-Dixie is the anchor tenant at dozens of shopping plazas throughout the Southeast.  Winn-Dixie’s leases at these shopping plazas typically contain a “Grocery Exclusive” provision that grants Winn-Dixie the exclusive right to sell groceries at that shopping plaza.  The standard restrictive covenant in these commercial leases reads as follows:

Landlord covenants and agrees that Tenant shall have the exclusive right to operate a supermarket in the shopping center and any enlargement thereof. Landlord further covenants and agrees that it will not directly or indirectly lease or rent any property located within the shopping center, or within 1000 feet of any exterior boundary thereof, for occupancy as a supermarket, grocery store, meat, fish or vegetable market, nor will the Landlord permit any tenant or occupant of any such property to sublet in any manner, directly or indirectly, any part thereof to any person, firm or corporation engaged in any such business without written permission of the Tenant; and Landlord further covenants and agrees not to permit or suffer any property located within the shopping center to be used for or occupied by any business dealing in or which shall keep in stock or sell for off-premises consumption any staple or fancy groceries, meats, fish, vegetables, fruits, bakery goods, dairy products or frozen foods without written permission of the Tenant.

In some leases, Winn-Dixie would agree to limited exceptions that allowed other tenants in the plaza to sell groceries in a small section of their space, incident to a different line of business.  But the takeaway:  No other merchant was moving into these shopping plazas and taking grocery business away from Winn-Dixie.

Whenever Winn-Dixie inked a new lease to serve as an anchor tenant at another shopping plaza, it recorded all of this in the public record.  That’s right:  Winn-Dixie recorded copies of its own lease, the grocery exclusive language, a legal description of the particular shopping plaza and a variety of other information in the public records of the relevant counties.  Flash back to property class in law school:  We have a covenant that runs with the land.

Since at least 2005, Dollar Tree has operated stores in dozens of shopping plazas across the Southeast where Winn-Dixie is the anchor tenant and Dollar Tree potentially is or was subject to the Grocery Exclusive.  All of us see where this is headed:  Dollar Tree allegedly was selling groceries beyond what was permitted in any exception and in violation of the Grocery Exclusive!

Winn-Dixie’s original complaint named only Dollar Tree and affiliated companies as defendants.  A subsequent amended complaint also named Big Lots.  Eventually, Winn-Dixie’s had claims related to 98 of its stores in 98 different shopping plazas throughout the Southeast.  The district court’s ruling can best be explained as follows:

 43 Stores – No Relief Granted

For 43 of the stores, the court denied all of the requested relief.  That means no injunction and no damages.  The court did so for a variety of reasons.

First, several of the stores were located in Louisiana and Mississippi.  As it turns out, the restrictive covenants at issue are unenforceable under Louisiana and Mississippi law— but not for the reasons some might think.  This has nothing to do with standard concerns related to restraints of trade and competition.  Instead, it’s all about property law.  Recall that the covenants at issue “run with the land.”  Winn-Dixie never alleged that Dollar Tree and Big Lots signed contracts and agreed to the terms of their restrictive covenants.  Instead, Winn-Dixie alleged that by signing leases in those shopping plazas, Dollar Tree and Big Lots took the leases subject to the terms of its own leases, which were recorded in the public records.  But Louisiana and Mississippi law hold otherwise:

Under Louisiana law, a restrictive covenant running with the land must be a “real obligation” that is clearly apparent in the property’s “title documents.”  Critically, Louisiana distinguishes between real property rights and personal property rights.  The leases at issue are not title documents that implicate real property rights and can create a “real obligation.”  As a result, the Grocery Exclusive cannot run with the land under Louisiana law and is unenforceable against those Dollar stores in that state.   Likewise, the restrictive covenant was unenforceable against the one Dollar store in Mississippi because of certain nuances of Mississippi property law.  In brief:  Mississippi law requires strict vertical privity to enforce a restrictive covenant running with the land— and that was absent here.

There were other problems with Winn-Dixie’s claims vis-à-vis those 43 stores.  Thirty Dollar stores had closed, so there was nothing to enjoin.  Certain stores lacked sufficient notice based the manner of recording.  Some Grocery Exclusives used different language, resulting in no violation. And one Dollar store had assumed the lease of a previous tenant, meaning its tenancy in the plaza predated Winn-Dixie.

And for all of these stores where the restrictive covenants were enforceable, the district court refused to award compensatory damages because Winn-Dixie’s method of calculating their damages was unreliable and could not pass muster under Rule 702 and Daubert.  In relevant part, Winn-Dixie’s model of damages suffered from the following deficiencies (1) It did not account for the fact that Dollar and Big Lots were permitted to sell some groceries, up to a certain amount of square feet.  Instead, it measured Winn-Dixie business lost to Dollar or Big Lots— without reducing the damages to account for permitted sales.  (2) Winn-Dixie’s model did not measure damages caused by the Defendants selling more groceries than they were allowed— It measured the general effect of that competition.  Having excluded Winn-Dixie’s expert testimony regarding damages, the court concluded that Winn-Dixie could not prove compensatory damages.

So, for these 43 stores, Winn-Dixie gets nothing:  In LA and MS, the restrictive covenants are unenforceable.  Period.   In other plazas, the Dollar stores no longer exist so there is nothing to enjoin.  Beyond that, Winn-Dixie has no damages.

The Other 54 Stores

That leaves 54 stores where (1) the Dollar or Big Lots stores are still in business and (2) the restrictive covenant – the Grocery Exclusive – is enforceable.  The district court took a narrow view of the term “groceries” and, based on that view, denied injunctive relief as to 37 stores and granted a limited injunction for the 17 remaining stores, requiring that Defendants ensure their sales of food items did not exceed the permissible amount of shelf space based on the covenants at issue.

 Result on Appeal

On appeal, the Eleventh Circuit (1) affirmed the district court’s ruling as to the 43 stores that got nothing and (2) reversed as to the other 54.  In construing the term “groceries” contained in the Grocery Exclusives, the trial court treated the term as synonymous with food items. In evaluating whether the Defendants had violated the restrictive covenants, the district court only considered square footage dedicated to food items, not all square footage dedicated to groceries (food items plus non-food groceries).  This ignored relevant Florida appellate case law that, in a nearly identical context, construed the term groceries broadly to include not only food, but also a variety of household supplies.  And when it comes to matters of state law, intermediate appellate decisions of state courts are binding on federal courts.  So the decision was reversed as to the Florida-based of the 54 stores.  The decision also was reversed with respect to 11 states in Alabama and 2 in Georgia (part of the 54) because the district court failed to interpret the restrictive covenants at issue under Alabama and Georgia law.

 The Takeaways

For me, the biggest takeaway is this:  Control your experts.  It may be the case that the damages in this scenario are nearly impossible to calculate.  Winn-Dixie’s damages can be stated as follows:  The amount of revenue Winn-Dixie lost because Defendants exceeded their allotted grocery space.  Consider how complicated this is:  Suppose in one store, Dollar exceeds its allotted space by 700 square feet.  How much damage to Winn-Dixie did that 700 square foot overage cause?  Bottom line:  This is an extremely complicated calculation.  But I have to bet that you could do a better job than the Plaintiffs and their expert.   In fact, Winn Dixie’s expert admitted that her model measured measured the effect of the general presence of a competitor in the vicinity, not the specific effect of the violations.  That’s ridiculous.  No federal judge would let in that model of damages.  It doesn’t even attempt to measure the right thing.  Given how logically unsound and completely off-base this damage model was, I’m surprised Winn-Dixie’s lawyers did not insist upon going a different direction.

The case is Winn-Dixie Stores, Inc. v. Dolgencorp, LLC, 12-14527, 2014 WL 842949 (11th Cir. Mar. 5, 2014).

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida.  He focuses his practice on competition, particularly cases involving non-compete, trade secret and antitrust disputes and represents clients in Florida and throughout the country.  He is licensed in all Florida federal and state courts and routinely represents clients in Fort Lauderdale, Miami, West Palm Beach, Fort Myers, Tampa, Orlando, Jacksonville, and beyond.  His office can be reached at 954-332-2380954-332-2380.  For more information, visit http://www.pollardllc.com.

Share On Facebook
https://twitter.com/jonathanpollard/
https://plus.google.com/+Pollardllcflorida-non-compete-lawyer/
Share On Linkdin
Share On Youtube