Exclusive Use Clauses And Antitrust Concerns

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It’s been a thousand or more leases since Ruminations did any serious thinking about the intersection of exclusive use restrictions, radius clauses, and their respective lawfulness. This isn’t a current topic of discussion in leasing circles, though it certainly was 40 to 50 years ago. Yes, there is comfort in knowing that, with the passage of time, we aren’t seeing the “anti-trust” or “unfair methods of competition” armies marching into the shopping center arena. That is, possibly, until now.

Readers can research the law on their own. It isn’t worth wasting electrons on hyper-technical legal background. Suffice it to write that there is a Federal Trade Commission Act barring “unfair methods of competition in commerce … .” The lessening of competition is a danger also addressed in the Robinson-Patman Act, the Sherman Act, and the Clayton Antitrust Act. Further, some states have their own anti-competition or antitrust laws.

In 1970, suit was brought attacking the exclusive use grants at a District of Columbia area regional shopping center. The basis of the attack was the Clayton Antitrust Act. It was an unsuccessful suit, but it spawned many others. [To see the Appellate Court decision, click: HERE. It will point to the lower court decision and that can be seen by clicking: HERE.] Basically, courts have wound up holding that exclusivity clauses, per se, are not unlawful. That, however, was not the end of it. In some limited cases, based on unique facts, some success was reached, often by way of settlement. This was not the end of it. During the heydays of these challenges, numerous Consent Orders between retail players and the Federal Trade Commission were executed; some (we think) are still in force today.

If all of that is ancient history, buried in the annals of our industry, why has Ruminations written today’s blog posting? We’re glad you asked. Otherwise, this would be our shortest posting to date.

There are about 47,000 shopping centers in the United States. In 2015, 202 of them were “outlet” malls. Three developers owned 75% of them. Why so few? Why such concentration? Here is a general explanation. Those in the “know,” please don’t attack us if we don’t get the details perfectly correct, especially if you think your own ox is being gored by us.

Outlet malls are designed to draw traffic from within pretty large trade areas. Those trade areas need to be where the “population” resides. [This is true, to a lesser degree, when it comes to “ordinary” shopping centers.] So, for outlet malls, there aren’t a lot of eligible locations meeting those criteria. The sign for Buford, Wyoming, located on Interstate 80, boasts a population of one, enough to support a single house, gas station, and post office. It is about 30 miles from Cheyenne, Wyoming and the same distance from Laramie, Wyoming. Mentone, Texas, the only community in 112- person Loving County, Texas (2015) is almost 100 miles from Midland, Texas. Would you be building an outlet mall or regional mall in Buford or Mentone, keeping in mind that Cheyenne, Laramie, and even Midland, aren’t places where you’ll find a million people of more?

[A “rhetorical question” is one asked in order to produce an effect or to make a statement rather than to elicit information.]

Even at that, there are places suitable for outlet malls. So, why isn’t there more than one outlet mall in most of those places, just like we find multiple shopping centers, in proximity to one another, vying for the same customers?

Here’s the simple answer: radius clauses. The universe of suitable outlet retailers is small and many want to be in every outlet mall in the country. Remember, that would only be about 200 stores. Further, they have a limited choice of landlords. That’s a lot of landlord-leverage power.

So, if a typical radius restriction is 60 miles, that would be a circle with a diameter of 120 miles. Such a circle covers more than 11,000 square miles.

There is long-established outlet mall in Central Valley, New York, a distance of 49 miles from Times Square – the heart of New York City. A sixty mile radius restriction extends beyond all of New York City. This outlet mall is owned by the owner of 43% of all U.S. outlet malls. So, if you want to be in that owner’s outlet malls, you sign that owner’s lease and accept the radius restriction. Besides that, all of the other tenants in the Central Valley location have agreed to the same restriction. As a result, there no other outlet malls within 60 miles of the one we’re describing.

That’s been true since 1985. But, going forward, things may change.

On August 21, the outlet mall owner and the New York State Attorney General executed an “Assurance of Discontinuance.” It opens up all five Boroughs (Counties) within New York City to an outlet mall. It does so for much of Long Island, parts of which also fall within the 60- mile radius.

Preventing the operation of a successful outlet mall in New York City (most likely its “outer” Boroughs and on adjacent Long Island), bothered the Attorney General. He thought that forcing New York City residents to go 40 to 60 miles in order to shop at an outlet mall deprived those residents of a benefit that others enjoyed, especially depriving those without a private automobile.

So, the Attorney General investigated. And, then, it confronted the outlet mall owner with the results of its investigation and accused the owner of violating the (federal) Sherman Act as well as two sections of New York law. All pertained to unlawful anti-competitive behavior and antitrust violations.

Though no litigation followed, the Attorney General got relief for the New York City Area in the form of a settlement that reduced the area covered by the owner’s radius restrictions. In the settlement, the owner agreed to waive and amend the radius restrictions found in existing leases and to exclude the New York City area from future radius restrictions. It can’t reduce the lease term or otherwise modify existing leases and has agreed not to retaliate against tenants who avail themselves of this new flexibility. The actual Assurance of Discontinuance includes related, important provisions, but readers should be getting the point.

To be frank, we don’t know if this settlement will have a material, adverse effect on the settling outlet mall or will result in a new outlet mall in or about New York City. Time will tell.

Does Ruminations think the floodgates have been opened and that this settlement will inspire tenants or other prosecutors to raise their cudgels? No, we don’t. But we do think that, if the facts are compelling, this can open the door to challenges at other outlet malls.

Certainly, the action taken by the New York Attorney General should make this particular outlet mall owner and others think about the future, but what does this have to do with the other 47,000 shopping centers in the country? Here’s what we think.

Antitrust law isn’t dead; it’s just sleeping. It can be aroused at the right time and under the right circumstances. With the federal government avowing to take a more hands-off, business and job friendly approach, some states may feel compelled to become an anti-trust enforcer. The laws exist; they haven’t been amended; they are available for use. Further, they aren’t only applicable to outlet malls or landlords. They are aimed at anti-competitive practices in all of commerce. They can be used to invalidate exclusive use clauses whose legitimate business purposes are outweighed by the right of the public to choose, in a practical way, from among a variety of retailers.

That could mean renewed scrutiny for clauses that do not serve a legitimate business purpose but serve to harm a competitor. Excluding certain competitors by name may (again) become an issue. It’s one thing to exclude a category of retailers and to list competitor’s names as examples, but it’s another thing to exclude just one or two named competitors. Though it seems pretty clear that exclusive use grants are, in general, just fine with the courts, it isn’t so clear that using them as a sword to skewer a competitor, and not merely as a legitimate shield to protect an investment, will fly now that we’ve seen some (small, granted, small) reawakening to anti-competitive practices in the retail mall area.

The problem is not limited to tenants who desire exclusivity (especially those who demand a radius clause restricting landlords from developing nearby properties). Landlords need to be cautious. They would be wise to make clear that they are only liable for an exclusive use violation if the restriction is lawful and sustained by a court. It isn’t clear that, just because an anti-competitive exclusive use restriction turns out to be unenforceable a tenant would not have remedies against its landlord. That might happen where the landlord agreed that its tenant could terminate its lease if a competitor showed up at the property or at a nearby property owned (in some way) by the landlord. After all, wasn’t the landlord a party to the unlawful provision? Also, it isn’t clear that an excluded competitor couldn’t get damages from the landlord as well as from the tenant who agreed to an unlawful restriction.

Food for thought? We think so. What do you think?

[To see the Attorney General’s press release, click HERE. To see the Assurance of Discontinuance (the Settlement), click: HERE.]

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Comments

  1. Peggy Israel says:

    I don’t know if this is an antitrust issue vs. a reasonableness of the radius restriction. Radius restrictions have to be reasonable to be enforceable, don’t they? Just like non-compete clauses in employment contracts.

    • Peggy, I think that’s another avenue of attack. It, however, is a private matter, one that a party to the lease (i.e., the tenant) could raise. It isn’t one that the Attorney General could or would raise and not one that a non-party could raise. As a private matter between contracting parties, it would be a very tough position to maintain. It is unlikely that a commercial tenant could succeed with an argument that, even though the provision was consensual, it was an unenforceable provision of adhesion. Here, the New York Attorney General specifically pursued the antitrust (Clayton Act and two state statute) approach. Unlawful anti-competitive behavior is a matter of public concern, not because it hurts competitors or contracting parties (such as the landlord and tenant), but because it harms the public. Other retailers and other developers could have raised the anti-trust argument, but they probably have independent business reasons not to do so. Tenants are in multiple outlet malls and have to live with their landlord. Other developers are doing the same thing where they got to a location first
      Those are just my thoughts, certainly not those of an authority in the area, let alone a judge. If anyone else has some thoughts, please share them.

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