Daily Development for Friday, December 2, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

A “product exclusivity clause” is not an impermissible restraint of trade if the clause is tailored to directly correspond with tenant's business. 

Buford-Clairmont Co., Ltd., v. RadioShack Corp., 2005 WL 2374723 (Ga.App., September 28, 2005).

RadioShack, a shopping center tenant, invoked a “product exclusivity clause” in a lease amendment that permitted it to reduce its rent if the landlord permitted the use of any space in the center for "retail sale or display of electronic equipment and components."  The clause permitted tenant to reduce its rent to the lesser of a fixed amount or three percent of gross.  Landlord had allowed a third party, a company that sold cell phones, to lease space in the same shopping center.

Landlord  brought a dispossessory and declaratory judgment action, arguing that the provision was an unenforceable restraint on alienation.  The trial court found as a matter of law that the clause was enforceable if the facts showed that the landlord breached the clause and that the tenant had not waived it.  A jury found for the tenant on the factual issues, and the court entered judgment in favor of tenant.

  Georgia case law had already concluded that exclusive use clauses are not unenforceable as restraints on alienation because so long as they are reasonable:

“. . . subject to the overriding requirements that, as to territoriality and/or duration, they be reasonably necessary to protect the interests of the covenantee, that they not impose greater restrictions upon the covenantor than are necessary for the covenantee’s protection, and that thjey not unduly prejudice the interests of the public.”

 Landlord claimed the product exclusivity clause imposed greater restrictions than were necessary to protect tenant’s legitimate business interests and ultimately restricted the public's interest to shop freely for electronic items. 

The total clause read as follows:

“[Landlord] covenant that during the Lease Term, no space with the shoping Center (other than the Demised Premises) or any adjacent property owned by [Landlord] shall be used for the retail sale or display of electronic equipment and components, including, but not lmiited to, all types of telecommunication and transmitting equipment, computers and related accessories, and audio/video equipment and accessories.”

Although the court and the parties termed the clause in question a “product exclusivity clause,” it looks and feels like what the trade calls an “exclusive use clause” with a “radius feature.”

The Court of Appeals agreed with tenant, finding the exclusivity clause tailored to correspond with tenant’s business.  Tenant’s manager had testified that all of the items described in the clause were in fact sold at the Radio Shack store.

The landlord also protested that the tenant had withheld its share of the CAM charges, which it claimed were not rent, but an obligation to share in maintenance (this is a reversal of the usual position taken by landlords, who normally are anxious to characterize CAM as rent.)  But the court said that it didn’t matter whether CAM charges constituted rent, because the remedy clause for breach of the “product exclusivity” provision stated that the reduced rent was “in lieu of the Fixed Minimum Rent and all additional charges under the lease.”  (Whoops)

Comment 1: Why the even bother here?  Maybe the bite was just too big, and landlord was hoping against hope to get a settlement.  The landlord really should have taken up its problems with whoever permitted Radio Shack, usually a relatively small operation, to get such a massive exclusive with such an effective remedy.

Comment 2: Perhaps the remedy is the most interesting part of the case.  It gives the tenant a remedy it can invoke without going to court to seek an injunction and doesn’t require the tenant to prove damages.  It is up to the landlord to initiate the lawsuit and defend its conduct, and all the while the tenant is paying reduced rent.  As old Captain Kirk saus: “Brilliant!!!”    Often tenants draft for themselves effective protections on paper, but fail to consider as a practical matter how they will enforce their rights in a cost efficient way. 

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