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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

DRURY INN - COLORADO SPRINGS, ) 

a Joint Venture between Drury) 

Inns Inc., a Missouri Cor- ) 

poration and Lincoln National ) 

Realty Corporation, an ) 

Indiana Corporation, ) 

Plaintiff-Appellant, 

v. 

THE OLIVE COMPANY, a 

Colorado Corporation, 

Defendant-Appellee. 

) 

) 

) 

) 

) 

) . 

) 

) 

) 

No. 88-1185 

JUN 2 61989 

ROBERT L. HOECKER 

Clerk 

Appeal from the United States District Court 

For the District of Colorado 

D.C. No. 86-M-1712 

Paul F. Hultin (Randall G. Alt with him on the briefs) of Parcel, 

Mauro, Hultin & Spaanstra, Denver, Colorado, for PlaintiffAppellant. 

John M. Vaught (Peter C. Houtsma and Andrew I. Gavil with him on 

the brief) of Holland & Hart, for Defendant-Appellee. 

Before LOGAN, MOORE, and BALDOCK, Circuit Judges. 

MOORE, Circuit Judge. 

Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 1 
The single but difficult issue for our review is whether a 

restrictive covenant in a real estate sales contract constitutes a 

per se violation of Section 1 of the Sherman Act, 15 u.s.c. § 1, 

and the Colorado Restraint of Trade and Commerce Act, Colo. Rev. 

Stat. § 6-4-101 (1973), and is thus unenforceable in an action for 

breach of contract. We believe it does not and reverse the 

judgment of the district court granting summary judgment for 

defendant. 

I. 

In 1982, The Olive Company, a Colorado corporation engaged in 

real estate development, sold land to plaintiff Drury Inn -

Colorado Springs, on which the Drury Inn Motel was subsequently 

constructed and opened for business. Because Drury purchased only 

a portion of a larger tract owned by Olive, the parties agreed to 

restrict the sale of the remaining land. Paragraph 8 of their 

contract stated: 

8. Seller agrees not to sell any portion of the 

remaining site to any potential hotel/motel 

competitor of the Purchaser before June 1, 

1985. 

In a later exchange of letters, the parties defined 

"potential hotel/motel competitor" more specifically and 

substituted the "clarification" that a competing motel "shall be 

defined as a motel whose room rates are within 20% of the Drury 

Inn." Soon after this exchange, Olive sold adjacent property to 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 2 
Chamak Enterprises, which built and, in July 1984, 1 opened a Super 

8 Motel, a budget motel whose average·room rate was within 20% of 

Drury's then current room charge.2 

Consequently, Drury filed an action for damages for Olive's 

alleged breach of the restrictive covenant and moved for summary 

judgment on the issue of liability. Olive filed a cross motion 

for summary judgment on the ground the restrictive covenant 

violates federal and state antitrust law. Characterizing the 

covenant as a naked agreement to fix prices and blatant attempt to 

exclude competition, defendant urged the district court find the 

Sherman Act per se forbade its enforcement. Drury maintained the 

covenant was ancillary to a valid real estate contract, supported 

by bargained for consideration, and executed by parties not in 

competition with each other. 

Acknowledging this case "does not present the classic 

situation where a number of competitors conspire to fix prices on 

an industry-wide basis," the district court, nevertheless, found 

it w~s "clear beyond question that the covenant at issue was 

intended to serve no other purpose than the exclusion of some type 

of competition." To the court, the bright line between this case 

and those triggering rule of reason analysis was price, the 

central nerve core in a competitive system. Had the covenant only 

eliminated a potential hotel/motel competitor, defendant conceded 

and the court agreed, a rule of reason analysis would be 

1The Drury Inn began operations in June 1984. 

2olive sold the remaining site in this development to Texian 

Colorado Springs, Ltd., which.constructed and presently operates a 

Texian Inn Motel. 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 3 
warranted. However, because the court was convinced the intent of 

the parties was to fix prices, it rejected plaintiff's contentions 

the agreement was ancillary to a legitimate business transaction; 

was sufficiently limited in time, 2! years, and geographic area, 

the adjacent 13.5 acres, to preclude an effect on the market for 

motel rooms in the Colorado Springs area; and did not involve 

competitors. Significant in the court's analysis was the parties' 

understanding that defendant would "monitor" the room rates of 

potential motels on the site "to ensure compliance with the 

protective covenant." (Order at 3, citing Answer to Defendant's 

Interrogatory No. 41). To support its conclusion, the court 

relied on Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332 

(1982); National Soc'y of Professional Engr's v. United States, 

435 U.S. 679 (1978); Keifer-Stewart Co. v. Joseph E. Seagram & 

Sons, 340 U.S. 211 (1951); and United States v. Socony-Vacuum Oil 

Co., 310 U.S. 150 (1940). 

II. 

Read literally, Section 1 of the Sherman Act prohibits 

"[e]very 

of trade." 

contract, combination . . 15 u.s.c § 1 (emphasis • or conspiracy, in restraint 

added). Despite this broad 

sweep, the courts have understood that Congress meant to outlaw 

only ''unreasonable" restraints of trade since all contracts alter 

trade in some manner. Maricopa County Medical Soc'y, 457 U.S. at 

342-43; Motive Parts Warehouse v. Facet Enterprises, 774 F.2d 380, 

386 (10th Cir. 1985). Thus, before the onus of the Sherman Act 

falls, a court must decide whether the activity is reasonable. 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 4 
The framework for this analysis was articulated by Justice 

Brandeis in Board of Trade v. United States, 246 U.S. 231, 238 

(1918): 

The true test of legality is whether the restraint 

imposed is such as merely regulates and perhaps thereby 

promotes competition or whether it is such as may 

suppress or even destroy competition. To determine that 

question the court must ordinarily consider the facts 

peculiar to the business to which the restraint is 

applied; its condition before and after the restraint 

was imposed; the nature of the restraint and its effect, 

actual or probable. The history of the restraint, the 

evil believed to exist, the reason for adopting the 

particular remedy, the purpose or end sought to be 

attained, are all relevant facts. This is not because a 

good intention will save an otherwise objectionable 

regulation or the reverse; but because knowledge of 

intent may help the court to interpret facts and to 

predict consequences. 

Certain practices, however, were deemed to be so pernicious 

as to fall outside of this analysis and be conclusively presumed 

to violate Section 1. "Per se treatment, a conclusive ·presumption 

of unreasonableness, is reserved for practices that experience has 

demonstrated are almost always anticompetitive." Dimidowich v. 

Bell & Howell, 803 F.2d 1473, 1480 (9th Cir. 1986). Horizontal 

price fixing, United States v. Trenton Potteries, 273 U.S. 392 

(1927) (agreement by manufacturers of 82% of all lavatory fixtures 

to fix prices and limit sales); United States v. Socony-Vacuum Oil 

Co., 310 U.S. 150 (1940) (agreement by various petroleum 

associations to purchase surplus gas at agreed price in return for 

reduction of production of surplus gas); concerted refusals to 

deal or boycotts, Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 

U.S. 207 (1959) (department store chain pressured manufacturers to 

refuse to deal with competing retailer); and tying arrangements, 

an "agreement by a party to sell one product but only on the 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 5 
condition that the buyer also purchases a different (or tied) 

product," Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 

(1958) (association of 18 railroads operating west of Mississippi 

established freight rates for lines), receive per se treatment. 

In these settings, the agreement itself is unlawful without an eye 

on the purpose and effect of the action. "In fullest flower, a 

per se rule condemns conduct without proof of power, effect, or 

purpose and without hearing claims of legitimate objectives.'' 

7 P. Areeda, Antitrust Law, 1509, at 409 (1986). 

When we plant the restrictive covenant at issue in this 

garden, it withers under Sherman's glare. The district court 

focused only on ~rice, that is, the setting of a 20% range in 

which a competitor could not sell hotel/motel rooms. Within the 

facts and circumstances of this case, however, the price term is 

descriptive only and unrelated to the conduct and action intended 

by the agreement. In this single transaction, the parties 

intended to transfer real property. As a facet of the exchange, 

they agreed to preserve the quality of the specific bargain by 

describing 

competition. 

the sale of adjacent land in terms 

To go beyond this intent and infer power 

of potential 

to affect 

competition within the Sherman Act's meaning improperly intrudes 

federal antitrust principles into state common law. The Sherman 

Act surely distinguishes between competition and predation, 

between individual actors and cartels, and between ancillary 

restraints and those which interfere directly with "the free play 

of market forces." Socony-Vacuum Oil Co., 310 U.S. at 221. 

"Section 1 cannot supply private parties with a tool to redress 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 6 
ordinary business torts because§ 1 forbids only those restraints 

damaging to competition." Lektro-Vend Corp. v. Vendo Co., 660 

F.2d 255, 268 (7th Cir. 1981), cert. denied, 455 U.S. 921 (1982). 

Because "price fixing do[es] not have absolute meaning," 

7 P. Areeda, fl 1510c, at 421, we cannot merely look at this 

agreement in the light of stare decisis to characterize it as 

naked price fixing. We must go beyond the words and inquire 

whether the covenant affects competition. As the Court stated in 

National Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 

85, 103-04 (1984): 

Per se rules are invoked when surrounding 

circumstances make the likelihood of anticompetitive 

conduct so great as to render unjustified further 

examination of the challenged conduct. But whether the 

ultimate finding is the product of a presumption or 

actual market analysis, the essential inquiry remains 

the same -- whether or not the challenged restraint 

enhances competition. Under the Sherman Act the 

criterion to ,be used in judging the validity of a 

restraint on trade is its impact on competition. 

(Emphasis added.) 

When we look at the circumstances surrounding this 

transaction, we cannot say that the parties' agreement to restrict 

competition violates the per se rule against price fixing. The 

rationale of the rule simply does not fit into this transaction. 

Price alone does not make the difference when market power is 

absent, See 7 P. Areeda, 11 1510c, at 422, and we cannot infer the 

existence of market power from the agreement alone. 

Although the district court found it significant that the 

covenant required Olive to police and monitor the room rates of 

potential competitors, in the absence of all the other indicia of 

anticompetitive conduct, we do not believe this obligation fills 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 7 
the void. At best, the record reveals the parties' understanding 

and interpretation of the condition varied.3 At worst, . the 

condition was sufficiently undefined within a potential price 

fixing scheme or covenant not to compete to render it illusory. 

Thus, in the absence of an explicit cartel arrangement or 

even one that we could infer from the agreement, we cannot label 

the Drury-Olive restrictive covenant a prohibited price fixing 

agreement. No other evidence offers a sufficient basis to 

conclude the Sherman Act discourages the conduct present in this 

case. 4 

III. 

We are equally reluctant to allow introduction of Section 1 

into this case as an affirmative defense to an otherwise 

''intelligible economic transaction in itself." Kelly v. Kosuga, 

358 U.S. 516, 521 (1959). In Kelly, several onion growers, who 

had agreed to buy part of another's onion stock and subsequently 

withhold it from the market in a scheme to fix the price and limit 

3 In its response to Drury's motion for summary judgment, Olive 

stated that the parties did not contemplate that Olive would 

guarantee Super B's room rates. Robert Drury stated he understood 

Olive would "police the ingredients of the covenant." (Ex. B). 

4Because we are dealing with the sale of real property which 

involves different underlying legal relationships than those 

arising between a lessor and lessee, we are unpersuaded that the 

parties' citation of shopping center cases is entirely apposite. 

See, e.g., Harold Friedman Inc. v. Thorofare Markets Inc., 587 

F.2d 127 (3d Cir. 1978); Child World, Inc. v. South Towne Centre, 

Ltd., 634 F. Supp. 1121 (S.D. Ohio 1986); Optivision, Inc. v. 

Syracuse Shopping Center Assocs., 472 F. Supp. 665 (N.D.N.Y. 1979. 

The closer analogy is the covenant not to compete in employment 

contracts. For example, in Lektro-Vend Corp., 660 F.2d at 269, 

the court found a covenant not to compete did not offend Section 1 

because "the main purpose of the transaction was legitimate, and 

the covenants were enforced reasonably with respect· to time, 

geographic scope, and product." · 

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Appellate Case: 88-1185 Document: 01019770508 Date Filed: 06/26/1989 Page: 8 
the amount of onions sold, raised the illegality of the contract 

under the Sherman Act as a defense to their default on payment of 

the purchase price. "As a defense to an action based on contract, 

the plea of illegality based on violation of the Sherman Act has 

not met with much favor in this Court." Id. at 518. The Court 

reasoned that the "avoidance of private contracts as a sanction'' 

could not be added to the Sherman Act's express remedies, and 

because private contracts are governed by state law, "the federal 

courts should not be quick to create a policy of nonenforcement of 

contracts beyond that which is clearly the requirement of the 

Sherman Act." Id. at 519. Only if ''the judgment of the Court 

would itself be enforcing the precise conduct made unlawful by the 

[Sherman] Act, the courts are to be guided by the overriding 

policy, as Mr. Justice Holmes put it, 'of preventing people from 

getting other people's property for nothing when they purport to 

be buying it."' Id. 520-21 (quoting Continental Wall Paper Co. v. 

Louis Voight & Sons Co., 212 U.S. 227, 271 (1909) (Holmes, J. 

dissenting). 

We are persuaded that the reasoning of Kelly applies equally 

to this case. Plaintiff had fully performed its side of an 

otherwise valid contract, and we see no basis for permitting 

defendant to avoid ·the agreement by wielding the Sherman Act. 

We therefore REVERSE the order of the district court granting 

Olive summary judgment on its defense to the action for breach of 

contract. We REMAND the case for a disposition of Drury's claim 

that Olive breached the restrictive covenant in the contract. 

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