Opinion ID: 2049459
Heading Depth: 1
Heading Rank: 5

Heading: Breach of Implied Covenant Against Destructive Competition

Text: RRC contends that the Court of Special Appeals erred in affirming the Circuit Court's dismissal of Count I of RRC's Amended Complaint for failure to state a claim upon which relief may be granted. RRC submits that two cases, namely, Automatic Laundry Service, Inc. v. Demas, 216 Md. 544, 141 A.2d 497 (1958), and Eastern Shore Markets, Inc. v. J.D. Associates Limited Partnership, 213 F.3d 175 (4th Cir.2000) (applying Maryland law), when read together, establish that: (1) the duty of good faith and fair dealing, which binds every party to a contract and which was stated explicitly in the 2005 sublease, implies a covenant against destructive competition where (a) a tenant is bound by a percentage lease and (b) the parties contract to limit competition with that tenant (in the contract or another document) by creating exclusivity or a particularly limited level of competition; and, (2) when a plaintiff alleges an implied covenant imposing a duty to refrain from destructive competition and a subsequent breach of that duty, a court may not dismiss the complaint. Thus, RRC posits that, because it alleged a breach by BAA of its duty to refrain from destructive competition (citing the RFP's proposed concessions plan contemplating four additional News/Gifts locations and the number of Hudson stores permitted by BAA well in excess of four), the Circuit Court should not have dismissed Count I of the Amended Complaint. Upon examination of Automatic Laundry and Eastern Shore Markets, the Court of Special Appeals held that an implied covenant against destructive competition cannot be inferred from a shopping center lease where the tenant has reason to expect expanding competition at the time of execution of the lease. In the intermediate appellate court's opinion, because the Amended Complaint's allegations reveal[] that, at the time RRC executed the 2005 sublease, [RRC] had reason to expect unlimited competition in the sale of regionally themed gifts and souvenirs beyond the level of competition contemplated by the RFP and proposed concessions plan, the Circuit Court dismissed correctly Count I of RRC's Amended Complaint. In addition, the court opined that RRC's allegations that the 2005 sublease contained a covenant of good faith, provided for RRC to pay a percentage of gross receipts as rent, and restricted some of RRC's new stores to selling only regionally themed gifts and souvenirs provided an insufficient basis for the court to infer from the provisions of the 2005 sublease or temporary sublease an implied covenant against destructive competition in the business of selling regionally-themed gifts and souvenirs. We agree with the Court of Special Appeals's determination. [11] Count I of RRC's Amended Complaint charges BAA with breaching its implied obligations under the 2005 sublease and temporary sublease [12] to refrain from engaging in destructive competition by allowing Hudson to sell regionally-themed gifts and souvenirs in more locations than the four stores contemplated by the RFP's proposed concessions plan. [13] Specifically, Count I, entitled Breach of Contract and Implied Breach of Contract, of RRC's Amended Complaint alleges the following: 39. Plaintiff adopts and incorporates the foregoing allegations of fact in paragraphs 1 through 38 as if stated herein. 40. Defendant BAA has an express obligation under Article 12.17 of the 2005 sublease agreement as well as an implied covenant of good faith and fair dealing under the sublease agreement and temporary sublease to perform its obligations in good faith. Article 12.17 of the Sublease states: BAAM [BAA] and Subtenant agree to perform their obligations under this Sublease and to exercise their rights and remedies under this Sublease, in good faith and consistent with customary standards of commercial reasonableness and fair dealing. By authorizing additional vendors to sell souvenirs and gifts based on themes of Baltimore, Washington and the State of Maryland at BWI more than those delineated in the concession plan of the RFP, BAA acted in bad faith and breached the sublease agreement and its implied covenant of good faith. 41. Defendant BAA breached its express obligation of good faith under the sublease agreement and its implied obligation of good faith and fair dealing by: (1) allowing Hudson and Hudson-related stores at BWI to sell regionally-themed souvenirs and gifts and other competing merchandise at BWI to an extent beyond the specifications in the state-issued RFP; (2) increasing the number of Hudson and Hudson-related stores at BWI; and (3) permitting Hudson and Hudson-related stores selling regionally-themed souvenirs and other competing merchandise at BWI to devote expanded shelf space to those items. Defendant BAA's actions were in bad faith and its conduct was not commercially reasonable under the circumstances. BAA did not believe in good faith that the sale of regionally-themed souvenir and gift sales by Hudson and Hudson-related stores would be harmless to Plaintiff and knew that the competing sales would constitute destructive competition. 42. As a result of the material breach of the sublease by the Defendant, the Plaintiff was unable to perform all of its obligations under the sublease agreement and suffered damages. In support of its contention that the allegations contained in the Amended Complaint state sufficiently a claim for breach of the implied covenant against destructive competition, RRC directs our attention to the following factual allegations in the Amended Complaint: 13. The RFP issued by MAA included a proposed concession plan. In addition to existing RRC's stores, the concession plan, as revised in September 2004, included new spaces for the following concepts: Gourmet Coffee/Newstands-2 locations; Newstands-2 locations; News/Gifts-4 locations; News/Sundries-8 locations; Books/News/Coffee-2 locations. On information and belief, BAA responded to the RFP from MAA. 14. On or about March 10, 2004, and based in part on BAA's response to the RFP, MAA entered into a master lease and concession contract with BAA authorizing BAA to be its agent and to serve as developer of certain areas of BWI and to provide food, retail and service facilities to serve the needs of BWI patrons and employees. On information and belief, the master lease and concession contract between MAA and BAA incorporated the June 2003 RFP and proposed concession plan.    16. RRC entered negotiations with BAA. RRC based its negotiations and proposal to BAA in reliance on the RFP concession plan, which contemplated only four competing gift stores. 17. The RFP concession plan was a material condition on which all subsequent agreements between RRC and BAA were based.    22. Pursuant to paragraph 33 of the temporary sublease, the terms of the Master Lease between MAA and BAA are incorporated by reference into the temporary sublease and both BAA and RRC are bound by all sublease obligations in the Master Lease.[ [14] ]    25. Pursuant to Article 2.1.1 of the 2005 sublease agreement, RRC was provided eight future locations at BWI to operate concession facilities. The specific operations for those locations were delineated in exhibit D to the sublease and specified patriotic themed souvenirs, collectibles and gifts for the Best of Washington store; regionally-themed Maryland, Baltimore and Washington souvenirs, collectibles and gifts for the Celebrate Maryland stores; children's toys, gifts and collectibles for the Just Plane Kids store; and products about women, their careers, their experiences and their relationships for the Women Rock store. 26. Pursuant to the sublease agreement, both RRC and BAA have an express obligation of good faith and fair dealing. Article 12.17 of the 2005 sublease provides: Good Faith and Fair Dealing BAAM and Subtenant agree to perform their obligations under this Sublease, and to exercise their rights and remedies under this Sublease, in good faith, and consistent with customary standards of commercial reasonableness and fair dealing. 27. Pursuant to the sublease agreement of 2005, RRC was obligated to pay to BAA a minimum rent and a percentage rent of specific dollar amounts of gross receipts which is defined as all monies of any kind payable to RRC or derived by RRC from the operation of its BWI stores.    29. On information and belief, in or about 2004, MAA and BAA approved agreements permitting a vendor called Hudson Group (Hudson), a New Jersey-based firm with extensive operations nationwide, to operate multiple news and gifts concessions in areas at BWI in the same terminals as stores operated by RRC. Hudson is neither a [Disadvantage Business Enterprise] nor a[] [Minority Business Enterprise]. In a sharp departure from the original business expectations of RRC based on its reliance on the concession plan, BAA permitted Hudson and entities related to Hudson to sell regionally-themed souvenirs related to Baltimore, Washington and the State of Maryland in more stores at BWI than was anticipated by RRC pursuant to the concession plan.    31. By 2007, eighteen locations of Hudson and Hudson related stores were selling regionally themed gifts and souvenirs at BWI, far in excess of the four news/gifts locations in the retail concession plan of the RFP. In Automatic Laundry, we recognized that a court may imply, under appropriate circumstances and based on certain contractual language, and enforce a covenant to refrain from engaging in destructive competition. 216 Md. at 549-551, 141 A.2d at 500-01. There, the plaintiff and defendants entered into a lease, under which the plaintiff obtained the right to install, maintain, and operate a sufficient number of washing machines to service the occupants of defendants' trailer park. Id. at 547, 141 A.2d at 499. In exchange for the right to install its machines at the park, the plaintiff agreed to pay the defendants 25 percent of the gross receipts from each machine. Id. While the lease was in effect, one of the defendants installed his own washing machines at the trailer park, in direct competition with the plaintiff's machines, resulting in a dramatic decline in the plaintiff's gross receipts. Id. at 548, 141 A.2d at 499. The plaintiff brought suit, but its complaint was dismissed. Id. at 546, 141 A.2d at 498. On appeal, we reversed, concluding that the defendant had a duty of loyalty to refrain from destructive competition, which included an obligation not to render valueless his contract with Automatic by permitting the destructive competition here shown to have been created by the introduction of the competing machines. Id. at 549-51, 141 A.2d at 500-01. In support of that holding, the Court reasoned: It is quite plain that there is no express grant of an exclusive right, and any such right would, therefore, have to arise, if at all, by inference. Though we are somewhat inclined to the view that such an inference should be drawn, we do not find it necessary to decide the question, for we think that the duty of loyalty to refrain from destructive competition is sufficiently established and was clearly violated. . . . In the first place, the agreement is one to share profits on the basis of gross receipts, and in the next place Automatic is obligated to install enough machines to render adequate service to the premises. The evidence shows that the Trailer Park had a capacity of some twenty-four families. The Demas contend that the laundry facilities at the Trailer Park also served members of the Aberdeen community not residing at the Park. The figures as to earnings after [the plaintiff's] or [the defendant's] competing machines were installed show that there was no need for a second group of machines to fulfill Automatic's obligation, and that the profit to Automatic under its agreement with [the defendant] was almost wiped out. Corbin on Contracts, Vol. 3, § 568, pp. 200-201, states with regard to the doctrine of implication: In any commercial agreement in which the compensation promised by one to the other is a percentage of profits or receipts, or is a royalty on goods sold, manufactured or mined, there will nearly always be found an implied promise of diligent and careful performance in good faith and of forbearance to make performance impossible by going out of business or otherwise. Id. at 549-50, 141 A.2d at 500. In Eastern Shore Markets, the federal Court of Appeals for the Fourth Circuit, applying Maryland law and noting specifically this Court's opinion in Automatic Laundry, recognized similarly the potential for a claim based on an alleged breach of the implied covenant to refrain from engaging in destructive competition. 213 F.3d at 183-85. In that case, the parties entered into a lease under which the plaintiff leased space for use as a grocery store in the defendant's strip mall. Id. at 178. The terms of the lease: (1) obligated the plaintiff to pay the defendant a base rent, plus a percentage rent of 1.25% of the store's annual gross sales in excess of $10 million; (2) although not giving explicitly the plaintiff an exclusive right to be the only grocery store in the shopping center, incorporated a site plan that was approved by the parties and which outlined and labeled the remaining space in the mall as future department and retail stores; (3) restricted the plaintiff to operating only a supermarket primarily for sale of food; and, (4) required the plaintiff to include in its gross sales, and therefore its percentage rent computation, the revenues from any other grocery stores it established within a three-mile radius of the mall. Id. While the lease was in effect, the defendant leased one of the remaining spaces, listed in the site plan as a future department store, to a developer who constructed a competing grocery store. Id. at 179. Thereafter, the plaintiff's monthly sales were reduced significantly. Id. In response, the plaintiff filed suit against the defendant in the U.S. District Court for the District of Maryland, alleging that the defendant engaged in destructive competition. Id. Upon the defendant's motion, the plaintiff's action was dismissed for failure to state a viable claim. Id. at 180. On appeal, the Court of Appeals for the Fourth Circuit reversed the dismissal, stating that, under Maryland law, the intentions of parties as expressed in the lease providing for rent calculated in part as a percentage of sales, combined with the circumstances surrounding the lease's formation, may give rise to an implied covenant to refrain from competition that is destructive to the mutual benefit of the contracting parties. [15] Id. at 185. The court took special note of the circumstances surrounding the lease's formation, including a shopping-center site plan, which was made part of the lease, and its inclusion of [the plaintiff's] store as the only grocery store in the shopping center, which was attached to the plaintiff's complaint. Id. at 184-85. In addition, in reaching its conclusion that the plaintiff's complaint should not have been dismissed, the court observed: Eastern Shore alleges in its complaint that J.D. Associates willfully undermined its profitability and threatened its viability. It asserts that certain features of its lease agreement contemplate a particular tenant mix and an important role for its store as the only grocery store within the shopping center. Viewing the complaint in the light most favorable to Eastern Shore, as we are required to do on review of a 12(b)(6) motion, we cannot conclude that Maryland courts would categorically refuse to recognize an implied covenant to refrain from destructive competition in the lease between Eastern Shore and J.D. Associates. We recognize that further proceedings below may reveal facts and defenses counseling against the implication of such a covenant. But without the benefit at this stage of the right to evaluate facts, we conclude that this claim should not have been dismissed under the rigid standards that control the disposition of 12(b)(6) motions. Id. at 185. Another case from this Court, Food Fair Stores, Inc. v. Blumberg, 234 Md. 521, 200 A.2d 166 (1964), is useful to consider in determining the viability of Count I of RRC's Amended Complaint. As noted by the Court of Special Appeals in its opinion in the present case, although Food Fair is not precisely a destructive competition case, it is nevertheless instructive. In Food Fair, the plaintiffs leased to the defendants a store building, in which the defendants operated a supermarket, and adjacent parking areas. Id. at 526, 200 A.2d at 169. Under the terms of one of the leases between the parties, the defendants owed to the plaintiffs yearly rent of $1,200, plus 1% of the gross sales in excess of $2,320,000, up to $2,700,000. Id. at 533, 200 A.2d at 173. The defendants proceeded to open two additional stores in the area which, according to the plaintiffs' complaint, violated the lease's implied covenant on the part of the defendants to refrain from diverting sales from the leased premises. Id. at 533-35, 200 A.2d at 173-74. Upon the defendants' motion, the trial court dismissed the plaintiffs' complaint. We affirmed, stating: We are dealing here only with an alleged implied covenant. There was, of course, no legal obstacle to prevent an express covenant being placed in the lease, so as to provide for [the plaintiffs'] contentions here. After considering the nature of [the defendants'] business and the terms of the leases and after construing them in the light of the circumstances surrounding the parties at the time the leases were made, we are unable to conclude the parties impliedly covenanted that the [defendants] would not expand their business in the area of [the plaintiffs'] store. Id. at 535, 200 A.2d at 174 (emphasis in original). In support of our conclusion, we noted that: (1) there was no allegation of a wilful intent on the part of the defendants to divert sales from the plaintiffs' store, nor was there an abandonment of the business; (2) nothing in the record showed a lack of good faith or fair dealing by the defendants; and, (3) the leases involved were lengthy, and entered into only after prolonged negotiations, with provisions covering many contingencies. Id. Taken together, Automatic Laundry, Eastern Shore Markets, and Food Fair, establish that an implied covenant to refrain from destructive competition may be inferred from a percentage lease, based on the duty of good faith and fair dealing, where the intentions of the parties, as indicated by the terms of the lease and the circumstances surrounding the formation of the lease, suggest that such an inference is appropriate, namely, by limiting competition to a particular level with, or granting exclusivity to, the plaintiff, either in the contract or an incorporated pre-lease document. In Automatic Laundry, the terms of the lease stated that the plaintiff was to install machines sufficient to meet the demands of the trailer park, a clear indication that the contract implied the plaintiff's right to expect exclusivity. Similarly, in Eastern Shore Markets, the development plan incorporated into the lease indicated clearly that the defendants had no plans to permit the development of an additional grocery store in the shopping center that would compete with the plaintiff's store. As such, in those cases, the courts correctly inferred from the parties' inherent duties of good faith and fair dealing the existence of an implied covenant to refrain from destructive competition. On the other hand, in Food Fair, the complex and sophisticated lease contained no suggestion that the parties intended for the defendants to be restrained from opening additional stores in the area that might divert sales revenue from the store leased from the plaintiffs. Therefore, the Court noted appropriately that no implied covenant to restrict additional competition should be inferred from the terms of the parties' lease. With the appropriate standard now illuminated for determining whether an implied covenant to refrain from destructive competition should be inferred from a percentage lease, we examine whether the terms of the sublease agreements, as alleged in RRC's Amended Complaint, and the circumstances surrounding their creation, plead a triable issue of whether the parties intended for competition to be limited to some definable amount and, therefore, the Circuit Court should have permitted RRC to proceed with Count I based on BAA's alleged breach of the implied covenant to refrain from destructive competition. Despite RRC's protestations to the contrary, the Amended Complaint does not allege sufficiently that RRC and BAA contracted to limit competition, such that the Circuit Court or other trier-of-fact could have inferred reasonably an implied covenant to refrain from destructive competition. In essence, RRC's Amended Complaint asserts that the RFP's proposed concessions plan contemplated the addition of four News/Gifts locations in competition with RRC's stores, that the RFP's proposed concessions plan was incorporated generally into RRC's subleases, and that RRC based in part its negotiations with BAA in reliance on the RFP's proposed concessions plan. In conclusory fashion, the Amended Complaint states additionally that BAA was bound to a configuration of concession sales locations for news/gifts of four locations. RRC's allegations, however, fail to suggest that the parties intended for competition to be limited to the four News/Gifts locations contemplated by the RFP's proposed concessions plan, such that the Circuit Court could infer the existence of an implied covenant on the part of BAA to refrain from destructive competition. As noted by the Court of Special Appeals in its unreported opinion in this case, the Amended Complaint did not allege that the RFP's proposed concessions plan established an immutable plan for the future development and leasing of retail space at BWI. Although RRC need not have alleged that the RFP was immutable, its allegations fail to establish that the RFP was anything more than a development plan proposed by MAA in its effort to elicit proposals from potential contractors. In fact, RRC's Amended Complaint states that the 2005 sublease authorized RRC to open up eight new gift stores, a clear indication that the RFP's proposed concessions plan was not a firm limit upon, or a promise by, BAA to permit only four additional News/Gifts stores in sum, and that, in fact, RRC had reason to expect greater competition in the sale of souvenirs and gifts than that contemplated by the RFP. In addition, the Amended Complaint states that the Lessee's Proposal was incorporated into the Master Lease along with the RFP's proposed concessions plan, providing further indication that the RFP's proposed concession plan did not amount to a limit on competition to which BAA had agreed. As such, because RRC's Amended Complaint fails to allege facts sufficient to infer that RRC and BAA, when they entered into the sublease agreements, intended for RRC's competition to be limited contractually to four additional stores, the Circuit Court correctly determined that Count I of RRC's Amended Complaint did not state a claim for breach of an implied covenant against destructive competition. As with Count II, RRC's allegations that it relied on the RFP's proposed concessions plan during its sublease negotiations or that the RFP's proposed concessions plan was a material condition upon which the subsequent sublease agreements were based do not transform a mere development proposal, which did not establish clearly a limit upon the number of additional News/Gifts stores at BWI, into a promise by BAA to limit competition from which a court or fact-finder could infer an implied covenant on BAA's part to refrain from destructive competition. [16]