A West Palm Beach federal judge has curtailed legal efforts by Winn-Dixie Stores Inc. to fight growing competition from discount stores that operate in its shadow at strip malls throughout the South.
U.S. District Judge Donald Middlebrooks in an Aug. 13 ruling looked at more than 100 lawsuits filed by Winn-Dixie in which the chain claimed discount tenants violated “restrictive covenants” in leases that limited the discounters’ grocery items to “the lesser of 500 square feet of sales area or 10 percent of the square foot area of any storeroom within the shopping center.”
The Jacksonville-based supermarket chain filed lawsuits last year against Virginia-based Dollar Tree Inc., Tennessee-based Dollar General Corp. and Ohio-based Big Lots Stores Inc, among others, claiming they violated Winn-Dixie’s “grocery exclusive” clauses when they operated in the same retail centers as the grocery store chain.
Middlebrooks found that out of the 136 stores sued by Winn-Dixie, only 10 violated its agreement — seven of them Big Lots stores. Winn-Dixie sued 48 Dollar Tree stores, but an injunction was imposed on just one store.
“Plaintiffs have failed to demonstrate what damages were caused by defendants’ violations of their grocery exclusives,” Middlebrooks ruled.
The cases were filed separately around the country, but were litigated together in front of Middlebrooks.
Steve Silverman, a partner at Kluger, Kaplan, Silverman, Katzen & Levine, and lead trial counsel for Dollar Tree, said the decision was a big setback for Winn-Dixie. He speculated the chain used the litigation as part of its business plan after emerging from bankruptcy six years ago.
He said the chain felt confident it could win in federal court after key victories on the state level against a handful of discount stores. Winn-Dixie sought injunctive relief to restrict the discounters from selling “groceries,” which Silverman said was broadly defined in the complaints filed as anything the supermarket sold.
“Winn-Dixie sought to squelch its competition through the courts,” he said. “The outcome of this case was a direct hit against Winn-Dixie’s attempted legal maneuvers.”
Winn-Dixie and its attorney, Ryan Cobbs of Carlton Fields in West Palm Beach, had no comment on the decision or if an appeal was planned.
Last year, Barry M. Wolfe, vice president of investments at commercial brokerage Marcus & Millichap in Fort Lauderdale, said he was not surprised by Winn-Dixie’s legal strategy. He said discount stores were moving heavily into foodstuffs and putting large freezers in their stores.
Other retailers such as Wal-Mart Stores Inc. are rolling out a smaller version of its big box stores to take advantage of the discount market, which has been booming during the recession, he said.
Supermarkets have reason for concern, Wolfe said. There’s worry that discounters could move into other product lines, such as prescription pharmaceutical products, that would further infringe upon the big grocery stores’ bottom lines.
“Dollar stores are certainly continuing to expand their food offerings. Obviously, they do have the grocery stores in their sites,” Wolfe said. “It’s a very thin-margin business and the grocery stores sense a threat.”
Silverman said Middlebrooks’ decision could define legal battles between tenant and other grocery chains looking to protect their profit margins.
“The litigation of restrictive covenants is an active area of law across the country,” he said. “Other courts should take notice of the court’s well-reasoned rulings.”