Restrictive Covenants in Real Estate: Next Antitrust Enforcement Target?
The Federal Trade Commission (the “FTC”) and Department of Justice, Antitrust Division (the “DOJ”) (together the “Agencies”) continue to carry out the Biden Administration’s stated mission to reinvigorate antitrust enforcement to “Promote Competition in the American Economy.”
One of the Agencies’ priorities has been to attempt to end, or at least significantly curtail, the use of restrictive covenants, including those used in sale of business transactions and in employment contracts. For example, the FTC brought an enforcement action in 2022 that required ARKO Corp. and its subsidiary GPM to roll back allegedly anticompetitive provisions of their acquisition of 60 Express Stop retail fuel outlets from Corrigan Oil Company pursuant to which the parties agreed to limit their agreement not to compete that they imposed on Corrigan Oil Company.
More recently, the FTC’s issued through its rulemaking authority a proposed ban on restrictive covenants in employment contracts. While the rule has not been finalized and may be subject to challenge, the proposed rule reflects the FTC’s hostility toward restrictive covenants.
Practitioners are likely wondering whether there is more to come from the Agencies, namely, whether there are other types of restrictive covenants that will be targeted in the future. Although there has not been any explicit action by the FTC or the DOJ, FTC authorities have recently turned their attention to restrictive covenants in real estate, particularly those used in the retail industry.
Restrictive covenants in real estate are commonly used throughout the retail industry. For example, supermarket owners often will often include exclusive use protections in their leases which will range from a simple prohibition on other grocery stores in the shopping center to more complicated restrictions where they prohibit any businesses selling grocery store products for off-premises consumption, subject to an incidental sale concept. Those restrictions then get included in the tenant’s memorandum of lease that gets recorded against the shopping center as a whole or in restrictive covenants in a set of covenants, conditions, and restrictions (CC&R) or similar documents so that they restrict the use of other space in the center. Occasionally there will be an additional restriction on the landlord not to lease space to another grocery store at any property owned by the landlord within a certain radius around the property (e.g., 1 mile, 5 miles, etc.).
These practices may now be under increased antitrust scrutiny. In a March 2022 panel moderated by Attorney‑Advisor to FTC Chair Lina Khan, Thomas Dahdough, Yale Law School Professor Christopher Leslie blamed restrictive covenants for creating and prolonging food deserts across America that disproportionately affect poor neighborhoods and deny those residents affordable healthy food.[1] He further argued that anti-grocery covenants imposed by exiting supermarkets should be unenforceable as a matter of law and called for a nationwide ban of restrictive covenants in the grocery context.[2] Land use restrictions have also been the subject of recent lobbying by interest groups, academics, and the media, and several state attorneys general have investigated retailers. Finally, because many restrictive covenants in real estate are filed with local authorities, they can be accessed easily by the Agencies.
Given the current antitrust enforcement climate and the potentially significant impact a government antitrust investigation can have on a business, retailers should consider evaluating their current practices as part of staying ahead of the next potential wave of antitrust enforcement.
FOOTNOTES
[1] Christopher Leslie, Anti-Grocery Covenants, Reforming America’s Food Retail Markets (March 12, 2022).
[2] Id.
