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J.C. PENNEY CO. v. GIANT EAGLE

September 16, 1992

J.C. PENNEY COMPANY, INC., Plaintiff,
v.
GIANT EAGLE, INC., GIANT EAGLE MARKETS, INC., and STANLEY R. GUMBERG, individually and as Trustee under those certain Irrevocable Deeds of Trust dated May 9, 1969, Defendants.



The opinion of the court was delivered by: DONALD J. LEE

September 16, 1992

 I. PROCEDURAL BACKGROUND

 1. The plaintiff, J.C. Penney Company, Inc. ("J.C. Penney") is a corporation organized and existing under the laws of the State of Delaware, having its principal place of business in the State of Texas.

 2. Defendant, Giant Eagle Markets, Inc. is a corporation organized and operating under the laws of the Commonwealth of Pennsylvania with its principal place of business in Pittsburgh, Pennsylvania, as is defendant, Giant Eagle, Inc. Inasmuch as the parties have not differentiated these two corporate entities in their pleadings or in the hearings conducted in this Court, the Court will use "Giant Eagle" to refer to both corporate defendants collectively.

 3. Defendant, Stanley R. Gumberg ("Gumberg"), is a citizen of Pennsylvania, with his place of business in Pittsburgh, Pennsylvania.

 4. On August 13, 1992, J.C. Penney filed a Verified Complaint to Enjoin Operation of Drug Store operated by Giant Eagle at a shopping center owned by Gumberg. The Complaint alleges: (i) Gumberg is the owner and landlord of a shopping center known as Quaker Village Shopping Center in the Borough of Leetsdale, Allegheny County, Pennsylvania, and that J.C. Penney has the exclusive right to operate a drugstore in Quaker Village in which a registered pharmacist is in attendance; (ii) Giant Eagle is a party to a 1977 lease with Gumberg which permits Giant Eagle to operate a food supermarket at the shopping center; (iii) Giant Eagle is remodeling its supermarket and preparing to open a drugstore or drug department within its supermarket in which a registered pharmacist is in attendance, in violation of J.C. Penney's exclusive lease with Gumberg; *fn1" (iv) that Gumberg's acquiescence to Giant Eagle's addition of a drugstore having a pharmacy department is a breach of J.C. Penney's "exclusive" provision with Gumberg; (v) Giant Eagle has intentionally interfered with existing contractual relationships between Gumberg and J.C. Penney. J.C. Penney filed Motions requesting this Court to enter a temporary restraining order, a preliminary injunction and a permanent injunction enjoining the opening and operation of the Giant Eagle drugstore in violation of the exclusive terms of the lease between Gumberg and J.C. Penney.

 5. Jurisdiction

 The Court finds and concludes that it has diversity jurisdiction over the subject matter of this action pursuant to § 1332 of Title 28 of the United States Code because there is complete diversity of citizenship between the plaintiff, a Delaware corporation with its principal place of business in Texas, and defendants, all citizens of Pennsylvania doing business in Pennsylvania, and the amount in controversy exceeds $ 50,000, exclusive of interest and costs.

 6. On August 13, 1992, the Court heard J.C. Penney's request for a temporary restraining order, which request was denied on that day. A hearing on J.C. Penney's Motion for Preliminary Injunction was conducted on August 28, 1992. J.C. Penney and Giant Eagle have submitted Proposed Findings of Fact and Conclusions of Law. After due consideration of the Proposed Findings of Fact and Conclusions of Law, the oral testimony and exhibits introduced at the hearing on the preliminary injunction, and the arguments of the parties, this Court grants plaintiff's Motion for a Preliminary Injunction enjoining defendant, Giant Eagle, from operating a pharmacy department in its supermarket at Quaker Village.

 II. FINDINGS OF FACT

 A. THE 1962 LEASE

 1. In 1962, J.C. Penney's predecessor in interest, the Thrift Drug Company of Pennsylvania, ("Thrift") and Gumberg's predecessor in interest, Quaker Village, Inc., entered into a lease agreement whereby Thrift rented 81,000 square feet of first floor storeroom space at a shopping center to be constructed and operated as Quaker Village Shopping Center in the Borough of Leetsdale. (Plaintiff's Exhibit 1 at 1, paragraph 1.)

 2. The lessor, Quaker Village, Inc., warranted that it would have certain key tenants who would continuously occupy stores in the shopping center for the term of the lease, namely Thorofare Markets, Inc., which would operate a supermarket, and Triple "A", which would operate a national chain variety store. The term of the lease was 15 years, with the option granted Thrift to renew and extend the lease for three additional terms of five years each upon proper notice to the lessor. (Plaintiff's Exhibit 1, paragraphs 2, 6, 7.)

 3. This lease also provided the "demised premises shall be used by Tenant only for the operation of a retail drugstore business," and granted tenant the "right to display therein all such articles as are displayed and sold by it in its other retail drugstores and the right to operate a soda fountain and luncheonette." (Plaintiff's Exhibit 1, paragraph 10.)

 9. The Lessor covenants and agrees that it will not during the term of this lease, or any renewal or extension thereof, lease, rent, occupy, or permit to be occupied as a drug store, or for the filling or selling of prescriptions, any other part of the aforesaid shopping center or any extension or enlargement thereof. This covenant shall run with the land and, in the event of a breach thereof, Tenant shall be entitled to cancel this lease and/or to full and adequate relief by injunction or other equitable proceedings, and/or to damages for such breach. These provisions, however, shall not be construed to prevent the sale by the supermarket or the variety store, as an incident to their regular business, of some articles of merchandise customarily sold in drug stores, provided said other tenants do not compound or sell prescriptions, or sell merchandise which is limited by state law or State Board of Pharmacy regulations to sale in licensed pharmacies.

 Plaintiff's Exhibit 1, paragraph 9. (Emphasis added.)

 5. A memorandum of lease, or short form lease, was recorded in the Allegheny County Recorder of Deeds Office on March 2, 1962, pursuant to the Act of June 2, 1959, P.L. 454 §§ 1-7, 21 Pa. Stat. Ann. §§ 404-410 (Supp. 1992). This memorandum set forth a description of the demised premises leased by Thrift, the date of commencement of the term of the lease, and the term of the lease and its options to renew, and other information. (Plaintiff's Exhibit 2.) *fn2"

 6. J.C. Penney considers an exclusive pharmacy provision in a lease critical to providing a competitive edge in the pharmacy business, always seeks to negotiate exclusives in its shopping center leases, and considers exclusives to be a "very important, if not the most important, provision in a lease." (J.C. Penney Proposed Finding of Fact 24; Exhibits 4-6, 11-12.)

 7. When J.C. Penney has the only pharmacy in a shopping center, it attracts customers who would not otherwise enter the store and purchase non-prescription items were it not for their need for prescription drugs. Such non-prescription items account for almost half of the sales in a typical Thrift Drug Store, and the loss of an exclusive provision produces a "ripple effect" because, when J.C. Penney loses prescription drug business of its customers, it also loses all of the other non-prescription sales that accompany the customers' purchase of prescription drugs.

 B. THE GIANT EAGLE LEASE - 1977

 8. On September 21, 1977, Giant Eagle agreed to lease a one-story storeroom of approximately 37,000 square feet at Quaker Village from Gumberg for a term of 20 years, with an option to extend the term of the lease for four successive periods of five years each. (Plaintiff's Exhibit 18, paragraphs 1, 4, 6.)

 9. This lease provides:

 Use of Demised Premises

 Tenant shall use the demised premises as a food and grocery super market for the sale of items customarily sold in the markets which it operates in the greater Pittsburgh area, including but not limited to the right to operate a bakery and/or a restaurant minor in nature to main business on the demised premises.

 (Plaintiff's Exhibit 18, paragraph 16.) (Emphasis added.)

 10. Giant Eagle's Quaker Village lease also contained an exclusive provision designed to protect Giant Eagle from competition in the shopping center, with some exceptions. Paragraph 30 provides:

 Restrictive Covenant

 (Plaintiff's Exhibit 18, paragraph 30.)

 C. THE 1978 LEASE

 11. From 1975 through 1977, J.C. Penney discussed with Gumberg or his agents his proposal that J.C. Penney relocate its drugstore in the Quaker Village Shopping Center. Throughout these discussions/negotiations, J.C. Penney emphasized the importance of retaining its exclusive pharmacy right, and insisted that the transaction be structured so as to maintain the continuity of the 1962 lease, including the exclusive pharmacy right contained in that lease. (Testimony of Mr. Donald Harr, August 28, 1992; Plaintiff's Exhibits 3-6.) J.C. Penney gave considerable attention to the timing of the termination of the 1962 lease and the commencement of the 1978 lease, structuring the transactions so that the 1962 lease would terminate on October 31, 1978, one day after the 1978 lease. Thus, there was no gap in J.C. Penney's tenancy or in its exclusive pharmacy provision.

 12. The 1978 lease provided that J.C. Penney would relocate to another location in the shopping center which it leased for a term of 15 years, with an option to extend or renew the lease for three successive five year terms. (Plaintiff's Exhibit 8, 2.)

 13. The use provision of the 1978 lease provides that the demised premises

 may be used for the operation of a drug store, or drug department, in which a registered pharmacist is in attendance, for the sale of health and beauty aids, and in addition, for the sale of any and all other items or services now or hereafter sold by the Thrift Drug Company . . . or by other drug stores of comparable size throughout the country.

 (Plaintiff's Exhibit 8, 3(a)) This clause further provides that the demised premises can be used for any other lawful purpose not prohibited by a provision in another tenant's lease of premises within the shopping center which grants such tenant an exclusive right to operate a particular type of store or business or prohibits the landlord from leasing, using or permitting to be used other premises in the shopping center for specific purposes. Id.

 14. The 1978 lease contains the following provision granting J.C. Penney the exclusive right to operate a ...


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