Winn-Dixie Lease Could Nail Discount Grocers

(CN) - Lease provisions may help Winn-Dixie Stores stop Dollar Tree and Big Lots from selling nonfood groceries in the same shopping centers, the 11th Circuit ruled.

Winn-Dixie operates approximately 500 supermarkets on leased property in five southeastern states, with most in Florida.

The supermarket's lease at many of its locations contains a restrictive covenant prohibiting or sharply limiting the sales of "staple or fancy groceries" by other tenants in the same shopping center. A majority of these leases contain an exception allowing the "incidental" sale of grocery items not to exceed 10 percent of the square-foot area of the store.

In a suit involving 97 of its stores nationwide, Winn-Dixie claimed that Dollar General, Dollar Tree and Big Lots stores violated the restrictive covenants in shopping centers shared with Winn-Dixie supermarkets.

The violations allegedly cost Winn-Dixie more than $90 million in lost profits since 2005.

A federal judge in Miami construed the restriction narrowly, determining that "groceries" meant only food items, including nonalcoholic beverages, and measured "sales area" by shelf space. Based on these criteria, the court granted an injunction for 17 Winn-Dixie stores.

But the 11th Circuit found these definitions too narrow Wednesday, and remanded the decision as to 54 stores, 41 of which are located in Florida.

"As we read controlling Florida law, 'groceries' broadly includes food and 'many household supplies (as soap, matches, paper napkins),' and sales area 'includes fixtures and their proportionate aisle space,'" Judge Stanley Marcus wrote for the three-judge panel (parentheses in original). "Also, for eleven stores in Alabama and two found in Georgia, we are required to reverse and remand for interpretation of the covenant terms in accordance with the appropriate law of each of those states."

The court's decision rested in large part on a controlling Florida case, Winn-Dixie Stores v. 99 Cent, which cites the Webster Dictionary's definition of "groceries."

"Webster's Second New International Dictionary, published first in 1934, defined groceries to allow non-food items: a grocer is 'a dealer in tea, sugar, spices, coffee, fruits, and various other commodities, chiefly foodstuffs.' Indeed, a review of other dictionaries reveals no evidence of a contrary or changing definition," Marcus said.

The Atlanta-based federal appeals court affirmed, however, that the covenants are unenforceable in Louisiana and Mississippi. Winn-Dixie is also not entitled to punitive damages because the defendant stores did not act with intentional gross negligence.

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