Co. v. G.D.F., INCORPORATED, t/a Rite Aid

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
PROVIDENCE SQUARE ASSOCIATES,
L.L.C.,
Plaintiff-Appellee,
and
BONEY WILSON & SONS,
INCORPORATED; HANNAFORD BROS. No. 99-1246
CO.,
Defendants-Appellees,
v.
G.D.F., INCORPORATED, t/a Rite Aid,
Defendant-Appellant.
PROVIDENCE SQUARE ASSOCIATES,
L.L.C.,
Plaintiff-Appellant,
v.
No. 99-1346
BONEY WILSON & SONS,
INCORPORATED; HANNAFORD BROS.
CO.; G.D.F., INCORPORATED, t/a Rite
Aid,
Defendants-Appellees.
Appeals from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Robert G. Doumar, Senior District Judge.
(CA-98-743-2)
Argued: February 28, 2000
Decided: May 3, 2000

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Before WILKINS, MICHAEL, and KING, Circuit Judges.
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Reversed and remanded by published opinion. Judge King wrote the
opinion, in which Judge Wilkins and Judge Michael joined.
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COUNSEL
ARGUED: James Edward Moore, CHRISTIAN & BARTON, Rich-
mond, Virginia, for Appellant. Christian Lee Connell, MAYS &
VALENTINE, L.L.P., Virginia Beach, Virginia, for Appellees. ON
BRIEF: Gregory A. Giordano, SHUTTLEWORTH, RULOFF &
GIORDANO, P.C., Virginia Beach, Virginia, for Appellee Provi-
dence Square Associates.
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OPINION
KING, Circuit Judge:
G.D.F., Inc., trading as Rite Aid ("Rite Aid"), leases space from
Providence Square Associates ("Providence Square") in the Provi-
dence Square Shopping Center ("shopping center") in Virginia Beach,
Virginia. Among other things, Rite Aid's lease guarantees Rite Aid
the exclusive right to operate a "drug store" and a "photo finishing
business" in the shopping center.
The dispute underlying this appeal arose when Hannaford Bros.
Co. and its subsidiary Boney Wilson & Sons, Inc. (collectively "Han-
naford"), opened a supermarket in the shopping center, into which
Hannaford incorporated a full-service pharmacy and photo drop
booth. In the suit below, Rite Aid brought claims against both Hanna-
ford and Providence Square, asserting that Hannaford's operation of
a pharmacy and a photo drop booth violated the exclusivity provisions
in Rite Aid's lease with Providence Square. The district court rejected
these claims, holding that Hannaford was not violating Rite Aid's
exclusivity provisions because Hannaford's "Food and Drug Super-
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store" was neither a "drug store" nor a"photo finishing business."
Finding no breach of Rite Aid's lease, the district court entered sum-
mary judgment against Rite Aid. See Providence Square Assocs.,
L.L.C. v. Boney Wilson & Sons, Inc., 34 F. Supp. 2d 1030, 1037 (E.D.
Va. 1999).
Rite Aid has appealed the district court's judgment. For the reasons
set forth below, we reverse.
I.
A.
Rite Aid is the successor in interest to a lease originally signed by
Drug Fair of Virginia, Inc. ("Drug Fair"). On August 6, 1977, Drug
Fair signed a lease ("Rite Aid lease") with Providence Square for
approximately 15,500 square feet of space in the shopping center. As
an anchor tenant in the shopping center, Drug Fair was able to negoti-
ate several exclusive rights clauses from which Rite Aid now benefits.
For example, the Rite Aid lease provides, in pertinent part:
Lessor covenants that, while this lease or any extension or
renewal thereof, is in force and effect, it will not lease for
or permit the conducting of any other drug store, variety
store or photo finishing business or any stores whose pri-
mary business is the sale of patent medicines, health and
beauty aids, cosmetics, lawn and garden and/or outdoor liv-
ing merchandise (this does not exclude a Home Cen-
ter/Hardware type of operation) in the shopping center or
building or site of which the leased premises are a part, nor
upon any real estate within a radius of one mile from said
shopping center . . . .
J.A. 201 (emphasis added) (hereinafter the "exclusivity provisions").1
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1 The Rite Aid lease provides that if the exclusivity provisions are
breached, Rite Aid is entitled to:
pay as revised rent for said premises a sum equivalent to one and
three-fourths percent (1-3/4%) of gross sales with a guaranteed
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The Rite Aid lease also contemplates that a "Safeway or another
National Chain Food Market" ("supermarket") would lease space in
the shopping center, J.A. 172, and the lease makes certain exceptions
to the exclusivity provisions for that supermarket. In that regard, the
exclusivity provisions do "not apply to any listed items2 sold by the
National Food Chain located in the shopping center, their assigns or
sub-lessees or any tenant of that space occupied or formerly occupied
by the National Food Chain Store." J.A. 202.
Safeway began leasing space in the shopping center on February
1, 1978. Significantly, Safeway's lease specifically required that
Providence Square lease space in the shopping center to a "Drug
Store," separate and distinct from the supermarket, for twenty years
-- the same term as Safeway's lease. J.A. 151. Thereafter, Safeway
and its successors operated a supermarket, without a pharmacy, in the
shopping center for approximately eighteen years.
In 1996, Hannaford, through its representative, Boney Wilson,
began negotiating for the space formerly occupied by Safeway. In the
course of negotiating Hannaford's lease, Boney Wilson offered Provi-
dence Square three draft proposals (two draft leases and one letter of
intent), each of which prohibited Hannaford from operating a phar-
macy. The first draft lease provided (in language virtually identical to
the second draft lease) that: "For the purposes hereof, a `pharmacy'
shall mean any store, or department or counter within a store, which
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minimum rental of Twenty-Five Thousand Dollars ($25,000.00)
annually. Said minimum revised rental shall be paid in monthly
installments of Two Thousand Eighty-Three and 33/100 Dollars
($2,083.33) in advance of the first day of each month during the
balance of the term hereof.
J.A. 202.
2 In the same numbered paragraph, the lease specifies the "listed
items": "patent medicines, health and beauty aids, cosmetics, lawn and
garden and/or outdoor living merchandise." J.A. 201-02. Hannaford
asserts that a "drug store, variety store or photo finishing business" are
also to be included in the "listed items"; however, this assertion fails
because, in context, it is plain that those businesses are not "items" in the
mold of the other listed products.
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sells prescription medicines or drugs or any items requiring the pres-
ence of a registered pharmacist." J.A. 458. However, the final draft
of the lease, which was ultimately executed by Hannaford and Provi-
dence Square, prohibited Hannaford from operating a pharmacy only
"[t]o the extent that" the Rite Aid lease prohibited as much. J.A. 218,
250-51.
Following execution of this lease, Hannaford began constructing
the supermarket, into which Hannaford incorporated a pharmacy. On
April 24, 1998, Rite Aid's lawyer informed Providence Square of
rumors that a pharmacy was being constructed in the Hannaford
supermarket, and Rite Aid requested that Providence Square take
appropriate action. Providence Square reacted to this notice from Rite
Aid by attempting to negotiate -- to no avail-- an indemnification
agreement with Hannaford, under which Hannaford would agree to
indemnify Providence Square for any costs arising out of the breach
of Rite Aid's exclusivity provisions.
The Hannaford supermarket opened on June 6, 1998. The store
houses both a full-service pharmacy and a drop-box for photo pro-
cessing, and Hannaford's signs and advertisements identify it as a
"Food and Drug Superstore." Four months after its opening, prescrip-
tion drug sales at Hannaford averaged between $30,000 and $32,000
per month, which represented approximately 2.3% of Hannaford's
overall sales. By comparison, Rite Aid's pharmacy sales during the
same period averaged $55,000 per month, a figure that declined in the
face of competition following the opening of Hannaford's pharmacy.
B.
Following Providence Square's failure to obtain an indemnification
agreement from Hannaford, Providence Square filed suit in Virginia
state court seeking a declaratory judgment clarifying the rights and
obligations of the parties under the applicable leases. In that suit,
Providence Square alleged that its leases were being breached
because: (1) Hannaford is operating a pharmacy and (2) Rite Aid is
withholding rent (see supra note 1). Following the removal of the
case to the Eastern District of Virginia, Rite Aid filed (1) a counter-
claim against Providence Square, alleging that Providence Square
allowed Hannaford to operate a pharmacy and a photo drop box in
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violation of Rite Aid's lease; and (2) a cross-claim against Hannaford,
alleging that Hannaford breached its lease with Providence Square,
violated the restrictive covenant in Rite Aid's lease, and tortiously
induced Providence Square to breach its lease with Rite Aid.
After the parties submitted briefs on various cross-motions for
summary judgment, the district court held that Hannaford's operation
of a pharmacy and a photo drop box did not violate the exclusivity
provisions of Rite Aid's lease. Based on this holding, the district
court, on January 26, 1999, granted summary judgment against Rite
Aid. Rite Aid has appealed, and we possess jurisdiction pursuant to
28 U.S.C. § 1291.
II.
A.
"We review the district court's grant of summary judgment de
novo, viewing all facts and inferences in the light most favorable" to
Rite Aid. Food Lion, Inc. v. S.L. Nusbaum Ins. Agency, Inc., 202 F.3d
223, 227 (4th Cir. 2000). In this review, we remain mindful that
"[s]ummary judgment is appropriate where there is no genuine issue
of material fact, and the moving party is entitled to judgment as a
matter of law." Semple v. City of Moundsville , 195 F.3d 708, 712 (4th
Cir. 1999) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)).
B.
1.
We are first charged, in this appeal, with resolving whether Hanna-
ford's operation of a pharmacy violates the provisions of Rite Aid's
lease prohibiting the operation of another "drug store" in the shopping
center. Hannaford contends, in an argument adopted by the district
court, that there is no violation of Rite Aid's exclusivity provisions
because they prohibit only the operation of another"drug store" in the
shopping center, and Hannaford is not a "drug store." Instead, Hanna-
ford asserts that it is a "supermarket," which is not prohibited under
Rite Aid's exclusivity provisions. At its base, Hannaford's argument
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is that a "drug store" or pharmacy, if incorporated into a supermarket,
is no longer a "drug store" within the meaning of Rite Aid's lease.
Inasmuch as the exclusivity provisions of Rite Aid's lease consti-
tute restrictive covenants, we are guided by Virginia law relating to
restrictive covenants.3 In Virginia, "[c]ovenants, express or implied,
restricting the free use of land are not favored and must be strictly
construed." Mid-State Equip. Co. v. Bell, 225 S.E.2d 877, 884 (Va.
1976). In fact, "substantial doubts or ambiguity" about the meaning
of a restrictive covenant must be resolved in favor of the unrestricted
use of land. Woodward v. Morgan, 475 S.E.2d 808, 810 (Va. 1996).
However, Virginia will enforce "such covenants when applicable, but
the person claiming the benefit of the restrictions must prove that the
covenants are applicable to the acts of which he complains." Sloan v.
Johnson, 491 S.E.2d 725, 727 (Va. 1997). In our analysis, we also are
guided by Virginia principles of contract interpretation, under which
we seek to determine the intent of the parties from the language
expressed in the contract. Langley v. Johnson , 499 S.E.2d 15, 16 (Va.
Ct. App. 1998). If the terms of the contract are clear and unambigu-
ous, then we must afford those terms their plain and ordinary mean-
ing; however, if the terms are vague or ambiguous, then we may
consider extrinsic evidence to interpret those provisions. Shoup v.
Shoup, 525 S.E.2d 61, 63-64 (Va. Ct. App. 2000).
Applying these principles to the case before us, we conclude that
the district court erred in its determination that Hannaford's pharmacy
is not a "drug store." Indeed, given that Hannaford's signs and adver-
tisements trumpet it as a "Food and Drug Superstore," we might eas-
ily resolve this question by merely taking Hannaford at its word.
However, reading Rite Aid's exclusivity provisions in context makes
clear that the supermarket could not sell prescription pharmaceuticals
without violating Rite Aid's restrictive covenant. That is, although the
exclusivity provisions prohibit the operation of a"drug store," the
provisions also stipulate that the supermarket may, without violating
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3 In this appeal, we are sitting in diversity; therefore, our task "is to
`rule upon [Virginia] state law as it exists and not to surmise or suggest
its expansion.'" Harbor Court Assocs. v. Leo A. Daly Co., 179 F.3d 147,
153 (4th Cir. 1999) (quoting Burris Chemical, Inc. v. USX Corp., 10 F.3d
243, 247 (4th Cir. 1993)).
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the non-competition clause, sell several items that were otherwise
prohibited under the exclusivity provisions, including (non-
prescription) patent medicines, health and beauty aids, cosmetics,
lawn and garden/and or outdoor living merchandise (collectively the
"listed items"). J.A. 201-02. That the leases's "listed items" specifi-
cally exclude prescription medicine makes clear that the supermarket
in the shopping center may not sell prescription medicines. In other
words, when the exclusivity provisions are viewed in context, it is
clear that Rite Aid's prohibition of another "drug store" sought to
avoid the competitive sale of prescription medicine in the shopping
center.
Our conclusion is buttressed by the decision of the Supreme Court
of Appeals of Virginia in Krikorian v. Dailey , 197 S.E. 442, 446
(1938), a case enforcing a restrictive covenant under similar circum-
stances. In Krikorian, a tenant operating a"confectionery" negotiated
a restrictive covenant in his lease prohibiting his landlord from leas-
ing an adjacent property "for a confectionery during this lease." Id. at
444. When it appeared that the adjacent site would be occupied by a
drug store that sold confectionery goods, the tenant sued to enforce
the restrictive covenant. At trial, the court instructed the jury that the
restrictive covenant was breached if the drug store was "a business
substantially similar" to a confectionery. Id. at 447. The jury found
that the covenant was breached, and the highest state court in Virginia
upheld both the jury's determination and the jury instruction: "All of
these rules [of contract construction] are to be remembered, and the
academic definition of words is often important, but more important
still is the purpose of the covenant. Has that purpose been kept or bro-
ken?" Id. at 446. The court then explained:
The courts should and do look to the substance of things in
the construction of contracts. If a landlord owned two store-
rooms in a building and were to rent one to be used as a del-
icatessen shop and covenanted that no other delicatessen
store was to be established in that building, plainly to permit
the establishment of another store, designated by its propri-
etor as a "Food Shoppe," which carried the same merchan-
dise carried by the delicatessen store, would be a violation
of this covenant. Nor would the situation change if in addi-
tion other things were sold there.
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Id. at 446.
We believe that this common sense approach is apposite, and we
follow it here. The clear lesson of Krikorian is that we should look
to the substance -- not the label -- of the activity sought to be
restricted under a covenant. Under this guidance, we are compelled
to hold that the sale of prescription drugs by Hannaford breaches Rite
Aid's exclusivity provisions. A "drug store" is no less a drug store
merely because it has been incorporated into a structure called a "super-
market."4
2.
The district court reached a contrary conclusion, and we briefly
address some of the points upon which the district court relied. First,
the district court noted that the sale of prescription drugs only consti-
tuted 2.3% of Hannaford's sales. Because, the district court con-
cluded, the sale of prescription drugs is "an incidental" rather than
primary source of sales, Hannaford is not a "drug store."
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4 There is, of course, authority in which courts have held various
restrictive covenants to be inapplicable, and Hannaford has cited several
such cases as authority here. We find none of those cases persuasive. For
example, Hannaford has relied upon Marriott Corp. v. Combined Prop-
erties L.P., 391 S.E.2d 313, 314 (Va. 1990). There, the Supreme Court
of Virginia upheld a trial court's determination, following a bench trial,
that a lease provision prohibiting the operation of a "drive-in food estab-
lishment" in a "described area" did not prohibit the operation of a
McDonald's "fast-food" restaurant in that"area." Id. In that case, how-
ever, the Supreme Court undertook the same analysis adopted here: it
compared the substance of that which was sought to be prohibited --
operation of a "drive-in food establishment"-- with the substance of the
activity sought to be conducted -- operation of a"fast-food" restaurant
and concluded that the two were not coextensive. Further, the appeal in
that case followed trial; therefore, the court was bound to view the facts
in the light most favorable to the "fast-food" restaurant, which had pre-
vailed at trial. Id. at 315. In this case, by contrast, we are compelled to
view the facts in the light most favorable to Rite Aid, and we have con-
cluded that the scope of the activity sought to be avoided -- operation
of a "drug store" -- is coextensive with the activity sought to be con-
ducted -- operation of a pharmacy.
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We conclude that the 2.3% figure is, in the context of the issues
here, simply a red herring. In fact, the relevant figure is $30,000 --
representing the average prescription drug sales per month at Hanna-
ford. When this figure is compared with Rite Aid's prescription drug
sales of $50,000 per month, there is no doubt that Hannaford's sales
qualified that pharmacy as exactly the form of competition that Rite
Aid sought to avoid in its lease.
In a similar vein, the district court relied upon Virginia's Sunday
closure laws ("Blue Laws") for a definition of"drug store." Under the
Blue Laws, a "drug store" was defined as a store where "`a majority
of the sales receipts . . . consist[ ] of prescription and nonprescription
drugs, health and beauty aids.'" Providence Square, 34 F. Supp. 2d
at 1035 (quoting Va. Code Ann. § 18.2-341(17) (Michie 1975)).
Because, the district court noted, only 2.3% of Hannaford's sales
come from these sources, Hannaford does not fit the Blue Laws' defi-
nition of a "drug store." On this point, we conclude that the district
court's reliance on the Blue Laws was misplaced. First, there is no
indication that the parties relied upon the Blue Laws when they
drafted the lease, and the Blue Laws thus provide little evidence of
the intent of the parties who drafted the relevant provisions. Second,
the purpose of Blue Laws "are to provide a day of rest for persons and
to prevent physical and moral debasement from uninterrupted labor."
Bonnie Belo Enters., Inc. v. Commonwealth, 225 S.E.2d 395, 397
(Va. 1976). As such, those laws are drafted to permit as few busi-
nesses as possible from operating, and the category of businesses
exempt from the Blue Laws is thus narrowly drawn. Put simply, the
Blue Laws contained a definition of "drug store" that is unduly
restrictive and inapplicable outside the Blue Laws, and that definition
should not control or even inform the interpretation of Rite Aid's lease.5
The district court also applied a canon of construction: expressio
unius est exclusion alterius ("expression of one thing is the exclusion
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5 In fact, there are other statutes in Virginia that define the word "phar-
macy" using the word "drugstore" as a synonym. See, e.g., Va. Code
§ 54.1-3300 (Michie 1999) (part of the regulatory scheme for pharma-
cists and pharmacies). Similarly, Webster's defines"drugstore" as "[a]
store where prescriptions are filled and drugs and sundries are sold." See
Webster's II New Riverside University Dictionary at 407 (1984).
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of another") to the exclusivity provisions in order to reach its conclu-
sion. The district court noted that the lease's"listed items" specified
goods that could not be the primary business of a store in the shop-
ping center, and the fact that prescription drugs were excluded from
the "listed items" evidenced, for the district court, an intent not to pro-
hibit the sale of prescription drugs. On the contrary, as we have noted,
the exclusion of prescription drugs from the "listed items" actually
bolsters Rite Aid's argument that the supermarket was not to be per-
mitted to sell prescription medicine. See supra at 8. Further, to the
extent that we are to rely upon any principle of contract construction,
we believe that the more applicable principle is that "the construction
[of a contract] adopted should be reasonable, and absurd results are
to be avoided." Transit Cas. Co. v. Hartman's, Inc., 239 S.E.2d 894,
896 (Va. 1978). Were we to adopt Hannaford's construction of the
Rite Aid lease, then as long as Hannaford's prescription drug sales
constituted less than 50% of its overall sales (no matter how large the
volume), Hannaford would not be a "drug store" and it would be per-
mitted to sell prescription drugs. Similarly, under Hannaford's reason-
ing, it might well avoid qualifying as a "drug store" because it calls
itself a "Drug Superstore." J.A. 554-61 (emphasis added). An
approach that so permits the label to control substance could surely
lead to such absurd results, and we thus cannot adopt Hannaford's
reading of the lease.
The restrictive covenant at issue in this case was negotiated
between two commercially savvy corporations, and it must be read to
have some meaning. Thus, while we are to strictly construe restrictive
provisions, we conclude that a proper reading of this lease prohibits
Hannaford's sale of prescription drugs. We therefore reverse the dis-
trict court's summary judgment against Rite Aid, and we thereby rein-
state Rite Aid's claims, arising out of this issue, against both
Hannaford and Providence Square.
C.
We also briefly address Rite Aid's other claims that were dismissed
through the district court's entry of summary judgment. First, Rite
Aid's claims below alleged that Hannaford's operation of a photo
drop box also violates the exclusivity provisions; however, the district
court dismissed this claim on the same reasoning it applied to the
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"drug store" issue. At oral argument, Hannaford's counsel contended
that there was no distinction between Hannaford's operation of a
"drug store" and Hannaford's operation of a photo drop box, effec-
tively conceding that an adverse ruling with respect to the "drug
store" issue also mandates reversal on the photo drop box issue. We
agree with Hannaford on this point; we conclude that the evidence
submitted in the district court also mandates reversal of the summary
judgment entered with respect to Hannaford's operation of a photo
drop box. Accordingly, we reinstate Rite Aid's claims against both
Hannaford and Providence Square arising out of this issue.
Rite Aid also has stated a claim against Hannaford for tortious
interference with contract. To establish liability under such a claim,
Rite Aid must prove that: (1) a valid contract exists or existed; (2) the
interferor knew of the contract; (3) the interferor intentionally inter-
fered, inducing or causing a breach of the contract; and (4) the party
who has been disrupted suffered damage. Duggin v. Adams, 360
S.E.2d 832, 835 (Va. 1987). We also conclude that, in these circum-
stances, there is sufficient evidence for Rite Aid to proceed on this
claim, and we thus reverse the district court's entry of summary judg-
ment.
III.
Because the district court erred in granting summary judgment
against Rite Aid, we reverse its judgment and remand this case for
further proceedings consistent with this opinion.
REVERSED AND REMANDED
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