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Shop ‘n Bag Retailer Wins Landmark Judgment  Against Landlord, Dollar Tree Stores

In what is believed to be a landmark decision involving supermarkets successfully litigating against encroachment from other retailers selling similar products, Philadelphia-based Holiday Supermarkets, Inc. has prevailed in its effort to thwart Dollar Tree Stores from continuing to sell grocery and food products, including refrigerated and frozen food, at its store in the Mayfair Shopping Center in Northeast Philadelphia.

On January 29 in Philadelphia Commerce Court, a jury unanimously agreed with the Gilbert family (Harry, Catherine, Gary, Mark and Kathy Gilbert Irwin), which operates four independent supermarkets (three Shop ‘n Bags and one Thriftway), all in the city, that the landlord violated the exclusive use provision in Holiday’s lease by allowing Dollar Tree to directly compete in the same shopping center with the Gilberts’ Shop ‘n Bag store by selling the same types of food and grocery items.

Holiday Supermarket has anchored the center since it was built in 1992. This case actually dates back to 2003 when Dollar Tree became a tenant in the shopping center. While Dollar Tree sold food and grocery products from the inception of its lease,Holiday’s owner, Harry Gilbert, had no idea. “Honestly, I thought they were only selling candy and gum,” Gilbert noted. Gilbert did not suspect that Dollar Tree may have been directly competing against his store in violation of his lease until sometime in 2006 or 2007 when he heard that Dollar Tree had installed refrigerated and frozen cases. Harry Gilbert immediately complained to the landlord at the time (Regency Realty and USRP I), which responded by sending a letter to Dollar Tree in August of 2007 to cease and desist from selling food and grocery items in violation of Holiday’s exclusive rights. This request was ignored.

In 2009, Gilbert again complained about Dollar Tree’s continued food and grocery sales, this time through his attorneys. The landlord’s legal department sent a second cease and desist letter which also was ignored. Despite acknowledging that Dollar Tree was violating Holiday’s lease rights, the landlord was unwilling to take legal action against Dollar Tree. This forced the Gilberts (Holiday) to commence a lawsuit in 2009.

In 2010, a Philadelphia judge, Albert W. Sheppard Jr. (who has since died), dismissed Holiday’s lawsuit, finding that Holiday’s lease was limited to competition from other supermarkets and Dollar Tree was not a supermarket. At that time, Holiday retained new counsel, White and Williams LLP, who was successful in getting the decision reversed on appeal. This time the case was heard by Judge Patricia McInerney. The case was remanded for a jury to determine what the original parties to the lease intended by the restriction which gave the lessee the exclusive right to operate a “retail supermarket of any nature.”

After a five day trial, the jury found that the Mayfair Dollar Tree store was a retail supermarket of some nature and that the landlord (Regency Realty and USRP I) violated the exclusive use provision in the Gilberts’ lease by allowing Dollar Tree to sell food and grocery products in competition with the Gilberts’ Mayfair Shop ‘n Bag.

Dollar Tree argued that there was no lease violation because it was not a retail supermarket. But Holiday’s attorney, Justin Proper of White and Williams, effectively proved to the jury that the original parties to the lease did not intend for the language “retail supermarket of any nature” to simply limit competition from other traditional supermarkets. Instead, Proper was able to prove that the parties intended the lease to prohibit competition from any business selling food and grocery items in competition with Mayfair’s Shop ‘n Bag’s business.

The key testimony in this regard came from a video deposition taken of Ed Heller, the attorney who represented the original lessee Fleming Foods (Holiday was a sublesee of Fleming, the now defunct wholesaler). Heller testified that he had represented Fleming for over 30 years in its lease negotiations with landlords and that all the company’s leases contained broad language to provide the supermarket anchor tenants with protection against competition from other businesses, not just supermarkets. Heller testified that both parties understood that this was the intent of the language “retail supermarket of any nature.”

After deciding the issue of original intent, the jury found that Dollar Tree was operating a retail supermarket of some nature by selling the same types of food and grocery items as Holiday. The evidence at trial showed that the Mayfair Dollar Tree’s food and grocery sales had increased year after year since 2006, comprising well over 50 percent of its total sales in 2012. This increase is consistent with Dollar Tree’s corporate policy of increasing the sale of food as a means of driving customer traffic into their stores. According to Proper, the former store manager at the Mayfair Dollar Tree testified that he knew his store was taking customers away from the Mayfair Shop ‘n Bag and he suspected corporate knew this as well.

The case was bifurcated (the jury was only asked to decide whether the landlord breached its lease with Holiday) and a separate trial will be scheduled to decide the issue of damages.

While Holiday did not pursue any direct claims against Dollar Tree, Dollar Tree brought a declaratory judgment action in which it sought a declaration or ruling from the trial judge concerning the parties’ respective lease rights and obligations. Judge McInerney agreed with the jury, finding that Dollar Tree has been operating a retail supermarket of some or any nature since the inception of its lease in 2003. This court’s ruling is a final order which is appealable and Dollar Tree is expected to appeal.

An interesting twist in the case is that the shopping center was sold in 2010, so if the appeal is not heard (or the Gilberts prevail on appeal) the new landlord (WP Realty) would be assigned the task of potentially evicting Dollar Tree. Those trials and rulings probably won’t take place until later this year or early 2014.

Asked about how this verdict may affect other supermarkets that are facing similar encroachments by non-traditional retailers selling many similar items, Proper stated: “While the language of every lease is unique, this case has potential broad implications for all supermarket operators whose exclusivity rights have been violated. In my opinion, the nature of Dollar Tree and other dollar stores’ business would allow a jury to find violations of many different types of lease restrictions, including leases that restrict competition from other supermarkets, food stores, grocery stores, and the like.”

Proper commented, “Dollar stores like Dollar Tree have made a conscious decision to operate as non-traditional supermarkets which they have every right to do provided, of course, they do not violate the exclusive lease rights of the anchor supermarket.”

As for Harry Gilbert, one of the true veterans of the grocery industry (who started in the business as a 13 year-old with Frankford Unity and formed Holiday Supermarkets in 1970), was filled with so much emotion that he rejoiced in a loud and cheerful that “Today justice has been served!”

“It’s been going on for so long; there were many times that I just wanted it to end, but I knew we had to persevere because we were doing the right thing. The jury saw through the smoke screen from Dollar Tree’s high powered attorneys and accepted Mr. Justin Proper’s clear and concise presentation of the true facts. I think this sends a message to independent retailers that you can’t be bullied by big corporations who try to steamroll small business owners by forcing them to pursue expensive litigation. Our business was unfairly damaged by the actions of the landlord and Dollar Tree and the jury’s verdict clearly reflects this fact.”

Beyond the potential powerful impact of the legal ruling, it’s important not only to note the courage and perseverance of the Gilbert family, especially patriarch Harry Gilbert, who could have easily just licked his wounds and saved hundreds of thousands of dollars in legal fees and five years of stress by just accepting what is a growing problem among supermarkets. Harry set an example for all retailers who see the terms of their leases violated or compromised.

Nothing against Dollar Tree, one of the most successful and fastest growing merchants in the country and the best run, in my opinion, dollar store operator in the industry. Dollar Tree has a great operating model, but to deny that its store on Sackett Street in Northeast Philadelphia is not competing with the Gilberts’ Mayfair Shop ‘n Bag unit is profoundly absurd.

In the end, neither Dollar Tree nor the landlord could provide a credible defense to the court, but as so often happens, big publicly-traded corporations believe their best strategy is to throw more money into the process hoping to deter the little guy. Unlike a lot of retailers (particularly independents), who face these types of competitive threats to their businesses and understandably find the field of battle too costly or exhausting to engage, old warhorse Harry Gilbert would have none of this attempted power play.

Sure, Dollar Tree will appeal (it’s only the shareholder’s money) and wishfully the Appellate Court will once again rule in the Gilbert’s favor. And hopefully, this legal precedent will set the standard for other retailers to fight back and defend their tenant rights.