<i>Simon v. Starbucks</i>: Preliminary Injunction Granted to Prevent Store Closings

All of the Simon Leases contained a “Continuous Operations Covenant” that included the following or substantially similar language:

Tenant will occupy the Premises upon the Commencement Date and thereafter continuously operate and conduct in one hundred percent (100%) of the Premises during each hour of the entire Lease Term when Tenant is required under this Lease to be open for business the business permitted [herein], with a full staff and full stock of merchandise, …. The parties agree that: Landlord has relied upon Tenant's occupancy and operation in accordance with the foregoing provisions; because of the difficulty or impossibility of determining Landlord's damages which would result from Tenants [sic] violation of such provisions, including but not limited to damages from loss of Percentage Rent from Tenant and other tenants, and diminished saleability [sic], mortgageability [sic] and economic value, Landlord shall be entitled to liquidated damages if it elects to pursue such remedy; …. In addition to all other remedies, Landlord shall have the right to obtain specific performance by Tenant upon Tenant's failure to comply with the provisions [hereof].

Id. at 4 (emphasis in original).

In addition, all of the Simon Leases included either the remedy of specific performance for breach of the Continuous Operations Covenant or the right to obtain injunctive relief. Each lease further stated that none of the remedies was exclusive, but all were separate and cumulative.

Notwithstanding the Continuous Operations Covenants, on July 27, 2017, Starbucks publicly announced it was closing all of its Teavana stores. Once Starbucks announced such closure, it began reducing its workforce at the Teavana distribution center, halting orders for Teavana inventory and reassigning employees.

On Aug. 21, 2017, Simon filed both a complaint for injunctive relief and a motion for temporary restraining order and preliminary injunction against Starbucks to compel the continued operation of its Teavana stores at the Simon shopping centers. Four days later, the parties submitted an agreed-upon order pursuant to which Starbucks was enjoined from closing or operating other than as required by the Simon Leases and/or conducting any going out of business or fire sales until the court ruled on Simon's motions.

The Test for Preliminary Injunction

The purpose of a preliminary injunction, the court explained, “is to maintain and preserve the status quo until the merits of the case can be heard” in order “to prevent harm to the moving party which could not be corrected by a final judgment.” Id. at 12 (internal citations omitted). In granting Simon's motion for preliminary injunction, the court found that Simon had satisfied each of the following elements to obtain a preliminary injunction:

1. That it had a reasonable likelihood of success on the merits;
2. That the remedies at law were inadequate and that irreparable harm would occur during the pendency of the action if preliminary injunctive relief were not granted;
3. That the threatened injury to the movant from denying the motion outweighed the potential harm to the nonmoving party from granting the motion; and
4. That the public interest would not be disserved by granting the injunction.

Reasonable Likelihood of Success on the Merits

On the first point, the court found that Simon had a “better than negligible” possibility of succeeding on the merits. Starbucks acknowledged that closing the stores was a breach of the Continuous Operations Covenants and specific performance and other equitable relief were remedies expressly agreed to by the parties under the Simon Leases. Id. at 15.

Inadequacy of Remedies at Law

The court explained that, on the issue of irreparable harm, Simon need not show that no legal remedy existed in order to prevail. Instead, to show irreparable harm, Simon needed only to demonstrate that the legal remedy was inadequate. The court stated: “To be adequate in the appropriate sense, the legal remedy must be plain, complete, practical, efficient — in brief, as good as or better than the injunctive relief sought. A preliminary injunction may still be appropriate even when damages are purely economic 'due to the extreme difficulty of establishing both causation and the amount of damages.'” (Internal citations omitted). The court rejected Starbucks' argument that Simon's legal remedies for lost rent were adequate.

Instead, the court examined the effect that denying the preliminary injunction would have on Simon's operations across the country and found “the types of damages alleged [by Simon] to be considered irreparable harm due to the difficulty in calculating the ultimate damages.” Id. at 19. In making such determination, the court considered the total square footage of the 77 Teavana stores at issue, the number of shopping centers affected by such closures, and the effect that not enforcing the Continuous Operations Covenant in the Simon Leases might have on other tenant leases. The court also found that a ruling against Simon would adversely affect Simon's ability to rely on its tenants staying for the terms of their leases and to maintain an appropriate tenant mix, and the resulting damages to Simon could include “reduced rent, diminished reputation, and lost prospective tenants.” Id. at 20. Based on these factors, the court concluded that the legal remedy of lost rent would be inadequate.

The Balance of Harms

Next was the question of the balance of harms. In considering whether the “threatened injury” to Simon outweighed the “potential harm” to Starbucks, the court found that because “the threatened injury to Simon may manifest itself in many forms that are difficult to quantify, whereas the harm to Starbucks is straight-forward and pecuniary, the threatened injury to Simon outweighs the potential harm to Starbucks.” Id. at 25.

In so concluding, the court found that if a preliminary injunction was not granted, the threatened injury to Simon would include:

(i) the harms resulting from increased store vacancies, which include:

(a) difficulty replacing the vacancies with appropriate tenants;
(b) a diminished image of Simon's malls; and
(c) harm to Simon's reputation with its other tenants and consumers;

(ii) Simon's long-term ability to effectively plan and operate its malls would be hindered if other tenants were able to close their stores at will, upsetting Continuous Operations Covenants in their leases, as well as co-tenancy and kick-out provisions;

(iii) Simon's short-term ability [to] operate its malls would be hindered because there is a strong possibility other tenants will follow Starbucks' lead, dishonor their obligations under their leases, and attempt to close their stores if they feel their business is unprofitable or if they can find a better deal elsewhere; and

(iv) Simon's impaired ability to enforce, after a trial on the merits, the specific performance remedy negotiated in the Teavana store Leases, because the Teavana stores would no longer be in existence.”

Id. at 24.

In contrast, granting a preliminary injunction in favor of Simon and requiring Starbucks to continue to operate the Teavana stores may cause the following harms to Starbucks:

(i) approximately $15 million to keep the Teavana stores open during a trial on the merits and

(ii) the following operational challenges:

“(a) re-establishing relationships with vendors in order to enter into new supply agreements to resupply stores . . .;

(b) prohibitive costs to 'air freight' said inventory to each of its stores up to five times the current cost;

(c) difficulty getting adequate staff to work, as store managers and employees have begun leaving Teavana stores since Starbucks' July 27, 2017 announcement it planned to close all Teavana stores; and

(d) the need to work closely with Simon, the same company it has been actively involved in litigation with.”

Id. at 24.

The court also noted that a non-movant's “self-imposed” hardships weighed against such party in balancing hardships between the parties. Here, the court found that Starbucks' decisions to acquire Teavana, voluntarily assuming the obligations under the Teavana leases, including the Continuous Operations Covenants, and then announcing the store closures and taking affirmative action toward such closures were all self-imposed acts by Starbucks.

The Public Interest

Finally, in concluding that granting the preliminary injunction and requiring the Teavana stores to continue to operate would not disserve the public interest, the court recognized Indiana's “strong public policy in favor of enforcing parties' contracts.” Id. at 26. According to the court, “[r]elieving a party of its obligations under a contract merely because the contract is burdensome, unprofitable, or causes hardship goes against the public policy of this State.” Id. Furthermore, by allowing Starbucks to close these stores in the face of the Continuous Operations Covenants to which it agreed, “the [c]ourt would be relieving Starbucks of the failed risk it took, merely because Teavana has now proven to be unprofitable to Starbucks. To allow a company such as Starbucks to do so would have grave implications on the public's confidence in entering into future contracts. It would also signal to Simon's remaining tenants that the Continuing [sic] Operating [sic] Covenants will likely never be enforced, eliminating the equitable remedy of specific performance which the parties freely agreed to in these leases.” Id.

Conclusion

A major reason the court sided with Simon was the fact that in almost all of the relevant 77 leases, an enumerated remedy for a threatened breach of the Continuous Operations Covenant was specific performance. Clearly, the contracting parties had placed great importance on the continued presence of Teavana stores in the malls, as signaled by the inclusion of these specific performance provisions. Without them, the court might have been more sympathetic to Starbucks' argument that the stores were unprofitable and that general remedies would suffice to make Simon whole.

In addition, this decision was undoubtedly made easier for the court by the fact that the Teavana stores were currently open and operating — the court did not have to order closed businesses to be reopened. As it was, the court order merely maintained the ongoing businesses in their current form, and monitoring compliance would not be burdensome. If any monitoring were required, the court noted that it had the power to appoint a party to supervise the compliance, at the parties' and not the public's cost.

Finally, it is important to note that while the court found Simon's potential harm to be greater than those of Starbucks, the court did require Simon to post a bond for $15 million to mitigate Starbucks' damages should Starbucks succeed on the merits.

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Marisa L. Byram, a member of this newsletter's Board of Editors, is a member of Lewis Rice LLC, practicing in the Real Estate and Corporate Departments.