May Dept. Stores Co. v. First Hartford Corp.

• Decision Date: 08 August 1977
• Docket Number: Civ. No. H-76-348.
• Citation: 435 F. Supp. 849
• Court: U.S. District Court — District of Connecticut
• Parties: The MAY DEPARTMENT STORES COMPANY v. FIRST HARTFORD CORPORATION, First Hartford Realty Corporation and Forbes & Wallace, Inc.

435 F. Supp. 849

The MAY DEPARTMENT STORES COMPANY v. FIRST HARTFORD CORPORATION, First Hartford Realty Corporation and Forbes & Wallace, Inc.

Civ. No. H-76-348.

United States District Court, D. Connecticut.

August 8, 1977.

Robert K. Ciulla, Tyler, Cooper, Grant, Bowerman & Keefe, New Haven, Conn., Seymour D. Lewis, Asa D. Sokolow, Marvin R. Lange, New York City, for plaintiff.

Henry C. Ide, Hartford, Conn., Samuel Kirschenbaum, Dreyer & Traub, Brian Michael

Seltzer, Thomas C. Lambert, New York City, for defendants.

RULING ON PLAINTIFF'S MOTION TO STRIKE THE FOURTH AND SIXTH AFFIRMATIVE DEFENSES

BLUMENFELD, District Judge.

This is a diversity action for specific performance of a contract and for related relief. Plaintiff, The May Department Stores Company ("May") alleges two causes of action: first, that defendants breached an alleged contract between May and defendant First Hartford Realty Corporation to convey a leasehold interest in department store premises then occupied by defendant Forbes & Wallace, Inc., a partially owned subsidiary of defendant First Hartford Corporation; second, that the defendants fraudulently induced plaintiff into erroneously believing that First Hartford Realty Corporation would convey a right of occupancy in the Forbes & Wallace store premises to May, and would not seek to negotiate with other parties in an attempt to secure a more favorable agreement. It is undisputed that Forbes & Wallace has conveyed its interest in the department store to a third entity not a party to this action.

The defendants have interposed numerous defenses, two of which are the subject of the plaintiff's present motion to strike pursuant to Fed.R.Civ.P. 12(f).¹ In their Fourth Affirmative Defense, the defendants allege that May was subject to an order of the Federal Trade Commission ("F.T.C.") which deprived it of the "right power or authority" to enter into the alleged contract.² It is asserted that this order bars plaintiff's recovery on the contract. In their Sixth Affirmative Defense, the defendants allege that the plaintiff falsely represented that it was under no factual or legal disability with respect to the execution or performance of an agreement to acquire the assets of Forbes & Wallace. The defendants assert that this non-disclosure of the existence of the consent decree amounted to a material misrepresentation which entitled the defendants to rescind the contract. Although these defenses are somewhat related, they present significantly different theories of defense. As such, the legal sufficiency of each must be separately considered.

I. Fourth Affirmative Defense

It is admitted that on September 9, 1966, the F.T.C. issued a complaint and a consent order involving the plaintiff May. The complaint charged that May's acquisition of two department stores was in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. While not admitting that these acquisitions violated Section 7, May consented to an order requiring for 10 years that it "cease and desist from acquiring, directly or indirectly, without first notifying the Federal Trade Commission and obtaining its consent, any department store . . . or any assets constituting a substantial part of all of the assets, or any concern engaged in the department store . . . business in the United States."³

The defendants' Fourth Affirmative Defense rests on the contention that the contract in question is unenforceable because it violated this F.T.C. order. While ordinarily it is desirable for the law to protect competent parties in their right to make and enforce bargains between themselves, this freedom to contract is restricted by the transcendent rule that denies enforceability to illegal bargains. Northwest Airlines, Inc. v. Alaska Airlines, Inc., 351 F.2d 253, 256 (9th Cir. 1965), cert. denied, 383 U.S. 936, 86 S.Ct. 1068, 15 L.Ed.2d 853 (1966). However, this defense of illegality should be permitted "only in clear cases" and "the principle must be cautiously applied to guard against confusion and injustice." Steele v. Drummond, 275 U.S. 199, 205, 48 S.Ct. 53, 54, 72 L.Ed. 238 (1927).

There are several sources from which an agreement may be rendered illegal and hence unenforceable: by legislation, in the form of a statutory or constitutional provision; by the common law, as embodied in judicial precedent; or by the often vague dictates of public policy. 6A Corbin on Contracts, § 1374 (1962). On the theory that a court should similarly not come to the aid of a plaintiff by enforcing a contract which does not comply with an outstanding administrative order, the defendants seek to extend the doctrine and assert the defense of illegality here. This case, however, does not require an analysis of the general effect of administrative orders on otherwise valid contracts, for the concern here is with a unique type of agency order, the consent decree. Moreover, while the parties have argued at length about whether or not the alleged contract violates the order, the legal sufficiency of the defense turns in the first instance on the more fundamental question of the precise nature of an F.T.C. consent order.

As the Supreme Court has recognized, an F.T.C. consent decree or order, at least for enforcement purposes, must be construed basically as a contract. United States v. ITT Continental Baking Co., 420 U.S. 223, 238, 95 S.Ct. 926, 43 L.Ed.2d 148 (1975).

"Consent decrees are entered into by parties to a case after careful negotiation has produced agreement on their precise terms. The parties waive their right to litigate the issues involved in the case and thus save themselves the time, expense, and inevitable risk of litigation. Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and elimination of risk, the parties each give up something they might have won had they proceeded with the litigation. Thus the decree itself cannot be said to have a purpose; rather the parties have purposes, generally opposed to each other, and the resultant decree embodies as much of those opposing purposes as the respective parties have the bargaining power and skill to achieve. For these reasons, the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it. Because the defendant has, by the decree, waived his right to litigate the issues raised, a right guaranteed to him by the Due Process Clause, the conditions upon which he has given that waiver must be respected, and the instrument must be construed as it is written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation."

United States v. Armour & Co., 402 U.S. 673, 681-82, 91 S.Ct. 1752, 1757, 29 L.Ed.2d 256 (1971) (footnote omitted).

A consent order, therefore, being the product of compromise and negotiation between two parties has only the attributes of a contract.⁴ Unlike legislation, it is not the expression of broad and conscious policy-making. Cf. Rosten v. Federal Trade Commission, 263 F.2d 620, 622 (2d Cir. 1959); nor does it have the imprimatur of a neutral decision maker as does a judicial decree, National Candy Co. v. Federal Trade Commission, 104 F.2d 999, 1004 (7th Cir.), cert. denied, 308 U.S. 610, 60 S.Ct. 174, 84 L.Ed. 510 (1939). Indeed, the party against whom a consent order is directed admits to no violation of law, and the order may not be used as evidence to prove any antitrust violation against him.⁵ For all these reasons, a consent order does not embody the forceful legal mandate necessary to justify permitting a third party to rely upon it in order to relieve himself from an obligation that he has voluntarily assumed. Moreover, to permit the collateral use of the consent decree here runs contrary to its contractual nature because nothing in the decree indicates that the parties intended third party enforcement.⁶

In Kelly v. Kosuga, 358 U.S. 516, 79 S.Ct. 429, 3 L.Ed.2d 475 (1959), the Supreme Court was confronted with a problem not unlike that presented here. While fully cognizant of the principle underlying the defense of illegality, that is, that a court should not sanction illegal acts, the Court nevertheless held that a purchaser of goods could not interpose as an affirmative defense to a contract that the bargain was an indivisible part of an agreement that violated the Sherman Antitrust Act. The Court limited the availability of the illegality defense to those circumstances "where the judgment of the Court would itself be enforcing the precise conduct made unlawful . . . ." Id. at 520, 79 S.Ct. at 432. Cf. Bruce's Juices, Inc. v. American Can Co., 330 U.S. 743, 67 S.Ct. 1015, 91 L.Ed. 1219 (1947).

Enforcement of the alleged contract involved in the present case would not require the court to sanction such illegality.⁷ The consent order requires only that May obtain the F.T.C.'s permission before acquiring the assets of a department store. As Professor Williston has noted, "The fact that a party bargains to do an act which will be illegal unless governmental permission is obtained does not make such bargain illegal . . . rather if he does not obtain such permission he is responsible in damages for failure to perform." 6 Williston on Contracts, § 1767, at 5019 n.3 (1938). Whatever disability the F.T.C. order may have placed on May's ability to fulfill its contractual obligations to the defendants, it did not render the contract illegal. And, if May could not perform the contract, the defendants would have had an action for the damages resulting from the breach. Thus, even if the consent order was deemed to be legislative or judicial in character, the illegality defense would not be available here.

What has been said thus far is not intended to detract from the seriousness of a violation of an F.T.C. consent order. Indeed, the Congress has provided severe...