Sound Ship Building Corp. v. Bethlehem Steel Corp.

• Decision Date: 08 January 1975
• Docket Number: Civ. A. No. 112-73.
• Citation: 387 F. Supp. 252
• Parties: SOUND SHIP BUILDING CORP., a New York Corporation, Plaintiff, v. BETHLEHEM STEEL CORP., a Delaware Corporation, Defendant.
• Court: U.S. District Court — District of New Jersey

387 F. Supp. 252

SOUND SHIP BUILDING CORP., a New York Corporation, Plaintiff, v. BETHLEHEM STEEL CORP., a Delaware Corporation, Defendant.

Civ. A. No. 112-73.

United States District Court, D. New Jersey.

January 8, 1975.

Hannoch, Weisman, Stern & Besser by James A. Scarpone, Newark, N. J., for plaintiff.

Riker, Danzig, Scherer & Brown by Dickinson R. Debevoise, Newark N. J., for defendant.

OPINION

COOLAHAN, District Judge.

This action and the presently pending motion for summary judgment by defendant Bethlehem Steel Corporation and the cross-motion for partial summary judgment as to liability by plaintiff Sound Ship Building Corporation concern the issue of the validity, under § 1 of the Sherman Act, 15 U.S.C. § 1, of a covenant between buyer and seller restricting for a 20-year period the uses to which real property can be put. Plaintiff argues that the covenant violates the Sherman Act whether tested by the per se or "reasonableness" standard of illegality. The Court disagrees. The per se standard is inapplicable to the facts of this case, and the covenant when measured by traditional reasonableness standards is not violative of the law.

Plaintiff Sound Ship Building Corporation (Sound), a New York corporation, was engaged in the construction and repair of non-self-propelled barges at its facility at College Point, New York. Its business was equally divided between barge construction and repair. In the New York City harbor area Sound was the sole business that constructed new barges, but was one of at least eleven businesses engaged in barge repair.

Bethlehem's primary business is the construction and repair of ocean-going vessels. Bethlehem does no barge construction, but does some barge repair work at its Hoboken, New Jersey, facility.

Prior to 1970 neither Sound nor Bethlehem was "aware" of the barge work of the other. Consequently, neither regarded the other as a present or future competitor.

In the early 1960s the ship building industry in the New York harbor was in a general state of decline.¹ During this period, Bethlehem sold all but one of its parcels of harbor-front property. Each deed contained a restrictive covenant similar to the one which accompanied the sale on August 20, 1964 of property located on Staten Island known as "Mariner's Harbor" to JML Trading Company (JML). JML is in the real estate business. In relevant portion the restrictive covenant in the Mariner's Harbor deed mandated that:

The Grantee, for itself and its successors and assigns hereby covenants with the Grantor, and its successors and assigns, that no part of the Premises is to be used for the business of drydocking, building, repairing (including painting below the light load line), or converting ocean-going ships, ferry boats, or harbor craft; provided, however, this restriction shall not apply: (a) to the drydocking, building, repair or conversion of pleasure craft (yachts and similar small pleasure boats); or (b) to any such activities which are required to be conducted at the Premises in times of national emergency by governmental action. This covenant shall continue in full force and effect for twenty (20) years from the date of this deed, shall run with the land, and shall bind the Grantee, and its successors and assigns. The Grantee shall include the foregoing covenant in any lease or conveyance of the Premises or of any part thereof made by it during such period of twenty (20) years and shall include in each conveyance made of the Premises or any part thereof during such period a provision requiring the Grantee, its successors and assigns, to include this restriction in any subsequent conveyance made during such twenty-year period.

In 1969, five years after Bethlehem's sale of the Mariner's Harbor property, Sound learned that, upon expiration in 1972, its lease at College Point would not be renewed. Consequently in 1971 Sound began searching for a new site for lease or purchase. After reviewing approximately 30 possible alternatives, Sound determined that the only property "truly suitable" for its purposes was Mariner's Harbor. Sound's determination rested not only on financial and physical considerations but also on considerations of immediate availability.²

Accordingly, Sound, with JML's support, sought from Bethlehem a waiver of the restrictive covenant. Bethlehem initially refused,³ but later offered to waive the restrictions if Sound agreed to pay Bethlehem a yearly premium of approximately $19,000 for the remaining 13 years of the covenant. Sound refused to lease or purchase the property on these terms.

Sound ultimately leased property in Hoboken, New Jersey. The property lacked launching ways capable of utilizing Sound's new dry dock, upon which Sound was relying to increase its business. Sound agreed to pay at Hoboken an annual rent $14,770 higher than the combined cost of rent plus the yearly premium demanded by Bethlehem at Mariner's Harbor. Subsequent to leasing the property at Hoboken, Sound's financial condition deteriorated and it went out of business.

Section 1 of the Sherman Act provides that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States or with foreign nations, is hereby declared to be illegal . . .."⁴ Courts have uniformly read the act to prohibit only unreasonable restraints.⁵ Courts have distinguished "naked" covenants not to compete, deemed per se violations of the Sherman Act, from covenants merely ancillary to a main lawful contract. The latter, unlike the former, must be examined to determine if they are so unreasonable as to violate the antitrust laws. United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff'd, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899); Orbo Theatre Corp. v. Loew's, Inc., 156 F.Supp. 770 (D.D.C.1959), aff'd, 104 U.S.App.D.C. 262, 261 F.2d 380 (1959), cert. denied, 359 U.S. 943, 79 S.Ct. 725, 3 L.Ed.2d 677 (1959).

The distinction rests upon a judicial recognition that a seller of a business or property may legitimately need to protect himself by the use of reasonable means from injury at the hands of the buyer.⁶

A distillation of Addyston and its progeny identify four primary indicia of reasonableness of a restrictive covenant.⁷

1. The restraint is ancillary to the main purpose of a lawful contract.

2. The restraint is neither imposed by a party with monopolistic power nor fosters a monopoly.

3. The restraint is partial in nature and reasonably limited in time and scope.

4. The restraint is no greater than necessary to afford fair protection to the parties and not so extensive as to interfere with the interests of the public.

Schine Chain Theatres v. United States, 334 U.S. 110, 68 S.Ct. 947, 92 L.Ed. 1245 (1948); Goldberg v. Tri-States Theatre Corp., 126 F.2d 26 (8th Cir. 1942); Syntex Laboratories, Inc. v. Norwich Pharmacal Co.,⁸ 315 F.Supp. 45 (S.D.N. Y.1970), aff'd, 437 F.2d 566 (2d Cir. 1970); United States v. Columbia Pictures Corp., 189 F.Supp. 153 (S.D.N.Y. 1960); Orbo Theatre Corp. v. Loew's, Inc., supra; United States v. Bausch & Lomb Optical Co., 45 F.Supp. 387 (S.D. N.Y.1942), aff'd 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024 (1944).

When these standards are applied in light of the evidence and factual circumstances surrounding the Mariner's Harbor deed, the covenant is not unreasonable within the meaning of § 1 of the Sherman Act.

1. The Mariner's Harbor covenant is ancillary to the main purpose of the contract — the lawful sale of property. Bethlehem underwent a general "house cleaning" of its harbor-front property motivated by economic conditions which made continuing maintenance of the property uneconomical. Plaintiff has alleged no facts to indicate that the prime purpose of the whole transaction was not the lawful sale of property.⁹

2. The covenant is sufficiently limited in scope and time. Although restricting many shipyard activities, the covenant is not all-inclusive, but rather, limited to specific types of harbor activity, and expressly provides exceptions for pleasure craft. Thus there are viable shipyard purposes to which the property can be put. Standing alone, a 20-year restrictive covenant is unreasonable.¹⁰ The fact, however, that the covenant was imposed (a) by a seller who retained at close proximity a similar business interest (b) in a market where viable alternative sites were available (c) during a period of economic decline in the business, enables the Court to find the covenant reasonable in time.

3. Plaintiff has not alleged facts to indicate that Bethlehem had monopolistic powers¹¹ in the barge construction or repair business at the time of the covenant's initiation nor adduced evidence that it was Bethlehem's intent¹² to develop such power or that in fact such has been the result at any time during the life of the covenant. Schine Chain Theatres v. United States, 334 U.S. 110, 68 S.Ct. 947, 92 L.Ed. 1245 (1948), where the Supreme Court found unlawful a covenant not to compete, is distinguishable because that covenant was part of a series of covenants that formed a larger plan to monopolize.

Sound strongly urges that there can be no dispute as to Bethlehem's anticompetitive motives which were designed specifically for the result it had — the elimination of Sound.¹³ In

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