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Covenant Case Analysis

With a better drafted restrictive covenant, the Tumbleweeds restaurant could easily have avoided the result in this case — leaving it up to the whim of a jury whether a Chili’s restaurant constitutes a “Mexican restaurant,” or serves “primarily Mexican food,” or is a restaurant “specializing in Mexican food.”

Tumbleweeds’ problem on remand will be that an urban jury is unlikely to find that Chili’s constitutes any of the above (notwithstanding the court of appeals’ decision that it is a jury question), and thus, it will probably not get its injunction, even though justice would seem to require that Tumbleweeds should be able to enjoin the Chili’s.

Like Chili’s, Tumbleweeds is not a Mexican restaurant either; both of these chains fall into a category of Southwest/American chain restaurants, selling primarily burgers, steaks, and ribs, plus a handful of pseudo-Mexican style foods such as fajitas and nachos.

Presumably, when the restrictive covenant was made a part of the sale, Tumbleweeds’ purpose was not to have its closest competitors opening restaurants in its own back yard. But by drafting a restrictive covenant referencing Mexican restaurants, that is likely to be exactly what it gets.

For guidance on drafting a restrictive covenant that would is more likely to accomplish its objective on summary judgment, rather than leaving it up to a jury, a good place to look is a similar case from Texas, New Braunfels Factory Outlet Center, Inc. v. IHOP Realty Corp., 872 S.W.2d 303 (Tex.Ct.App.1994).

In that case, IHOP bought real property from New Braunfels. The contract of sale included the following restrictive covenant: “Seller, for itself and its successors and assigns shall covenant at closing that, for a period of thirty (30) years after the closing, it will not permit, lease, allow or use, either by itself or any tenants thereof, directly or indirectly, any portion of the Shopping Center (exclusive of the Property) acquired by Seller or any of its affiliates or any property located within one (1) mile of the boundaries of the property owned or controlled by Seller or its affiliates for any kind of family-oriented coffee shop styled restaurant that would directly compete with the purchaser’s restaurant operation, such as, but not limited to, The Village Inn, Bob’s Bib Boy, Shoney’s, Denny’s, Perkins’, Waffle House, Baker’s Square, Coco’s, JB’s or Alice’s. (emphasis added).” New Braunfels, 872 S.W.2d at 305.

The covenant also listed various types of restaurants that were permissible, because they did not “directly compete” with IHOP, and listed “dinner houses, seafood, oriental, French, Mexican, Italian, or other ethnic restaurants,” as well as fast-food restaurants, or “any ice cream, yogurt, pop, submarine sandwich, pizza or similar food specialty shops.”

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However, the actual deed that was signed at closing failed to accurately recite the covenant properly, and thus, when New Braunfels began negotiating with a Cracker Barrel, litigation ensued.

IHOP ultimately prevailed, based on expert testimony that trade publications for the restaurant industry included both Cracker Barrel and IHOP in the same category of restaurants as direct competitors, as well as those specifically included in the covenant, such as Baker’s Square, Coco’s and Waffle House.

It is apparent that Tumbleweeds would have a far better chance of prevailing in front of the jury on remand had its restrictive covenant barred sale to “any kind of Southwestern/American chain restaurant (or simply “casual theme-type restaurant”) that would directly compete” with Tumbleweeds, and the covenant specifically enumerated examples of its closest competitors, the very first of which would, of course, be Chili’s.

Instead of arguing only about whether Chili’s and Tumbleweeds are direct competitors — an easy argument for Tumbleweeds to win — they will instead be arguing on remand about whether Chili’s specializes in Mexian food, an argument they are likely to lose.

– David Ziemer

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David Ziemer can be reached by email.

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