Radius Restrictions – New York AG Cracks Down on Outlet Mall Operator

by Patterson Belknap Webb & Tyler LLP
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Outlet malls are popular destinations for consumers seeking a bargain, even if not everyone agrees that the deals are as good as advertised.  But although the prices may seem low, a common provision in lease agreements between the operators of outlet malls and retailers may have reduced competition and raised the prices consumers paid.  This week, the operator of the most popular outlet mall in the New York City metropolitan area reached a settlement with the New York Attorney General that may lead to increased competition in the outlet mall space in New York and beyond.

The Allegations and Settlement

Woodbury Common is a collection of over 200 outlet stores about one hour’s drive from New York City.  Simon Property Group operates Woodbury Common (and the only other outlet center within an hour’s drive of New York City).  As part of its leading agreement, Simon required retailers leasing space at Woodbury Common to agree not to open another outlet within a 60-mile radius.  According to the New York AG, this provision, together with the fact that retail space at Woodbury Common is a “must have” for outlet retailers, meant that Simon effectively prevented competing outlet malls from opening within the New York area.  This allowed Simon to maintain its monopoly in the market for outlet mall retail space within one hour’s drive of New York City.

Simon agreed to a settlement before an antitrust case was filed in court.  As part of the settlement, Simon agreed to narrow the radius restriction from 60 miles to 39 miles.  In effect, the radius restriction will no longer prevent competing outlet malls from opening in Long Island, Brooklyn, Queens, Staten Island, and most of the Bronx.

Antitrust Analysis

Radius restrictions are subject to Rule of Reason analysis.  While the New York AG acknowledged the appropriateness of considering procompetitive justifications, it concluded that the Woodbury Common radius restriction was “likely not justified by efficiencies or legitimate business considerations.”  The settlement does not detail which procompetitive justifications may have been offered by Simon, but the primary justification likely was the need to protect the substantial investment needed to develop an outlet mall.  In this sense, radius restrictions are akin to non-compete clauses in employment agreements or territorial restrictions on franchises, both of which are analyzed under the Rule of Reason.  Indeed, the AG’s settlement—which expressly permits a 39-mile radius restriction—implies that the procompetitive justifications for this smaller radius outweigh the anticompetitive harms.  The problem with the Woodbury Common radius restriction was one of degree, not of kind.

This investigation and settlement is just the most recent example of settlements by the New York AG that are designed to allow and attract new market entrants.  In 2015, the New York AG, along with the DOJ Antitrust Division, announced a settlement with the dominant hop-on, hop-off tourbus operators in New York City.  New entrants were unable to enter that market because most of the limited bus stop permits were held by the dominant operators.  The settlement in that case required the bus operators to relinquish scarce bus stops at tourist attractions for use by competitors.  Time will tell whether the radius restrictions narrowed by the Woodbury Common settlement lead to additional bargain shopping opportunities for New York City-area consumers.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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