Restrictive Covenant as a Restraint of Trade

Restrictive Covenant as a Restraint of Trade

Sep 1, 2010

Restraints on the alienation or use of property, or on trade, are disfavored under Virginia law. A restriction on the use of property may be enforced if the party claiming the benefit of the restriction shows that the covenant’s application is limited to the acts complained of. A restraint of trade is only enforceable if it is “reasonable between the parties and not injurious to the public by reason of its effect on trade.” BP Products v. Stanley, decided in the U.S. District Court in Alexandra in July 2010, arose from a dispute over the enforceability of a restrictive covenant requiring an Alexandria service station to purchase all of its fuel and petroleum products from BP.

Defendant Charles Stanley operated an Alexandria gas station through a Virginia LLC. In 2005, the LLC acquired the station’s real property from BP. The purchase agreement contained a general warranty deed which, among other things, required Stanley to use and sell only BP products. Within a few months, Stanley was complaining to BP that the prices BP charged for its products were commercially unreasonable. By July 2008, Stanley stopped selling gasoline entirely and operated solely as a service and inspection station, claiming that he could not afford to buy and sell gas at BP’s prices. An accord could not be reached and BP filed suit when Stanley began selling an alternative fuel product in July 2009.

With the facts not in dispute, the parties filed cross summary judgment motions. The court refused to enforce the restrictive covenant and dismissed BP’s claim as an unlawful restraint of trade.

In reaching its decision, Judge Leonie Brinkema balanced a pair of competing policy considerations. Courts do not like to interfere with contracts because “the law looks with favor upon the making of contracts between competent parties for lawful purposes” and because courts “are averse to holding contracts unenforceable on the grounds of public policy.” On the other hand, courts generally disfavor restraints of trade as contrary to the interest of the public.

Judge Brinkema found little Virginia law on point and ultimately relied on a case from 1905, citing Merriman v. Cover in support of her conclusion that BP had the burden of showing that “the covenant was reasonable and that it did not injure the public by its effect on trade.” A ruling in favor of Stanley flowed logically from this procedural conclusion.

The covenant at issue was broadly written, prohibiting Stanley’s service station from using automotive lubricants not BP-branded or offering automotive service or repair. Since the evidence established that BP did not compete in the automotive lubricant industry nor receive any revenue in Virginia from automotive serve and repair, the restraint was overbroad and therefore unenforceable in its entirety as damaging to the public’s interest in full competitive sales of these products.

As a fall-back position, had BP argued that the court should “blue-pencil” the restrictive covenant and enforce only that portion “in which BP has a legitimate interest.” BP argued that since the parties intended to restrict Stanley’s sale of non-BP fuel, the covenant should be enforced to that extent only.

Judge Brinkema noted that BP offered no Virginia authority to support this argument and ruled that a court should not be in the business of cleaning up the mistakes of litigants: “parties should be encouraged to draft and negotiate covenants that clearly express their purposes and should not expect the judiciary to rewrite covenants.” As a result, Mr. Stanley is back in business in Alexandria, providing automotive service and selling the gas and fuel products of his choice.