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SOUND SHIP BLDG. CORP. v. BETHLEHEM STEEL CORP.

January 8, 1975

Sound Ship Building Corp., Plaintiff
v.
Bethlehem Steel Corp., Defendant


Coolahan, D.J.


The opinion of the court was delivered by: COOLAHAN

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. *fn1" 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. *fn2"

 Accordingly, Sound, with JML's support, sought from Bethlehem a waiver of the restrictive covenant. Bethlehem initially refused, *fn3" 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.

 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 . . . ." *fn4" Courts have uniformly read the act to prohibit only unreasonable restraints. *fn5" 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, 44 L. Ed. 136, 20 S. Ct. 96 (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. *fn6"

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


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