United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 5, 2001 Decided July 13, 2001
No. 00-7129
Red Sage Limited Partnership,
Appellant
v.
DESPA Deutsche Sparkassen
Immobilien-Anlage-Gasellschaft mbH, a/k/a DespaEuropa,
Appellee
Appeal from the United States District Court
for the District of Columbia
(No. 98cv02533)
Andrew J. Kline argued the cause for appellant. With him
on the briefs was Jeffrey L. Berger.
J. Jonathan Schraub argued the cause for appellee. With
him on the brief was Paige A. Levy.
Before: Edwards, Chief Judge, Ginsburg and Tatel,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge: A Washington, D.C. restaurant
sought a declaration that its landlord breached an exclusive
use covenant by renting space in the same building to a
specialty cake shop. The restaurant claimed that under its
lease, the breach entitled it to a 50 percent rent abatement.
The district court granted summary judgment for the land-
lord, finding that under the circumstances of this case, a 50
percent rent abatement would constitute an unenforceable
penalty. Because we conclude that the rent abatement,
negotiated by sophisticated parties, was not an unreasonable
estimate of the damages likely to result from a breach of the
exclusive covenant, and because the landlord's additional ar-
guments for summary judgment fail, we reverse and remand
for further proceedings.
I
Red Sage Limited Partnership operates an "internationally
known ... fine dining" restaurant in the Westory building, a
Washington D.C. office building. Appellant's Opening Br. at
5. In the same building, Red Sage operates several private
dining rooms used for catering and special events, a casual
Tex-Mex restaurant, and the Red Sage Market, a take-out
facility that sells sandwiches, salads, snacks, cold drinks, tea,
coffee, and desserts, including a variety of whole cakes avail-
able by special order.
Red Sage first leased space in the Westory building in
September of 1990. At that time, the building was owned by
607 14th Street Associates Limited Partnership. Insofar as
the original landlord, through his wife, had an ownership
interest in Red Sage, the original lease was not negotiated at
arm's length. The lease provided that "[t]enant shall use and
occupy the Leased Premises solely as a bar and/or a restau-
rant." The lease also included the following exclusive cove-
nant and penalty clause:
34. Exclusive Covenant
(a) To the extent permitted by law, Landlord covenants
that during the Term it shall not permit any other tenant
within the Building to operate a bar, restaurant or food
service establishment of any kind (a "Competing Use").
The provisions of this Section 34 shall be enforceable
only so long as Tenant is operating a bar and/or a
restaurant in the Leased Premises.
...
(e) In the event that a Competing Use is operated in the
Building at any time during the Term and Landlord has
violated its covenants under this Section 34, then (i) one
half (1/2) of the Base Rent payable hereunder shall be
abated during the period that the Competing Use is
operated in the Building, and (ii) Tenant may terminate
this Lease if the operation of the Competing Use contin-
ues for a period of six (6) months after written notice
thereof by Tenant to Landlord.... The provisions of
this subsection (e) shall not limit ... any other remedies
which Tenant may have against Landlord for violating its
obligations under this Section.
Six years later, in 1996, 14th Street Associates and Red
Sage executed an Amended and Restated Lease. The
amended lease contained the same exclusive covenant and
penalty clause as the original lease, but included a revised
tenant use provision:
Tenant use and occupancy of the Leased Premises shall
consist of owning and operating a restaurant and bar and
carrying on any and all activities incidental or related
thereto, including, but not limited to, operating a retail
general store primarily selling t-shirts, sweatshirts, sou-
venirs, spices, baked goods, foods and other items related
to Tenant's bar and restaurant.
The new lease also set base rent at "six and one-half percent
... of [Red Sage's] Gross Revenues, but in no event less than
Four Hundred Thousand Dollars." The parties do not dis-
pute that this lease was executed at arm's length.
In 1997, in preparation for the sale of the Westory Building
to DespaEuropa--Red Sage's current landlord and appellee
in this case--14th Street Associates and Red Sage again
amended the lease. This amendment left intact the tenant
use, base rent, exclusive covenant, and penalty clause provi-
sions in the amended lease, stating that "[a]ll terms and
provisions of the Lease which are not amended hereby are
hereby ratified and confirmed in all respects." Red Sage
asserts that Despa was "actively involved" in negotiating the
1997 amendment, since "reformulation of the Red Sage Lease
was a precondition to the purchase of the Westory Building
by Despa." Appellant's Opening Br. at 6. For its part,
Despa asserts that it "was not involved in any way in the
negotiations for or the drafting of the Red Sage Lease, but
rather inherited it as a second or third generation owner of
the building." Appellee's Br. at 5. It is undisputed, however,
that a Despa representative signed the 1997 amendment,
endorsing it "Accepted and Agreed."
Later that year, Despa purchased the Westory building
from 14th Street Associates and, the following year, leased
space in the building to a specialty store known as Cakes &
Company, triggering the dispute leading to this litigation.
Cakes' original lease permitted it to operate a "bakery/cafe"
selling "specialty cakes, baked goods, coffee, non-alcoholic
beverages and associated paper goods," but as Red Sage
concedes, Despa later amended the lease, deleting the refer-
ence to operating a "cafe" and permitting Cakes to sell food
items only for consumption off the premises. The parties
agree that Cakes primarily sold whole cakes--prepared else-
where and decorated on-site--for weddings and special occa-
sions. It also sold tea, coffee, single slices of cake, and some
of the same prepackaged drinks sold by Red Sage Market.
Cakes had no menu, wait staff, or customer tables or chairs.
In Cakes' first four months of operation, its gross sales were
almost $95,000, its gross profits around $50,000, and its net
income about $11,000.
Learning of the lease to Cakes, Red Sage wrote to Despa,
asserting that the landlord was violating the exclusive cove-
nant in Red Sage's lease and requesting a 50 percent rent
abatement. Despa replied: "The exclusive right you current-
ly enjoy in your lease ... pertains to a competing 'food
service operation.' Cakes & Company could not infringe
upon the highly stylized and critically acclaimed Red Sage."
Letter from Laurie McMahon, Director of Downtown Proper-
ty Management, Cassidy & Pinkard Property Services
L.L.C., to Bo Nilsson, Managing Partner, Red Sage, Inc.
(May 26, 1998).
Red Sage then sued Despa in the Superior Court for the
District of Columbia, seeking a declaration that Despa "has
breached and continues to breach section 34 of the Lease,
[and] that as a result of this breach Red Sage is entitled to an
abatement of one-half of the Base rent...." Compl. for
Declaratory Relief, Red Sage Ltd. P'ship v. DESPA mbH,
No. 98ca007066, at 6 (D.C. Super. Ct. Sept. 16, 1998). Despa
removed the case to federal court, and both parties moved for
summary judgment, contending that there were no disputed
issues of material fact. The district court denied the motions,
stating that "the contractual term 'food service establishment'
is not susceptible to definitive construction as a matter of law
under either the ... Lease or the Municipal Regulations of
the District of Columbia," and that there were "material
questions of fact concerning: 1) the parties' intentions as to
the scope and coverage of the restrictive covenant ... and 2)
the exact nature of the 'services' provided by Cakes." Order
Den. Cross-mot. for Summary J., Red Sage Ltd. P'ship v.
DESPA mbH, No. 98-2533 (D.D.C. Sept. 8, 1999).
At a subsequent status conference, Despa renewed its
motion for summary judgment on the alternative ground that
the rent abatement provision in Red Sage's lease constituted
an unenforceable penalty. Following supplemental briefing
on the issue, the district court granted Despa's motion for
summary judgment, finding that since "a rent abatement of
$200,000 ... would indeed impose an improper penalty,"
Despa was entitled to judgment as a matter of law. Red
Sage Ltd. P'ship v. DESPA mbH, No. 98-2533, Mem. Op. at
1-2 (D.D.C. Feb. 15, 2000), recon. denied, Red Sage Ltd.
P'ship v. DESPA mbH, No. 98-2533 (Apr. 11, 2000). At
some point following the grant of summary judgment, Cakes
closed its shop in the Westory building and terminated its
lease with Despa. The dispute in this case thus concerns the
value of the abatement for the period during which Cakes
operated. "We review a grant of summary judgment de
novo, applying the same standard as the district court. Sum-
mary judgment is appropriate when there is no genuine issue
as to any material fact and the moving party is entitled to
judgment as a matter of law." D.C. Hosp. Ass'n v. Dist. of
Columbia, 224 F.3d 776, 779 (D.C. Cir. 2000) (internal cita-
tions omitted).
II
We begin with a threshold issue: Red Sage urges us to
treat the rent abatement provision not as a liquidated dam-
ages clause, but rather as a contractual provision adjusting
rent in response to changed conditions. Noting that parties
to a lease sometimes agree in advance that rent will change
upon the occurrence of future conditions, see, e.g., Collins v.
Sears Roebuck & Co., 321 A.2d 444, 449 (Conn. 1973), Red
Sage argues that the rent abatement provision here reflects
the parties' understanding that "the premises leased by Red
Sage" would be "less valuable to Red Sage if there exist[ed]
[another] bar, restaurant, or food service establishment in the
[b]uilding." Appellant's Opening Br. at 15. Acting on this
understanding, the parties "provided for a partial abatement
of base rent in the event a Competing Use is operated in the
building." Id. at 14. "[N]ot knowing the precise nature of
the ... food service establishment which might some day be
located in the Building," they "predetermined" that a compet-
ing use would diminish the "value of Red Sage's premises" by
"one half of the Base Rent." Id. at 15. The abatement
provision, Red Sage argues, is "no different than provisions in
leases for increased rental in the event of a holdover tenancy,
which are routinely enforced even if the increased rental is
three, four or even five times the normal rental rate." Id. at
14.
This argument requires little discussion. Under D.C. law,
"the written language of a contract governs the parties' rights
unless it is not susceptible of clear meaning." Adler v.
Abramson, 728 A.2d 86, 88 (D.C. 1999). Here, we think it
clear from the language of the contract that the rent abate-
ment provision was a liquidated damages clause, not a rent
adjustment. To begin with, the clause states both that
"[r]ent ... shall be abated" if the landlord "violate[s]" the
exclusive covenant and that the rent abatement "shall not
limit ... any other remedies which Tenant may have against
Landlord for violating its obligations under this Section"
(emphasis added). This language strongly suggests that the
rent abatement is a "remed[y]" for a "viola[tion]" of the lease,
rather than a mere adjustment for changed circumstances.
Reinforcing this conclusion, the provision allows Red Sage not
only to abate its rent if the exclusive lease covenant is
violated, but also to "terminate [its] lease if the operation of
the Competing Use continues for a period of six ... months
after written notice thereof by Tenant to Landlord." The
possibility of termination is in some tension with the notion of
a rent adjustment, since it contemplates not an ongoing
landlord-tenant relationship under different terms, but an end
to the relationship altogether. Finally, Red Sage's analogy to
tenant holdover cases actually undermines its argument:
while Red Sage does cite one case from another jurisdiction
treating a double rent provision for holdover tenants as a
simple rent adjustment, First Capital Institutional Real Es-
tate, Ltd. v. Pennington, 368 S.E. 2d 165 (Ga. App. 1988), the
District of Columbia case it cites treats a similar provision as
a liquidated damages clause. Sanchez v. Eleven Fourteen,
Inc., 623 A.2d 1179 (D.C. 1993); see also Horn & Hardart Co.
v. Nat'l R.R. Passenger Corp., 659 F. Supp. 1258, 1266-68
(D.D.C. 1987) (analyzing triple rent holdover provision as
liquidated damages clause).
We thus turn to Red Sage's main argument: that, assum-
ing the rent abatement provision is a liquidated damages
clause, it is valid and enforceable. In reaching a contrary
conclusion, the district court invoked the principle that "[i]f
there is doubt as to whether the parties intended to provide
for legitimate liquidated damages, courts routinely construe
liquidated damages provisions as penalties" and thus decline
to enforce them "to prevent forfeitures." Red Sage, No.
98-2533, at 4 (D.D.C. Feb. 15, 2000) (citing Goldman v. Conn.
Gen. Life Ins. Co., 248 A.2d 154, 158 (Md. 1968)). In applying
this principle, the court neither developed an evidentiary
record of nor relied on extrinsic evidence regarding the
parties' intent. Cf. Farmland Indus., Inc. v. Grain Bd. of
Iraq, 904 F.2d 732, 736 (D.C. Cir. 1990) ("When the meaning
of a contract provision is facially uncertain, a court may
resort to an examination of extrinsic evidence, such as state-
ments, course of conduct, and contemporaneous correspon-
dence, aimed at discerning the intent of the parties."). In-
stead, the court found "considerable doubt" about the parties'
intentions regarding the rent abatement clause for two other
reasons. Red Sage, No. 98-2533, at 4 (D.D.C. Feb. 15, 2000).
First, "[t]he absence of arms length negotiation undercuts the
ordinary presumption that the language on which the con-
tracting parties have agreed accurately reflects their intent."
Id. Second, since "Red Sage Market ... did not exist when
the lease was written," even if the rent abatement clause
represented a "reasonable effort" by the parties to estimate
damages from breach of the exclusive covenant, that estimate
"obviously related to ... competition from a substantial 'food
service establishment,' and not from a small operation that
would not compete with Red Sage's principal business of
operating a restaurant." Id. at 4-5. Thus finding that the
parties had not clearly intended to provide for liquidated
damages in a case like this, the court construed the rent
abatement as a penalty and refused to enforce it.
Challenging this analysis, and noting that summary judg-
ment is inappropriate "if extrinsic evidence supports more
than one reasonable interpretation of [a] contract," Farmland
Indus., 904 F.2d at 736, Red Sage points out that it submitted
an affidavit from the drafter of the original lease stating that
the rent abatement provision was intended to estimate dam-
ages from breach of the exclusive covenant. It also points
out that the same affidavit, while acknowledging that Red
Sage Market did not exist at the time of the lease drafting,
made clear that none of Red Sage's businesses was operating
at that time, and that all aspects of its operation, including
the Market, were contemplated by the parties. Appellant's
Opening Br. at 19-22.
We need not resolve this aspect of Red Sage's challenge to
the district court's decision, however, because both the dis-
trict court's reasoning and Red Sage's responses concern the
original 1990 lease negotiated between 14th Street Associates
and Red Sage, and as we read the record, Red Sage's dispute
with Despa concerns the 1997 amended lease. Unlike the
1990 lease, the later lease was negotiated at arms length, and
Red Sage Market was operating in 1997. We therefore
consider for the first time whether the rent abatement provi-
sion in the 1997 amended lease was a penalty clause, focusing
in the first instance on its plain language. See Adler, 728
A.2d at 88.
In Davy v. Crawford, 147 F.2d 574 (D.C. Cir. 1945), this
court set out standards for deciding whether a liquidated
damages provision is an unenforceable penalty under District
of Columbia law. Because of its importance to this case, we
quote the relevant passage in full:
[T]he parties to a contract may agree in advance to a
sum certain which shall be forfeited as liquidated dam-
ages for breach of the contract without reference to the
actual damages found at the time of the breach. But if
such an agreement is for a penalty it is void. In order to
determine whether or not the provision should be con-
strued as a penalty the contract must be construed as a
whole as of the date of its execution. If under the
circumstances and expectations of the parties existing at
the time of execution it appears that the provision is a
reasonable protection against uncertain future litigation
the provision will be enforced even though no actual
damages were proved as of the date of the breach. If, on
the other hand, it appears that the stipulation is designed
to make the default of the party against whom it runs
more profitable to the other party than performance
would be, it will be void as a penalty. Thus, damages
stipulated in advance should not be more than those
which at the time of the execution of the contract can be
reasonably expected from its future breach, and agree-
ments to pay fixed sums plainly without reasonable rela-
tion to any probable damage which may follow a breach
will not be enforced.
Davy, 147 F.2d at 575 (citations omitted). The D.C. Code
governing leases, enacted many years after Davy, sets forth
essentially the same standard: "Damages payable by either
party for default ... may be liquidated in the lease agree-
ment, but only at an amount or by a formula that is reason-
able in light of the then anticipated harm caused by the
default ...." D.C. Code Ann. s 28:2A-504(a).
Applying these standards, we think the rent abatement
provision in the 1997 amended lease is valid as a matter of
law. To begin with, as Red Sage claims, at the time the lease
was signed, the parties could reasonably have believed the
damages resulting from a breach of the exclusive covenant
would be difficult to ascertain, rendering future litigation
"uncertain." Davy, 147 F.2d at 575; see also Barnette v.
Sayers, 289 F. 567, 570 (D.C. Cir. 1923) ("Uncertainty in
amount and difficulty of ascertainment of damages are re-
garded as supporting the view that a contract provides for
liquidated damages rather than a penalty...."). Disagreeing
with this conclusion, Despa suggests that damages to Red
Sage's restaurant business from a competing food service
establishment would have been easy to calculate by analyzing
overhead and table turnover to derive the value of lost sales.
As Red Sage points out, however, even if it could demonstrate
a decline in sales, "isolat[ing] the new competitor as the sole
reason for the decline" would be "almost impossible," making
damages difficult to prove. Appellant's Reply Br. at 2.
Moreover, "[l]ost sales do not represent the only damages
potentially arising from competition.... [D]amages may take
the form of lost opportunities whereby the new competitor,
instead of having an impact on existing sales, affects the
restaurant's ability to increase sales." Id. at 2-3. Damages
might also include a variety of intangible losses such as lost
goodwill, which would likewise be difficult to calculate and
prove.
We also cannot say that the abatement is "plainly without
reasonable relation to any probable damage which may follow
a breach." Davy, 147 F.2d at 575. Despa disagrees, arguing
that it would have been unreasonable to think the damages
resulting from Cakes' competition with Red Sage Market--
which the lease describes as an "incidental use" and which
produces only a small portion of Red Sage's total income--
would amount to 50 percent of its rent for all its operations,
especially in view of the fact that the same measure of
damages would apply to competition from a large-scale opera-
tion such as another bar and restaurant. The question before
us, however, is not whether a 50 percent rent abatement
would have been a reasonable estimate of anticipated dam-
ages from a competitor on the scale of Cakes. We read the
exclusive covenant as intending to ensure that Red Sage will
be the only "bar, restaurant[,] or food service establishment
of any kind" in the Westory building: as Red Sage put it in
its motion for summary judgment, the purpose of the cove-
nant was to "prevent[ ] another destination restaurant from
opening in the Westory Building" and "to prevent[ ] the
location of another food service business in the Westory
Building to service the office tenants." Plaintiff's Motion for
Summary Judgment, Red Sage Ltd. P'ship v. Despa mbH,
No. 98-2533 at 14 (D.D.C. June 15, 1999). The rent abate-
ment provision sets damages for a breach of this covenant,
and such a breach could involve a wide variety of competing
uses giving rise to a wide range of possible damages. The
question we must ask is thus whether a 50 percent reduction
in base rent was reasonable as a single formula intended to
estimate damages from a wide variety of possible competing
uses.
Although it is true, as Red Sage itself acknowledges, that
the parties might well have anticipated that damages from a
competitor like Cakes would probably be less than 50 percent
of base rent ($200,000 in this case), the parties might also
have anticipated that damages from a competing restaurant
would be considerably greater than this amount. (Though its
net income was not especially high, Red Sage's annual gross
income in a recent year was around $6.5 million.) According-
ly, as a single formula designed to capture the expected value
of damages from breach of the exclusive covenant, we cannot
say that half of base rent was unreasonable as a matter of
law.
Nor do we think the rent abatement provision "appears ...
designed to make the default of the party against whom it
runs more profitable to the other party than performance
would be." Davy, 147 F.2d 575. Although in this case the
rent abatement clause might well result in Red Sage receiv-
ing more than it actually lost as a result of Cakes' competi-
tion, the clause might significantly underestimate Red Sage's
damages in other circumstances, such as if the landlord were
to rent space to another upscale, full-service restaurant. In
other words, the provision does not guarantee Red Sage a
certain windfall in case of a breach. Cf. Raffel v. Medallion
Kitchens of Minn., Inc., 139 F.3d 1142, 1144-46 (7th Cir.
1998) (invalidating as a penalty a lease provision requiring
tenant to pay a "windfall" equivalent to seven months' rent if
rent was more than thirty days late).
Despa's strongest argument is that the very use of a single
formula to capture such a wide range of damages renders the
clause unenforceable. Because the rent abatement provision
"applies to a variety of types of defaults, each of which could
have vastly differing degrees of damages associated with
them," Despa urges us to declare it "null and void, under the
reasoning that there could not have been a good faith attempt
to pre-estimate possible damages, since the real and obvious
possibility existed that the damages provided for would turn
out to be excessive." Appellee's Br. at 18-19; see generally 5
Corbin on Contracts s 1066 (1964). In support of this claim,
Despa relies on Davy, which involved a lease for a house.
Under the lease, the tenant had an option to purchase at the
end of a fixed rental period. The lease required a "down
payment," which it described as "compensation for the option
to purchase and also liquidated damages for failure to exer-
cise it." Davy, 147 F.2d at 575. But the lease also provided
that the down payment (together with any accumulated equi-
ty in the house) would be forfeited for breach of "any
covenant" in the lease, including such things as promises to
pay gas, electric, and water bills on time. The court found
that the forfeiture provision was an unenforceable penalty in
part because the damages applicable to a major breach--
failure to exercise the option to purchase--would also have
applied to a "minor and insubstantial default" on the part of
the breaching party. Davy, 147 F.2d at 575. According to
Despa, the same is true here: under Red Sage's interpreta-
tion of the lease, the 50 percent abatement applies whether
the "competing use" is a small-scale operation like Cakes that
competes incidentally with Red Sage, or a full-scale restau-
rant competing directly with Red Sage's principal businesses.
This case, however, differs from Davy in at least four
significant ways. First, the provision at issue in Davy called
for forfeiture of a fixed sum regardless of the nature of the
breach. Davy, 147 F.2d 574; cf. Raffel, 139 F.3d at 114
(stating that liquidated damages clauses are penalties where,
among other things, "the amount of the damages is invariant
to the gravity of the breach") (emphasis added); 5 Corbin on
Contracts s 1066, at 379 (characterizing contracts that make
"one sum of money ... payable as damages for any breach
whatever" as penalty clauses) (emphasis added). The rent
abatement provision at issue here, in contrast, does not set
damages as a single sum: because the provision applies only
as long as a competing use is present, damages will vary with
the duration of the competing use. Second, the provision at
issue in Davy appears to have been one-sided: the down
payment would have been forfeited for failure to exercise the
option, or for a variety of smaller breaches, but never, it
seems to us, in a situation that would have disadvantaged the
landlord. Cf. Raffel, 139 F.3d at 1146 (because a 10 percent
late fee fully compensated a landlord for the effect of late
rent payments, an additional fine when rent was more than
thirty days late "ensure[d] the lessor more than his actual
damages" and was therefore invalid). Here, because the rent
abatement clause could just as easily have under- as over-
estimated actual damages, the provision appears not to have
been intended to penalize Despa. Third--and closely relat-
ed--the court in Davy found the lease as a whole, including
both the liquidated damages provision and other parts of the
contract, to have an "unconscionable and overreaching char-
acter" that heavily favored the landlord at the expense of the
tenant. Davy, 147 F.2d at 575. Here, neither party claims
that the lease as a whole is unconscionable and overreaching.
Finally, and perhaps most important, the agreement in Davy
appears to have involved a corporate landlord and a private
individual. See id. at 574 ("Action by Beatrice I. Crawford
and others against Myron Davy and others, trading as River
Terrace Company...."). The rent abatement provision in
Red Sage's lease, in contrast, was negotiated by sophisticated
parties, and District of Columbia courts, as well as Maryland
courts, to which District of Columbia courts often look for
guidance, see Geico v. Fetisoff, 958 F.2d 1137, 1143 (D.C. Cir.
1992), are generally reluctant to disturb terms agreed upon
by such parties. See, e.g., District of Columbia v. C.J.
Langenfelder & Son, Inc., 558 A.2d 1155, 1163 (D.C. 1989)
(rejecting the view that the phrase "equitable adjustment" in
a contract gave the court "roving discretion to reform the
contracts of informed and sophisticated parties"); Mass
Transit Admin. v. CSX Transp., Inc., 708 A.2d 298, 309 (Md.
1998) ("A decent respect for the freedom of sophisticated
parties contractually to establish the rules governing their
business relationship compels the conclusion that the [Mary-
land] General Assembly intended contracting parties to be
able to determine, when they contract, whether [a statutory
provision] applies to their agreement."); Mattvidi Assocs.
Ltd. P'ship v. NationsBank of Va., 639 A.2d 228, 239 (Md. Ct.
Spec. App. 1994) ("When two commercially sophisticated par-
ties freely enter into an agreement containing a late charge
clause ... it seems entirely appropriate that the burden of
proof should be on the party who later claims that the clause
is invalid.").
All liquidated damages clauses, if implemented in situations
where damages are difficult to estimate, will generally end up
either over- or under-estimating actual damages. And while
the range of possible damages in this case is quite wide, the
parties may have had good reason for wanting a broad
exclusive use covenant: for example, they may have wished to
ensure expansive protection for Red Sage's food service oper-
ations. The parties may also have had good reason for
wanting a single formula for calculating damages from a
breach of the exclusive covenant: they may have worried that
specifying different levels of damages to cover different levels
of breach could have enmeshed them in time-consuming and
expensive disagreements over which damages applied to a
particular breach. We do not know exactly why the parties
agreed to this particular clause, nor is it our role to discern
their precise intentions. Because the provision is neither
obviously one-sided nor obviously intended to impose a penal-
ty that would coerce performance, because the actual esti-
mate is not clearly unreasonable in relation to the range of
possible damages, and because both parties are sophisticated
businesses, we find that as a liquidated damages clause
covering operations of the scale of Cakes and larger, the rent
abatement provision in Red Sage's lease is enforceable as a
matter of law. See Langenfelder, 558 A.2d at 1163; see also
id. at 1169 (dissenting opinion) ("I agree with my colleagues
that judges have no roving commission to relieve sophisticat-
ed parties of their contractual obligations.").
III
In its original motion before the district court, Despa
suggested two additional bases for summary judgment: (1) on
its face, the phrase "food service establishment" excludes
Cakes; and (2) if the phrase covers Cakes, the exclusive
covenant is an unreasonable restraint of trade. According to
Despa, because the actual order accompanying the district
court's summary judgment opinion did not specify the
grounds for decision, the court implicitly accepted the addi-
tional arguments in Despa's original motion, and since Red
Sage's opening appellate brief addressed only the penalty
clause issue, and not the two alternate theories, Red Sage has
conceded those arguments.
This argument is absurd. Quite apart from the fact that
the district court rejected Despa's original motion for sum-
mary judgment and awarded relief only after ordering sup-
plemental briefing on the penalty clause issue, the court's
opinion makes abundantly clear that it awarded summary
judgment only because it decided the rent abatement provi-
sion was an unenforceable penalty. The three citations Des-
pa invokes for the proposition that courts "speak[ ] only by
[their] orders"--one of which is to a dissenting opinion,
another of which is to an unpublished decision--concern
instances where orders conflict directly with other court
documents. See Shafer v. Children's Hosp. Soc. of L.A., 265
F.2d 107, 117 (D.C. Cir. 1959); Flannigan v. Consol. Rail
Corp., 888 F.2d 127, 1989 WL 130634 (6th Cir. 1989); Mur-
daugh Volkswagen, Inc. v. First Nat'l Bank of S.C., 741 F.2d
41, 44 (4th Cir. 1984). Those citations thus have no bearing
on this case. Because Despa has re-asserted its alternate
arguments for summary judgment before this court, however,
and because Red Sage has responded in its reply brief, we
consider whether these arguments provide an alternate basis
for sustaining summary judgment for Despa. See In re
Swine Flu Immunization Prods. Liab. Litig., 880 F.2d 1439,
1444 (D.C. Cir. 1989) (stating that this court may affirm a
district court's grant of summary judgment on grounds not
relied upon by that court).
First, Despa argues that as a matter of law, the phrase
"food service establishment of any kind" in the exclusive use
covenant does not cover Cakes. Under District of Columbia
law, as we have already noted, "the written language of a
contract governs the parties' rights unless it is not susceptible
of clear meaning." Adler, 728 A.2d at 88. "In deciding
whether contract language has a clear meaning, the court
asks what a reasonable person in the position of the parties
would have thought the disputed language meant." Id. (in-
ternal quotations omitted). "When the meaning of a contract
provision is facially uncertain, a court may resort to an
examination of extrinsic evidence, such as statements, course
of conduct, and contemporaneous correspondence, aimed at
discerning the intent of the parties." Farmland Industries,
904 F.2d at 736.
Here, the plain language of the lease--"food service estab-
lishment of any kind"--could well describe a business like
Cakes. As Red Sage argues, the modifier "any" suggests
that the parties intended the provision to be read broadly. In
addition, the lease specifies that its terms are to be construed
according to District of Columbia law, and District regula-
tions define the similar phrase "food service operation" to
include businesses in which "food is prepared for service and
consumption elsewhere." D.C. Mun. Regs. tit. 23, s 2499.
Other features of the lease, however, indicate that the
parties may have intended the exclusive covenant to have a
narrower reach. The covenant refers to "restaurant[s],
bar[s], or food service establishment[s] of any kind" as "com-
peting use[s]," suggesting that the purpose of the clause was
to prevent competition with Red Sage. This in turn suggests
that an establishment that sold food but did not compete with
Red Sage in any way--a store selling freeze-dried camping
food, for example--might not fall within the covenant's reach.
In addition, the fact that the exclusive covenant applies only
so long as Red Sage operates a "bar and/or restaurant" could
mean that it excludes only food service operations that com-
pete with Red Sage's restaurants, not those that compete
with "incidental" uses like the Red Sage Market.
We thus think the language of the contract is unclear.
Beyond the lease itself, we have no factual record regarding
the 1997 parties' understanding of the phrase "food service
establishment of any kind." And if in fact that understanding
has something to do with protecting Red Sage from competi-
tion, there are (as the district court found) disputed issues of
fact regarding the exact nature of Cakes' business and its
degree of competitive overlap with Red Sage market. The
parties disagree, for example, about the degree to which
Cakes targeted its services to office workers in the Westory
building: while Red Sage asserts that Cakes "under[took]
special efforts to market cake[ ] and coffee as a snack combi-
nation," Appellant's Opening Br. at 9, Despa asserts that
Cakes "did not advertise any on-premises food service or
sales." Appellee's Br. at 8. Summary judgment would thus
be inappropriate on the question of whether the exclusive
covenant covers Cakes. See D.C. Hosp. Ass'n, 224 F.3d at
779.
Despa also argues that if Cakes is a "competing use" within
the meaning of the exclusive use covenant, that provision
amounts to an unreasonable restraint of trade. In the Dis-
trict of Columbia, covenants restricting competition are valid
if ancillary to some other legitimate interest. See Ellis v.
James V. Hurson Assocs., 565 A.2d 615, 618 (D.C. 1989).
Here, the exclusive covenant is ancillary to the landlord-
tenant relationship between Red Sage and Despa. Such
covenants, however, are invalid if they are "greater than is
needed to protect the promisee's legitimate interest." Re-
statement (Second) of Contracts s 188(1) (1981) [hereinafter
Restatement] (quoted in Venture Holdings, Ltd. v. Carr, 673
A.2d 686, 689 n.4 (D.C. 1996)). Here, Despa argues that the
exclusive use covenant, assuming it prohibits the lease to
Cakes, restrains more trade than is reasonable because com-
petition from Cakes was at best incidental to Red Sage. If
the covenant covers Cakes, Despa concludes, it amounts to a
complete prohibition on any competition whatsoever, and a
promise to "refrain altogether from competition" "implicates
the common law policy against unreasonable restraints of
trade." Venture Holdings, 673 A.2d at 689.
The District of Columbia has "adopted the common law
principles regarding promises in restraint of trade[ ] as re-
ported in the Restatement (Second) of Contracts." Venture
Holdings, 673 A.2d at 689. "Comment d" to the Restatement
provides that the extent of a restraint on competition may be
limited in three ways: by geographical area, time, and type of
activity. Restatement s 188 cmt. d. Here, the covenant is
restricted in all three ways: it applies only to the Westory
building; it lasts only the length of the lease; and rather than
preventing all retail activities, it prevents only food service
activities. The discussion in Venture Holdings on which
Despa relies is not to the contrary: that case concerned a far
more sweeping promise by a former employee not to "engage
in business competition" of any kind with his former employ-
er. See 673 A.2d at 689. As the Restatement suggests,
"[p]ost-employment restraints are scrutinized with particular
care because they are often the product of unequal bargaining
power and because the employee is likely to give scant
attention to the hardship he may later suffer through loss of
his livelihood." Restatement s 188 cmt. g. Not only are
similar considerations inapplicable here, but courts have pre-
viously enforced lease provisions like the one at issue in this
case. See, e.g., Grand Union Co. v. Laurel Plaza, Inc., 256
F. Supp. 78, 81 (D. Md. 1966) (enforcing a lease provision
making a supermarket the sole retailer of food to be con-
sumed off-premises in a shopping mall). We thus conclude
that the exclusive covenant in Red Sage's lease is not an
unreasonable restraint of trade.
IV
In sum, we find that as a matter of law, the rent abatement
provision would constitute neither an unenforceable penalty
nor an unreasonable restraint of trade as applied to Cakes.
Because we agree with the district court that the phrase
"food service establishment of any kind" cannot be definitive-
ly construed as a matter of law, we remand to the district
court to determine whether, in light of the contract's lan-
guage, the parties' intent, and the nature of Cakes' operation,
Despa's lease to Cakes entitles Red Sage to a rent abatement.
So ordered.