Walgreen's Breach Case

In 1991, Walgreen’s had ten years remaining on a 30-year lease at the Southgate Mall in Milwaukee, where they had a pharmacy since 1951. The lease included an exclusivity clause preventing Sara Creek Property Company, the landlord, from leasing space at the mall to a tenant who wants to have a pharmacy. In 1991, Sara Creek wanted to buy out the existing anchor tenant, which was struggling and had recently declared bankruptcy, and replace it with Phar-Mor, which would be a discount store containing a pharmacy. As a result, Walgreen’s sued Sara Creek for a breach of contract, as the exclusivity clause in the lease would be violated. Phar-Mor was also a Defendant, but it was determined that they were not liable for any wrongdoing and all claims

In court, Sara Creek had to justify the breach and hoped to pay damages, but Walgreen’s desired an injunction. Before comparing damages to an injunction in this specific case, it is helpful to mention the general differences between the two. One advantage of awarding an injunction (specific performance) is that it is on the parties to negotiate damages that benefit both sides. If the transaction costs are low, it could be more efficient to award an injunction. An injunction effectively takes the two parties to the market, which will determine the price of breaching more accurately than the government. The court uses expert witnesses to determine the costs of damages, with the court serving as a sort of mediator, while determining the cost outside of court allows both sides to negotiate directly. A disadvantage of awarding an injunction is that if transaction costs are high, damages would likely be more efficient, especially if it is not known how the property right is valued. It is not clear at how much Walgreen’s valued an injunction, meaning that damages were possibly more efficient. An injunction also creates the problem of a bilateral monopoly, as there is only one buyer and one seller. Given that an injunction was granted and Walgreen’s had the property right,

Expectation damages would have left Walgreen’s indifferent between the damages and performance by Sara Creek. Walgreen’s expected to make a certain profit, but would lose profit from a competing store and pharmacy as the anchor tenant. The difficulty in this case, and expectation damages in general, is that the value of performance is sometimes hard to quantify. Calculating expectation damages involves projecting future revenues and costs of Walgreen’s without the presence of Phar-Mor and determining the impact of the addition of Phar-Mor. The court determined that there was too much uncertainty in this calculation to award damages, but for the sake of argument, let’s say that Sara Creek would have paid damages monthly. If Walgreen’s expected to make $1 million per month for the next ten years without Phar-Mor, but Phar-Mor’s presence would mean that Walgreen’s would only make $600K/month. Walgreen’s should have no problem accepting damages of $400K per month. The problem is that Walgreen’s expects to make $600K, but they also think that making $300K in a month is a possibility. Comparing damages to the possibility of underperforming in some months means that even with damages, there is a good chance that Walgreen’s suffers a loss compared to what they might have gained without Phar-Mor. It is also possible that Walgreen’s overperforms, but they want damages