Now we know the Mall owners are scared, really scared, of new competition (revised 15 November 2007)

Here’s an interesting and important legal decision that will have some very real urban design/architectural implications. It’s yet another example of small, local and very particularized developments eclipsing centralized, consolidated, and homogenized ones.

It’s also interesting from another point of view: what information we get from this lawsuit. Lawsuits are actually very efficient ways of distributing information, as each lawsuit reveals things through the adversarial process that wouldn’t always come out. In this case the information is clear: Caruso’s development model is such a threat that his competition thought the legal risk they placed themselves in was worth it. That gives an insight as to how dangerous they thought this competition is, and what means they have to counter it. They think this competition is dangerous, and they don’t have a clear way of adapting to this threat.

And we see the theme of competition between things of different scales that was discussed here. The quote from Schumpeter (I’ll get to it in just a bit) that I just love also talks about changing scales. (I hadn’t noticed that before! How could I miss that?)

It’s interesting that this also ties into sustainable development, and the new topology of globalization–as discussed here and here and here and here. In this new topology, things like goods travel through more complex routes and are becoming dematerialized and more localized, in terms of both labor and material inputs. The only necessary global flows are the non-material things such as information, knowledge, ideas, skills, expertise and judgment.* This is simply a result of the response to higher energy prices, and much more importantly, the rising uncertainty about the cost of energy in the future. But more than just energy prices are driving these changes–there is also the whole sustainability imperative, that is acting both as the carrot (new markets for green products and services) and the stick (higher costs and more importantly, higher uncertainty for non-green businesses)

In this case the developer, Rick Caruso (who won this lawsuit to the tune of $74 million dollars, and the punitive damages have yet to be assessed) has been involved in mixed use projects that tie into local urban fabric like farmer’s markets, rather than sit isolated and look inward. His opponent, General Growth Properties, had pulled out all the stops–using every inch of leverage a large conglomerate could–pressuring chains which have locations in other General Growth Property malls with lease problems if they went to Caruso’s new development. They even sponsored an “astroturf” campaign against the development, getting a referendum on the ballot to stop the new mall. But the plan backfired, with the referendum not passing, and the new mall emerging with more support than ever.

This isn’t just a random event; the reason General Growth Properties pushed beyond the law is they realized how significant and dangerous the competition from Caruso was was, and they were completely desperate to crush him at all costs, and all of that came out in the law suit. It is cases such as this that re-affirm one of the very critical roles of law suits: distributing information.

Jury Tells Mall Giant to Pay $74 Million

Published: November 10, 2007

A jury awarded a private developer $74.2 million in compensatory damages late Thursday after finding that the owner of the Glendale Galleria mall in a Los Angeles suburb had tried to block the Cheesecake Factory chain from opening a restaurant in a rival open-air shopping and entertainment center.

The Galleria’s owner, General Growth Properties, is also facing the prospect of substantial punitive damages because the jury found the company acted with “malice, oppression or fraud” by interfering with negotiations between the restaurant chain and Caruso Affiliated Holdings, the developer of the new shopping center.

The case is the latest chapter in a long-running battle pitting General Growth, a publicly traded real estate investment trust based in Chicago, against Rick J. Caruso, the chief executive of Caruso Affiliated.

Mr. Caruso specializes in creating smaller open-air shopping centers, which have drawn business away from traditional malls in recent years. He is the developer of the Grove, a popular open-air shopping center next to the Farmers Market on Third Street and Fairfax Avenue in Los Angeles.

In 2001, the city of Glendale awarded Mr. Caruso a 15.5-acre site near the Galleria in downtown Glendale to build Americana at Brand, a $369 million open-air shopping center.

General Growth, which has interests in more than 200 shopping centers in 45 states, including the South Street Seaport in Lower Manhattan, tried several strategies to keep the Americana from opening — and potentially siphoning off the most desirable retail tenants.

General Growth, a real estate investment trust, first collected enough signatures to hold a referendum on the project, but voters approved its construction. A lawsuit challenging the environmental impact statement for the project was also unsuccessful.

Scheduled to open in April, the Americana is similar in concept to the Grove, except that it will have 238 apartments and 100 condominiums in addition to 475,000 square feet of retail and entertainment space.

According to accounts of the trial published in The Glendale News-Press, the Cheesecake Factory signed a letter of intent in 2003 to open a restaurant at the Americana, but it did not sign a lease until this year. Lawyers for Caruso presented evidence suggesting that General Growth tried to thwart the lease by threatening to block the chain’s deals at its own malls.

It is hard for me not to think of Schumpeter’s thoughts** here:

The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) – competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.

Noticed here the concern for the ‘largest-scale unit of control’ and reflect how very difficult it is for a shopping mall to change its scale (it is an economic unit, of a given size, for better or worse, once it is constructed.) This also ties into observations about the contention of items of a different scale that I had remarked about here.

* The order (information, knowledge, ideas, skills, expertise and judgment) is non-random, but shows a progression from the commoditized (pure information) to the specialized artifacts produced to meet individual needs which are deeply resistant to copying.

** (Joseph A. Schumpeter; Capitalism, Socialism and Democracy
Chapter VII: The Process of Creative Destruction page 83-84, Harper Torchbooks, New York, 1962)

Now we know the Mall owners are scared, really scared, of new competition (revised 15 November 2007)

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