Polk Bros., Inc. v. Forest City Enterprises, Inc.
776 F.2d 185 (1985)
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Rule of Law:
A restrictive covenant between competitors is not a per se antitrust violation if it is ancillary to a legitimate, pro-competitive joint venture, and is therefore analyzed under the Rule of Reason. A party's minor breach of a covenant does not bar them from seeking equitable enforcement under the "unclean hands" doctrine unless the breach was substantial and injured the other party.
Facts:
- In 1972, Polk Bros. (an appliance and home furnishings retailer) and Forest City Enterprises (a building materials and tools retailer) agreed to build and co-locate in a single, partitioned building in Burbank, Illinois.
- The stores had complementary product lines and were intended to create a one-stop-shop for home goods, attracting more customers to the shared location.
- To prevent direct competition and potential free-riding on each other's marketing efforts, their agreement included a restrictive covenant where Forest City promised not to sell major appliances or furniture, and Polk promised not to sell building materials, tools, and other specified items.
- In 1978, Forest City purchased its portion of the property, and the parties agreed the restrictive covenant would run with the land for 50 years.
- In 1982, new management at Forest City, concerned with declining profits, asked to be relieved of the covenant, but Polk refused.
- In January 1983, Forest City declared the covenant invalid.
- Polk had previously violated its own obligations under the covenant by covertly selling Toro brand lawn mowers and snowblowers from a back room.
- After Forest City protested in 1982, Polk stopped selling the Toro lawn mowers but continued selling snowblowers, claiming it was permitted to do so.
Procedural Posture:
- Polk Bros., Inc. sued Forest City Enterprises, Inc. in Illinois state court, seeking an injunction to enforce the restrictive covenant.
- Forest City (defendant) removed the case to the U.S. District Court for the Northern District of Illinois based on diversity jurisdiction.
- The district court denied Polk's request for a preliminary and then a permanent injunction.
- The district court held that the covenant was a per se violation of Illinois antitrust law and, alternatively, that Polk was barred from equitable relief due to the doctrine of 'unclean hands'.
- Polk Bros., Inc. (appellant) appealed the district court's judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a restrictive covenant allocating product markets between two retailers sharing a single building constitute a per se violation of antitrust law, and if not, is the plaintiff barred from enforcing it under the doctrine of "unclean hands" due to its own prior breaches?
Opinions:
Majority - Easterbrook, Circuit Judge
No. The restrictive covenant is not a per se violation of antitrust law because it is an ancillary restraint that is part of a productive, cooperative venture and must be judged under the Rule of Reason. Furthermore, the plaintiff is not barred from enforcing the covenant under the doctrine of 'unclean hands' because its prior breaches were not substantial and did not cause significant injury to the defendant. The court must distinguish between 'naked' restraints, which only suppress competition and are per se illegal, and 'ancillary' restraints, which promote the success of a larger, productive enterprise. The covenant here was essential to the creation of the joint retail facility, a pro-competitive venture that increased output and consumer convenience by preventing free-riding. Because the agreement promoted enterprise at its adoption, it must be analyzed under the Rule of Reason, which requires a showing of market power that Forest City failed to provide. Regarding the 'unclean hands' defense, Illinois law requires that the plaintiff's wrongful conduct be substantial and injure the defendant, or that the plaintiff is trying to take advantage of its own wrong. Polk’s breaches did not cause Forest City significant harm, as admitted by Forest City's manager, and Polk had largely come into compliance before the suit. Therefore, the breaches were insufficient to preclude injunctive relief.
Analysis:
This decision clarifies the crucial distinction between per se illegal 'naked' restraints and 'ancillary' restraints that are judged under the more flexible Rule of Reason. It establishes that horizontal agreements between competitors are not automatically illegal if they are part of a larger, pro-competitive joint venture that increases output or creates efficiencies. The opinion narrows the scope of the per se rule, reinforcing that antitrust law is meant to protect competition, not individual competitors. Additionally, it provides a modern, functional interpretation of the 'unclean hands' doctrine, treating it not as a subjective measure of a plaintiff's morality but as a tool to prevent a party from profiting from the specific wrong that created the dispute.
