Polk Bros., Inc. v. Forest City Enterprises, Inc.

• Decision Date: 26 November 1985
• Docket Number: No. 85-1374,85-1374
• Citation: 776 F.2d 185
• Parties: , 1985-2 Trade Cases 66,837 POLK BROS., INC., Plaintiff-Appellant, v. FOREST CITY ENTERPRISES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 185

776 F.2d 185

54 USLW 2281, 1985-2 Trade Cases 66,837

POLK BROS., INC., Plaintiff-Appellant, v. FOREST CITY ENTERPRISES, INC., Defendant-Appellee.

No. 85-1374.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 23, 1985.

Decided Oct. 31, 1985.

Rehearing and Rehearing En Banc Denied Nov. 26, 1985.

Peter B. Freeman, Hopkins & Sutter, Chicago, Ill., for plaintiff-appellant.

Leslie D. Locke, Ross & Hardies, Chicago, Ill., for defendant-appellee.

Before CUMMINGS, Chief Judge, EASTERBROOK, Circuit Judge, and GRANT, Senior District Judge. ^*

EASTERBROOK, Circuit Judge.

In 1972 Polk Bros., which owned some land in Burbank, Illinois, discussed with Forest City Enterprises the possibility of building a store large enough for both firms. Polk sells appliances and home furnishings; Forest City sells building materials, lumber, tools, and related products. Both have substantial chains of stores. They reached an agreement. Polk built a single building on a large parcel of land. The building is partitioned internally; Polk and Forest City have separate entrances; Polk's store contains 64,000 square feet, Forest City's 68,000 square feet. One parking lot serves both businesses. Forest City became Polk's lessee in 1973. The stores opened in 1975. In 1978 Forest City exercised its option to buy, and Polk took back a mortgage for some $1.4 million.

The attraction of the arrangement was the complementary nature of the firms' products. The two stores together could offer a full line of goods for furnishing and maintaining a home. Both Polk and Forest City were concerned, however, that competition might replace cooperation. They negotiated a covenant restricting the products each could sell. Forest City promised not to sell "major appliances and furniture", although it reserved the right to sell "built-in appliances in connection with Kitchen-Build-In business." Polk Bros. promised not to "stock or sell Toro and Lawnboy products including lawn mowers, building materials, lumber and related products, tools, paints and sundries, hardware, garden supplies, automotive supplies or plumbing supplies." The parties agreed on a long list of things that both could sell, including "Gas & Electric Heaters[,] Built-In-Ranges[,] ... Snow Blowers[,] Lawn Mowers[,] ... [and] Hardware/Garden Mdse". When Forest City became an owner in 1978 the parties agreed that the restrictions in the lease would become covenants running with the land for 50 years.

Forest City's management changed in 1982. The new managers were concerned about declining profits from its three stores near Chicago. Two stores sold some major appliances; the one at Burbank did not. Forest City found it uneconomical to advertise the large appliances when one of the three outlets could not sell them. Forest City asked to be relieved of its covenant at Burbank. Polk said no. In January 1983 Forest City informed Polk that it considered the covenant invalid; Polk responded with a suit in state court seeking an injunction. Forest City removed the action to the district court under 28 U.S.C. Sec. 1441, where it could have been filed initially under the diversity jurisdiction.

While the case was pending, Forest City started selling appliances. Polk sought emergency relief, and the district court referred the matter to a magistrate. The magistrate held an evidentiary hearing, made extensive findings of fact, and recommended that relief be granted. The district court, however, denied Polk's request, concluding both that the covenant is a per se violation of the antitrust law of Illinois and that Polk, having violated the covenant itself, may not obtain equitable relief. The district court then took additional evidence and denied Polk's request for a permanent injunction. We discuss the district court's two reasons in turn. The last portion of the opinion takes up some procedural matters, including a suggestion of mootness.

I

The district court held the covenant invalid under Sec. 3(1)(c) of the antitrust law of Illinois, Ill.Rev.Stat. ch. 38 Sec. 60-3(1)(c), which declares unlawful contracts "allocating or dividing customers, territories, supplies, sales or markets, functional or geographical, for any commodity." That state's antitrust law, however, refers courts to federal antitrust law as a guide to questions of interpretation. See Ill.Rev.Stat. ch. 38 Sec. 60-11; People ex rel. Scott v. College Hills Corp., 91 Ill.2d 138, 154, 61 Ill.Dec. 766, 773-775, 435 N.E.2d 463, 470-72 (1982); Maywood Sportservice, Inc. v. Maywood Park Trotting Association, Inc., 14 Ill.App.3d 141, 302 N.E.2d 79, 85-87 (1973). In order to find out what Illinois law forbids, we inquire what federal antitrust law forbids. Cf. Marrese v. American Academy of Orthopaedic Surgeons, 726 F.2d 1150, 1155 (7th Cir.1984) (en banc), rev'd on other grounds, --- U.S. ----, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985).

Like federal law, Illinois law recognizes a difference between contracts unlawful per se and those that must be assessed under a Rule of Reason. College Hills, supra. Although federal law treats almost all contracts allocating products and markets as unlawful per se, see Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 2740, 81 L.Ed.2d 628 (1984); United States v. Capitol Service, Inc., 756 F.2d 502 (7th Cir.1985); General Leaseways, Inc. v. National Truck Leasing Association, 744 F.2d 588 (7th Cir.1984), the per se rule is designed for "naked" restraints rather than agreements that facilitate productive activity. Any firm involves cooperation among people who could otherwise be competitors. Polk Bros. and Forest City each comprise many stores. The managers of each store could set prices independently, competing against each other, but antitrust law does not require this. See Copperweld, supra.

Cooperation is the basis of productivity. It is necessary for people to cooperate in some respects before they may compete in others, and cooperation facilitates efficient production. See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 104 S.Ct. 1464, 1470, 79 L.Ed.2d 775 (1984). Joint ventures, mergers, systems of distribution--all these and more require extensive cooperation, and all are assessed under a Rule of Reason that focuses on market power and the ability of the cooperators to raise price by restricting output. The war of all against all is not a good model for any economy. Antitrust law is designed to ensure an appropriate blend of cooperation and competition, not to require all economic actors to compete full tilt at every moment. When cooperation contributes to productivity through integration of efforts, the Rule of Reason is the norm. National Collegiate Athletic Association v. Board of Regents of University of Oklahoma, --- U.S. ----, 104 S.Ct. 2948, 2960-62, 82 L.Ed.2d 70 (1984) (NCAA ).

A court must distinguish between "naked" restraints, those in which the restriction on competition is unaccompanied by new production or products, and "ancillary" restraints, those that are part of a larger endeavor whose success they promote. See NCAA, supra. If two people meet one day and decide not to compete, the restraint is "naked"; it does nothing but suppress competition. If A hires B as a salesman and passes customer lists to B, then B's reciprocal covenant not to compete with A is "ancillary." At the time A and B strike their bargain, the enterprise (viewed as a whole) expands output and competition by putting B to work. The covenant not to compete means that A may trust B with broader responsibilities, the better to compete against third parties. Covenants of this type are evaluated under the Rule of Reason as ancillary restraints, and unless they bring a large market share under a single firm's control they are lawful. See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280-83 (6th Cir.1898) (Taft, J.), aff'd, 172 U.S. 211 (1899).

The evaluation of ancillary restraints under the Rule of Reason does not imply that ancillary agreements are not real horizontal restraints. They are. A covenant not to compete following employment does not operate any differently from a horizontal market division among competitors--not at the time the covenant has its bite, anyway. The difference comes at the time people enter beneficial arrangements. A legal rule that enforces covenants not to compete, even after an employee has launched his own firm, makes it easier for people to cooperate productively in the first place. Knowing that he is not cutting his own throat by doing so, the employer will train the employee, giving him skills, knowledge, and trade secrets that make the firm more productive. Once that employment ends, there is nothing left but restraint--but the aftermath is the wrong focus.

A court must ask whether an agreement promoted enterprise and productivity at the time it was adopted. If it arguably did, then the court must apply the Rule of Reason to make a more discriminating assessment. "[I]t is sometimes difficult to distinguish robust competition from conduct with long-run anti-competitive effects" (Copperweld, supra, 104 S.Ct. at 2740), and so a court must be very sure that a category of acts is anti-competitive before condemning that category per se. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979) (BMI ), and NCAA, supra, both of which assess under the Rule of Reason horizontal agreements that also involve cooperation among rivals that might produce larger output and more desirable products. Both BMI and NCAA emphasize that condemnation per se is an unusual step, one that depends on confidence that a whole category of restraints is so likely to be anticompetitive that there is no point in searching for a potentially beneficial instance. See also, e.g., Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 47-51, 97 S.Ct. 2549, 2556-58, 53 L.Ed.2d 568 (1977).

A restraint...