## Facts

- Polk Bros., Inc. operated retail stores selling appliances and home furnishings; Forest City Enterprises, Inc. operated retail stores selling building materials, tools, and related products.
- In 1972, the parties planned a shared retail facility in Burbank, Illinois, intending to combine complementary product offerings at one location.
- Polk built a single building divided into two store areas with a shared parking lot; Forest City became Polk’s lessee in 1973, and both stores opened in 1975.
- The parties agreed to reciprocal product-line restrictions to prevent direct competition within the shared site:
  - Forest City agreed not to sell major appliances and furniture, except certain built-in appliances connected to kitchen-build-in business.
  - Polk agreed not to sell various building-supply and related categories (including building materials, lumber, tools, paints, hardware, garden supplies, automotive supplies, and plumbing supplies) and certain specified brands.
- The agreement also listed numerous items both stores could sell.
- In 1978, Forest City purchased its portion of the premises, and the parties agreed the restrictions would run with the land for 50 years; Polk took back a mortgage.
- After a 1982 management change, Forest City sought to be released from the restrictions for business reasons; Polk refused.
- Forest City asserted the covenant was invalid; Polk sued for injunctive enforcement, and the dispute moved into federal court where antitrust validity became central.

## Issues

1. Whether the product-line restrictive covenant in the shared retail development was per se unlawful as a horizontal market-division agreement.
2. If not per se unlawful, whether the covenant was lawful and enforceable under the rule of reason as an ancillary restraint connected to a legitimate cooperative venture.

## Decision

- The Seventh Circuit reversed the district court.
- The court held the covenant was not subject to per se condemnation because it was ancillary to a productive collaboration rather than a naked market-division restraint.
- Applying the rule of reason, the court found the restraint reasonable in purpose and likely competitive effect.
- The case was remanded for entry of appropriate relief consistent with enforcement of the covenant (including injunctive relief).

## Legal Principles

- Per se treatment is reserved for categories of conduct that almost always reduce output or raise prices; restraints that may facilitate a legitimate collaboration generally require rule-of-reason analysis.
- A restraint is “ancillary” when it is reasonably necessary to the success of a cooperative venture that plausibly increases efficiency or output; ancillary restraints are evaluated under the rule of reason.
- Rule-of-reason analysis focuses on market context and competitive effect, including whether the restraint plausibly increases output, supports investment in a joint enterprise, or otherwise improves consumer offerings, and whether it meaningfully harms competition in a properly defined relevant market.
- A product-line allocation limited to organizing offerings within a single jointly developed site does not, by itself, establish market power or an unlawful suppression of competition in the broader market.

## Conclusion

The Seventh Circuit held that a product-line covenant governing two retailers operating in a jointly developed facility was an ancillary restraint and therefore not per se unlawful; under the rule of reason it was reasonable and enforceable, warranting injunctive relief.


Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185 (7th Cir. 1985)