Yes, sometimes “tying” violates the antitrust laws. Whether you arrive at the tying-arrangement issue from the perspective of the person tying, the person buying the tied products, or the person competing with the person tying, you should know when the antitrust laws forbid the practice. Even kids may want to know whether tying violates the antitrust laws.
Most vertical agreements—like loyalty discounts, bundling, exclusive dealing, (even resale price maintenance agreements under federal law) etc.—require courts to delve into the pro-competitive and anti-competitive aspects of the arrangements before rendering a judgment. Tying is a little different.
Tying agreements—along with price-fixing, market allocation, bid-rigging, and certain group boycotts—are considered per se antitrust violations. That is, a court need not perform an elaborate market analysis to condemn the practice because it is inherently anticompetitive, without pro-competitive redeeming virtues. Even though tying is often placed in this category, it doesn’t quite fit there either. Again, it is a little different.
Proving market power isn’t typically required for practices considered per se antitrust violations, but it is for tying. And business justifications don’t, as a rule, save the day for per se violations either. But, in certain limited circumstances, a defendant to an antitrust action premised on tying agreements might defend its case by showing exactly why they tied the products they did.
At this stage, you might be asking, “what the heck is tying?” Do the antitrust laws prohibit certain types of knots? Do they insist that everyone buy shoes with Velcro instead of shoestrings? The antitrust laws can be paternalistic, but they don’t go that far.
A tying arrangement is where a customer may only purchase a particular item (the “tying” item) if the customer agrees to purchase a second item (the “tied” item), or at least agree not to purchase that second item from the seller’s competitors. It is sort of like bundling, but there is an element of express coercion. When the seller prohibits the buyer from purchasing a product from the seller’s competitor, this is often called a negative tie.
With bundling, a seller may offer a lower combined price to buyers that purchase two or more items, but the buyers always have the right to just purchase one of the items (and forgo the discount). With tying, by contrast, the buyer cannot just purchase the one item; if it wants the first item, it must purchase the second or at least decline to purchase the second from the seller’s competitor.
Well, then why doesn’t the customer just go to someone else if they don’t want both items? That, in fact, is the issue. In a tying arrangement, the reason it is a problem is because the seller has a monopoly (or at least market power) over the first item, so buyers are, in many instances, stuck with that seller for that item. And if they can only obtain the monopolized item by purchasing the second item, they might as well just purchase the second item from the tying seller.
This, of course, may foreclose competitors from effectively competing by offering the second item. They will lose much of their market, even if they offer a superior product for a better price, because the customers will end up purchasing the second item from the other seller; the one with the monopoly for the first item. And this, ladies and gentleman, is why the antitrust laws care about tying.
Let’s go through the elements for tying briefly so you can try to apply them to your situation—whatever it is.
- The tying and tied items—that is, the first and second item—must actually be separate products (or services). In the abstract, this seems like an easy element, but in real life it is often complicated because sometimes two products are marketed together and seem like one. The issue usually turns on whether there is separate consumer demand for the two products, such that it would make sense for firms to offer them as separate products. This was a big issue back in the Microsoft antitrust wars of the 1990’s, with the browser and operating system.
- There must be an element of coercion; the seller must actually condition the purchase of the first item (or service) on the purchase of the second item (or service), or declination of purchasing the second item from a competitor (with a negative tie).
- The seller must have sufficient market power in the market for the tying item (the first item) to “appreciably restrain free competition” in the tied market (the second item).
- The tying arrangement must affect a “not insubstantial” amount of commerce in the tied item (the second item). In most cases, this element isn’t difficult to satisfy. But if the tying agreement doesn’t have much impact, the court could reject the claim.
- The seller must have an economic interest in both the tied and the tying items. This is obvious in most cases, but some courts express it as a separate element.
Even if a plaintiff can satisfy each of these elements, courts will sometimes, though rarely, allow defenses based upon limited business justifications. But these are almost always rejected. If you’ve reached this point in the analysis, it is time to call an antitrust attorney.