Tying Agreements

by Michael A. Lindsay, F. Matthew Ralph, Jaime Stilson, and Anthony Badaracco, Dorsey & Whitney LLP

This practice note describes one specific form of nonprice vertical restraints: tying agreements. This practice note explains various types of tying agreements and provides guidelines for evaluating tying arrangements when representing manufacturers and resellers. This practice note focuses on U.S. law. Note that jurisdictions outside the U.S. may treat tying arrangements differently.

For more information on other vertical agreements that manufacturers and other suppliers might use to manage their distribution systems, see the practice note Nonprice Restraints in Vertical Agreements.

In a tie-in or tying arrangement, a seller wants to induce a customer to buy more than one product or service. One way a seller does this is to place conditions on the sale of the first product. For example, the seller might refuse to sell the first product (tying product) to a customer unless the customer also buys a second product (tied product). Tying arrangements can be unlawful, especially when the seller has market power in the tying product.

Tying is distinguished under antitrust laws from product bundling because in bundling, a customer has the option to purchase the two products separately, but the seller offers a better deal on a “bundle” or “package” purchase of both products. If the customer could reasonably decide to buy the products separately, there is no tying arrangement. For more information on bundling, see the practice note Tying Versus Bundling.

While at one-time, courts held that tying was always per se illegal under Section 1 of the Sherman Act (see, e.g., International Salt Co. v. United States, 332 U.S. 392, 396 (1947)), that is no longer the case. Today the Supreme Court recognizes that tying arrangements may be consistent with a competitive market. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 45 (2006). Courts now use market share as a screen to determine whether to give the tying arrangement per se treatment or to evaluate it under the rule of reason. The Supreme Court has held that per se condemnation of a tying arrangement is only appropriate if it is probable that the seller has “either the degree or the kind of market power that enables him to force customers to purchase” a tied product. Jefferson Parish Hosp. District No. 2 v. Hyde, 466 U.S. 2, 13–18 (1984). In other words, to determine whether to apply the per se rule in the first instance, courts employ a rule of reason type inquiry, examining the defendant’s market power and sometimes the anticompetitive effects in the tied market.

For more information on the rule of reason and the per se rule, see the practice note Standards to Assess the Legality of Conduct in Antitrust Cases. Tying arrangements are now per se unlawful if they possess the following four elements:

• (i) Two separate products or services are involved
• (ii) The sale or agreement to sell one product or service is conditioned on the purchase of another
• (iii) The seller has sufficient economic power in the market for the tying product to enable it to restrain trade in the market for the tied product
• (iv) A not insubstantial amount of interstate commerce in the tied product is affected

See, e.g., Gordon v. Lewistown Hosp., 423 F.3d 184, 214 (3d Cir. 2005). Each of these elements is discussed below. Some courts have modified the third element to include an anticompetitive effects test. Some circuits have added an additional element: that the seller have an economic interest in the tied product (which is obviously satisfied where the seller sells both the tying and tied products). See, e.g., Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. 2006).

For the first element, two separate products, determining whether two products are involved turns “not on the functional relation between them, but rather on the character of the demand for the two items.” Jefferson Parish, 466 U.S. at 19. For there to be two products at issue, the products must be distinguishable in the eyes of buyers. For example, courts have found the existence of two separate products when the alleged tie involves cars and car advertising; debit and credit cards; and multistate and state-specific bar review courses. On the other hand, courts have declined to find separate products for truck engines and warranties on those engines; popular and hard-to-sell cars; and educational materials and their delivery. If you are trying to determine whether there are separate products for purposes of tying, you should focus on whether customers would want to buy the products separately.

For the second element, conditioning, most courts require some proof of coercion for a plaintiff to establish that a sale was conditioned. An express offer to sell the products separately will tend to negate the element of coercion, if the offer is one that at least some buyers could rationally accept. The coercion test is aimed at distinguishing those transactions in which the purchaser voluntarily acquires bundled goods from those in which the seller compels the purchase of bundled goods. For example, in the burger-fries-drink example where a customer can purchase these three items together for less than the total price if they bought each item separately, there is no coercion. Some customers may want to buy only the burger (because they would rather eat some other calorie-rich food instead of the fries), and the price for the burger alone compared to the bundled cost of the three products is low enough that the customer does not feel compelled to buy all three products even though the only thing that the customer wants to buy from this vendor is the burger.

The third element requires that the defendant have sufficient market power to restrain trade in the market for the tied product. A defendant will only have sufficient economic power if it has market power. Illinois Tool Works v. Independent Ink, 547 U.S. 28 (2006). As Justice O’Connor explained in Jefferson Parish, if the seller does not have “control or dominance over the tying product, the seller could not use the tying product as an effectual weapon to pressure buyers into taking the tied item.” 466 U.S. at 34. Consequently, although the per se label has sometimes been used in analyzing tying arrangements, it does not apply in the same way as it does with other per se offenses, such as horizontal price fixing agreements or market allocation. Instead, before applying the per se rule to a tying claim, courts will determine whether the seller has market power or whether there are anticompetitive effects from the tying arrangement. Unless a seller’s market power is greater than 30%–35%, it is highly unlikely that the market power element of a tying claim will be satisfied.

In determining whether the fourth element (substantial amount of commerce in the tied product) is met, courts focus on the absolute dollar amount of the commerce affected, not whether the amount of commerce represents a substantial share of the market. Telerate Sys. V. Caro, 689 F. Supp. 221, 234 (S.D.N.Y. 1988). The controlling standard is “whether a total amount of business, substantial enough in terms of dollar-volume so as not to be merely de minimis, is foreclosed to competitors by the tie.” Fortner Enters. v. U.S. Steel Corp., 394 U.S. 495, 501 (1969). The dollar amounts, however, can be relatively small. For example, in Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421, 1426 (9th Cir. 1995), the court stated that “a dollar volume of $100,000 per year for an unspecified number of years would hardly be de minimis.” But the foreclosure of that commerce must result from the tie, rather than from external conduct (or from some other wrongful conduct). In re Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litigation, 871 F.3d 1093 (10th Cir. Sep. 19, 2017).

A tying arrangement that is not a per se violation may still be unlawful under the rule of reason. As a practical matter, however, it is difficult for a plaintiff to establish liability under the rule of reason if the defendant does not have market power. A rule of reason violation requires that there be anticompetitive effects, which are unlikely to arise if the defendant has a low market share. For example, in DSM Desotech, Inc. v. 3D Sys. Corp., 2013 U.S. Dist. LEXIS 13017, *38 (N.D. Ill. Jan. 31, 2013), the court dismissed tying claims based on plaintiff’s failure to show market power—and the court considered this sufficient to dismiss the tying claim under the per se rule. The court also dismissed an alternative claim that the tying arrangement was illegal under the rule of reason. At least one court has held that a plaintiff who cannot show market power in the tying market might still be able to show anticompetitive effects in the tied-product market (although even that court found no rule of reason violation on the facts before it). See Town Sound & Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 477 (3d Cir. 1992) (en banc).

It is important to remember that although a tying agreement may injure a customer (by requiring it to buy an unwanted product), it can also injure the seller’s competitors (by preventing them from competing for business in the tied product). Consequently, foreclosed competitors are potential claimants. Palmyra Park Hospital, Inc. v. Phoebe Putney Memorial Hospital, 604 F.3d 1291, 1303 (11th Cir. 2010). Cf. NicSand, Inc. v. 3M Co., 507 F.3d 442 (6th Cir. 2007) (en banc) (competitor standing in exclusivity case).

Full Line Forcing

With full line forcing, the manufacturer requires its reseller to carry the manufacturer’s entire product line (or at least all its products within a given product family). For example, a soft drink manufacturer might require the reseller to carry not only its cola products, but also its lemon-lime products. Generally, full line forcing agreements do not prohibit the retailer from selling other manufacturers’ products.

Full line forcing can be analyzed as a tying arrangement because as a condition of buying one product, the reseller must buy all the other products in the line as well. Nevertheless, courts are more likely to analyze full line forcing agreements under the rule of reason. See, e.g., Smith Mach. Co. v. Hesston Corp., 878 F.2d 1290, 1297 (10th Cir. 1989). In the absence of evidence that the retailer is contractually restricted from handling competitive products, courts generally uphold full line requirements. See, e.g., Colorado Pump & Supply Co. v. Febco, Inc., 472 F.2d 637, 640 (10th Cir. 1973).

Technological Ties

Technological advances have raised the issue of technological tying. Technological tying involves combining two complementary products using technology. Courts are particularly reluctant to use the per se rule for technological ties. For example, in Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 542 (9th Cir. 1983), Kodak developed a new camera that could not be used without the new film, chemicals, and paper that Kodak also developed. The Ninth Circuit found that applying the per se rule in this case could hinder competition and innovation, particularly in industries where the technology is developing. Two decades later, the D.C. Circuit reached a similar conclusion in the Microsoft antitrust litigation. Microsoft had bundled its internet browser product with the Window operating system. The D.C. Circuit concluded that technological integration is common in some industries and can produce efficiencies that other kinds of ties do not produce. Consequently, the court rejected the per se treatment of the technological tie and remanded the case for analysis under the rule of reason. United States v. Microsoft Corp., 253 F.3d 34, 84–97 (D. C. Cir. 2001) (en banc).

Reciprocal Dealing

Reciprocal dealing can be considered a form of tying. In reciprocal dealing, Party A uses its economic power to insist that Party B buy a product from A in exchange for A’s agreement to buy a product from B. Courts use the same kind of analysis for reciprocal dealing as they do for other tying arrangements. For reciprocal dealing to be illegal, there must be an element of economic coercion. Reciprocal dealing cases are quite rare, and it is even rarer for a court to find liability in these cases.

The strength of the antitrust prohibition on tying agreements has diminished substantially over the last several decades, but tying agreements are still subject to the antitrust laws. Following are some practical guidelines when counseling clients regarding tying agreements.

Guidelines When Representing a Manufacturer

• •Understand your client’s business objective, if you are counseling on whether to adopt the proposed arrangement. Consider whether a tie-in is necessary to achieve the business purpose. For example, consider whether a bundle (rather than a strict tie) might be sufficient.
• •Determine your client’s market share in the narrowest product or service market that a potentially injured party could reasonably define. If that share is less than 30%–35%, then the legal risk of a tying arrangement is relatively low.
• •Determine whether competitors have adopted similar programs. Even assuming that your client has not discussed a competitive restraint with your client’s competitors, courts will assess the competitive effects of your client’s restraint against the realities of the market. A competitive restraint in a concentrated market can pose greater risk than the same restraint in a less concentrated market.
• •Know your client’s internal documents. Merely listening to your client’s oral description (or even written description to counsel) of the business rationale for the proposed conduct may not be sufficient. It is important to review any documents in which the client may have described the proposed restraint and its rationale, because those documents are what you will have to deal with in litigation, and the document may contain a different description of the restraint than the description of the restraint that the client provided to you. For example, the marketing director’s memorandum proposing the program to the VP-Marketing may only have described how a tying arrangement will maximize revenue by preventing competition in the market for the tied product. You should encourage your client to make sure that descriptions of a proposed program explain how the restraint will advance interbrand competition or otherwise help end-users (e.g., by providing a better overall product experience, strengthening the ability of the branded equipment to compete with other brands of equipment).

Guidelines When Representing a Reseller

• •Understand the nature of the vertical restraint. Just as you would when counseling a manufacturer, you should understand what the program does and what exactly the restraint permits or prohibits.
• •Determine whether there really is a tie. Sometimes a client will tell you that it is being forced to buy an unwanted product when in fact the supplier is simply offering a bundle and is willing to sell the tying product separately—or your client has not asked whether it can buy the tying product separately.
• •Determine whether your client has succumbed to the requirement of buying an unwanted product. If it hasn’t, then there is no “agreement” and thus no violation of Section 1 of the Sherman Act or Section 3 of the Clayton Act. (Your supplier’s competitor may still use the tying practice as part of a monopolization claim, though, because other customers may have been coerced into an “agreement” to buy the tied product.)
• •Ask whether your client played any role in securing the restraint. If your client asked for the restraint (for example, to protect itself from discounting rival resellers by inviting the manufacturer to impose a tying arrangement), and particularly if it joined other resellers in asking for it, inquire into the circumstances to determine whether someone could claim that the manufacturer is simply orchestrating or helping to police a cartel among your client and its competitors.