Tying (commerce)

Horizontal tying is the practice of requiring consumers to pay for an unrelated product or service together with the desired one.[1] A hypothetical example would be for Bic to sell its pens only with Bic lighters. (However, a company may offer a limited free item with another purchase as a promotion.)

Vertical tying is the practice of requiring customers to purchase related products or services together, from the same company.[1] For example, a company might mandate that its automobiles could only be serviced by its own dealers. In an effort to curb this, many jurisdictions require that warranties not be voided by outside servicing; for example, see the Magnuson-Moss Warranty Act in the United States.

Certain tying arrangements are illegal in the United States under both the Sherman Antitrust Act,[2] and Section 3 of the Clayton Act.[3] A tying arrangement is defined as "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees he will not purchase the product from any other supplier."[4] Tying may be the action of several companies as well as the work of just one firm. Success on a tying claim typically requires proof of four elements: (1) two separate products or services are involved; (2) the purchase of the tying product is conditioned on the additional purchase of the tied product; (3) the seller has sufficient market power in the market for the tying product; (4) a not insubstantial amount of interstate commerce in the tied product market is affected.[5]

For at least three decades, the Supreme Court defined the required "economic power" to include just about any departure from perfect competition, going so far as to hold that possession of a copyright or even the existence of a tie itself gave rise to a presumption of economic power.[6] The Supreme Court has since held that a plaintiff must establish the sort of market power necessary for other antitrust violations in order to prove sufficient "economic power" necessary to establish a per se tie.[7] More recently, the Court has eliminated any presumption of market power based solely on the fact that the tying product is patented or copyrighted.[8]

In recent years, changing business practices surrounding new technologies have put the legality of tying arrangements to the test. Although the Supreme Court still considers some tying arrangements as per se illegal, the Court actually uses a rule-of-reason analysis, requiring an analysis of foreclosure effects and an affirmative defense of efficiency justifications.[9]

In 1970, Congress enacted section 106 of the Bank Holding Company Act Amendments of 1970 (BHCA), the anti-tying provision, which is codified at 12 U.S.C. § 1972. The statute was designed to prevent banks, whether large or small, state or federal, from imposing anticompetitive conditions on their customers. Tying is an antitrust violation, but the Sherman and Clayton Acts did not adequately protect borrowers from being required to accept conditions to loans issued by banks, and section 106 was specifically designed to apply to and remedy such bank misconduct.

Banks are allowed to take measures to protect their loans and to safeguard the value of their investments, such as requiring security or guaranties from borrowers. The statute exempts so-called “traditional banking practices” from its per se illegality, and thus its purpose is not so much to limit banks' lending practices, as it is to ensure that the practices used are fair and competitive. A majority of claims brought under the BHCA are denied. Banks still have quite a bit of leeway in fashioning loan agreements, but when a bank clearly steps over the bounds of propriety, the plaintiff is compensated with treble damages.

At least four regulatory agencies including the Federal Reserve Board oversee the activities of banks, their holding companies, and other related depository institutions. While each type of depository institution has a “primary regulator”, the nation's “dual banking” system allows concurrent jurisdiction among the different regulatory agencies. With respect to the anti-tying provision, the Fed takes the preeminent role in relation to the other financial institution regulatory agencies, which reflects that it was considered the least biased (in favor of banks) of the regulatory agencies when section 106 was enacted.[24]

Tying is the "practice of a supplier of one product, the tying product, requiring a buyer also to buy a second product, the tied product".[25] The tying of a product can take various forms,[26] that of contractual tying[27] where a contract binds the buyer to purchase both products together, refusal to supply until the buyer agrees to purchase both products, withdrawal or withholding of a guarantee where the dominant seller will not provide the benefit of guarantee until the seller accepts to purchase that party's product,[28] technical tying occurs when the products of the dominant party are physically integrated and making impossible to buy the one without the other[29] and bundling where two products are sold in the same package with one price. This practises are prohibited under Article 101(1)(e) and Article 102(2)(d) and may amount to an infringement of the statute if other conditions are satisfied. However, it is noteworthy that the Court is willing to find an infringement beyond those listed in Article 102(2)(d), see Tetra Pak v Commission.[30]

The Guidance on Article 102 Enforcement Priorities sets out in which circumstances it will be appropriate taking actions against tying practices. First, it must be established whether the accused undertaking has a dominant position in the tying or tied product market.[31] Subsequently, the next step is to determine whether the dominant undertaking tied two distinct products. This is important as two identical products cannot be considered tied under Article 102(2)(d) formulation that states products will be considered tied if they have no connects ‘by their nature or commercial usage’. This arises problems in the legal definition of what will amount to tying in scenarios of selling cars with tires or selling a car with a radio. Hence, the Commission provides guidance on this issue by citing the judgement in Microsoft[29] and states that "two products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product".[32] Next issue is whether the customer was coerced to purchase both the tying and the tied products as Article 102(2)(d) suggests: ‘making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations’. In situations of contractual stipulation, it is clear that the test will be satisfied;[33] for an example of a non-contractual tying see Microsoft.[34] Furthermore, for an undertaking to be deemed anti-competitive is whether the tie is capable of having foreclosure effect.[35] Some examples of tying practices having an anti-competitive foreclosure effect in case law are the IBM,[36] Eurofix-Bauco v Hilti,[37] Telemarketing v CLT,[38] British Sugar[39] and Microsoft.[29] Subsequently, the defence available for the dominant undertaking is that it can provide that tying is objectively justified or enhances efficiency and the commission is willing to consider claims that are tying may result in economic efficiency in production or distribution that will bring benefit to the consumers.[40]

• Complementary good
• Iunctim
• Loss leader
• The OSx86 Project or 'Hackintosh', breaking the tie Apple holds between its hardware and Mac OS X to run the operating system on non-Apple hardware.
• Product bundling
• Product churning
• Vendor lock-in
• Digital rights management
• Tying of the iPhone to AT&T

• Donald Turner, Tying Arrangements Under the Antitrust Laws, 72 Harv. L. Rev. 50 (1958);
• George J. Stigler, A Note On Block Booking, 1963 Supreme Court Review 152;
• Kenneth Dam, Fortner Enterprises v. United States Steel: Neither a Borrower Nor A Lender Be, 1969 S. Ct. Rev. 1;
• Timothy D. Naegele, Are All Bank Tie-Ins Illegal?, 154 Bankers Magazine 46 (1971);
• Richard A. Posner, Antitrust: An Economic Perspective, 171-84 (1976);
• Joseph Bauer, A Simplified Approach to Tying Arrangements: A Legal and Economic Analysis, 33 Vanderbilt Law Review 283 (1980);
• Richard Craswell, Tying Requirements in Competitive Markets: The Consumer Protection Rationale, 62 Boston University L. Rev. 661 (1982);
• Roy Kenney and Benjamin Klein, The Economics of Block Booking, 26 J. Law & Economics 497 (1983);
• Timothy D. Naegele, The Anti-Tying Provision: Its Potential Is Still There, 100 Banking Law Journal 138 (1983);
• Victor Kramer, The Supreme Court and Tying Arrangements: Antitrust As History, 69 Minnesota L. Rev. 1013 (1985);
• Benjamin Klein and Lester Saft, The Law and Economics of Franchise Tying Contracts, 28 J. Law and Economics 245 (1985);
• Alan Meese, Tying Meets The New Institutional Economics: Farewell to the Chimera of Forcing, 146 U. Penn. L. Rev. 1 (1997);
• Christopher Leslie, Unilaterally Imposed Tying Arrangements and Antitrust's Concerted Action Requirement, 60 Ohio St. L.J. 1773 (1999);
• John Lopatka and William Page, The Dubious Search For Integration in the Microsoft Trial, 31 Conn. L. Rev. 1251 (1999);
• Alan Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bull. 65 (1999);
• Keith N. Hylton and Michael Salinger, Tying Law and Policy: A Decision-Theoretic Approach, 69 Antitrust L. J. 469 (2001);
• Michael D. Whinston, Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know, 15 Journal of Economic Perspectives, 63-80 (2001);
• Christopher Leslie, Cutting Through Tying Theory with Occam's Razor: A Simple Explanation of Tying Arrangements, 78 Tul. L. Rev. 727 (2004); and
• Timothy D. Naegele, The Bank Holding Company Act's Anti-Tying Provision: 35 Years Later, 122 Banking Law Journal 195 (2005).