The Antitrust Litigator

The Antitrust Analysis of “Tying”

By Jeffery M. Cross

In my antitrust practice over the past 45 years, I have frequently had to address the antitrust law’s treatment of “tying” both in litigation and in counseling. Tying occurs when a party requires those wanting to purchase one product to purchase another as well. One area where tying frequently comes up is franchising. Franchisees are often required to buy products from the franchiser, leading to tying claims. Indeed, one court has noted that tying may be the most common non-price antitrust claim in franchise litigation.

The product that consumers or franchisees want to purchase is referred to as the “tying” product. The second product that a franchisee must purchase to obtain the first is referred to as the “tied” product. Often the seller has monopoly or market power in the tying product.

Some academics and commentators have questioned whether tying ever should be a concern of antitrust law. Even if a seller had a monopoly in the tying product, a monopolist can only obtain a single monopoly profit. Because having a monopoly by itself and earning monopoly profits is not illegal, there would be no anti-competitive effect from tying.

Others have argued that the single monopoly profit theory of tying applies only when there are certain key assumptions made regarding the market. If any of those assumptions are not valid, there can be anti-competitive effects with tying. Depending on the market conditions, tying can increase monopoly profits, and lower both consumer and total welfare. Tying can also reduce the competitiveness of rivals in the tied product market and restrict entry into the tying market.

Under the antitrust laws, the analysis of tying applies a “hybrid” per se rule. Tying is deemed unlawful only if the tying seller has sufficient market power in the tying product to force buyers to take an otherwise unwanted tied product, and the tying arrangement has a substantial effect on the tied market.

The antitrust consideration of tying is a hybrid per se analysis because it requires some of the features of the Rule of Reason — a determination of market power and impact upon the tied product market — without the benefit of considering the pro-competitive justifications permitted under the Rule of Reason.

Significantly, the antitrust analysis of tying goes beyond just a determination of whether there is market power in the tying market. There must be substantial potential for an impact upon competition in the tied product market. For example, if only a single purchaser is affected, there is not enough impact in the tied product market. Or if a purchaser is forced to buy a product that it would not otherwise have bought, there is also not a sufficient impact to the tied product market. Furthermore, if consumers can purchase the product separately in the market, there is no anti-competitive effect from the tying.

The oft-cited example is a single grocery store selling sugar and flour as a package. Consumers shopping at that store who want to buy flour must also buy sugar. However, there can be no anticompetitive effect and no violation of the antitrust laws if there are many stores in the market that do not sell sugar and flour as a package.

There are generally four elements that must be established to find a violation of the antitrust laws with tying: The tying and tied products are two separate products; the sale or agreement to sell the tying product is conditioned on the purchase of the tied product; the defendant has sufficient market power in the tying product to force a purchaser to purchase the tied product; and there is an anti-competitive effect in the market for the tied product.

It is significant that the first element in the foregoing list is a determination of whether there are two separate, distinct products. Unless there are two products, selling them as a package is not likely to have an adverse impact on competition.

The test to determine whether there are two products is whether there is enough consumer demand for the tied product separate from the tying product so that it would be efficient for a firm to provide the tied product separately.

Courts classify a package sale of component products — such as a left shoe and a right shoe, or an alternator and a car — as a single product when there are obvious economies in jointly selling the components. Consumers find it very efficient to buy a car with the alternator already installed. In such a situation, a package sale is not considered the tying of two distinct products.

However, the Supreme Court has rejected the idea that, if two products are functionally linked — in other words, one product is useless without the other — then there cannot be two distinct products. If such a functionally linked test were applied, then a court would be forced to conclude that there could never be separate markets for cameras and film, computers and software, or automobiles and tires. Clearly, there is enough consumer demand for each of these products that it is efficient to sell them separately. Consequently, they are considered two separate products.

Frequently, in franchising, the question arises whether the trademark is a separate product from the goods that the franchisor may insist the franchisee buy. For example, for quality control reasons, a pizza franchisor may insist that its dough and sauce must be purchased by its franchisees. And courts have held that a trademark is not a separate product from the product it denotes, i.e., the trademark Buick and the car bearing that trademark.

In franchising, if the trademark identifies a method of doing business, it has been held to be a separate product from the products the franchiser may require the franchisee to buy, such as the dough and sauce example. On the other hand, if the product is an essential ingredient to the franchised system’s formula for success, there is only a single product. An example would be the unique herbs and spices used in preparing chicken sold through a chicken franchise.

The bundling of products and services is ubiquitous in the economy. Two common examples are season tickets and fast food value meals. Consequently, it is important for those engaging in commerce to understand the antitrust law of tying and its application to the many instances of bundling.

Jeffrey Cross is a columnist for Today’s General Counsel and a member of the Editorial Advisory Board. He is a partner in the Litigation Practice Group of Freeborn and Peters LLP and a member of the firm’s Antitrust and Trade Regulation Group. jcross@freeborn.com