Maple corporation conditions the sale of its syrup on the buyer's agreement to buy Maple's pancake mix. What type of arrangement is this? What factors would a court consider to decide whether this arrangement violates antitrust law?
This particular arrangement is called a “tying arrangement.” A tying arrangement is one in which a company agrees to sell something to another company, but only if the second company will buy something else as well. In this case, Maple Corporation says that it will sell the maple syrup, but only if the buyer will buy the pancake mix as well. This clearly qualifies as a tying arrangement.
Tying arrangements may or may not be illegal under American antitrust law. If a court had to decide whether this tying arrangement was legal, it would have to think about the purpose of the arrangement. If the purpose was to force the buyer to buy the pancake mix in order to get the syrup, it would probably be illegal. The court would also have to look at the relative powers of the two parties. Does Maple Corporation have the power to force the buyer to agree to this arrangement? If the seller’s power is much greater than the buyer, it is likely that the arrangement is illegal. Finally, the court would have to look at how much the arrangement would restrain trade. The greater the restraint of trade, the more likely it would be that the arrangement would be deemed illegal.
When one product is sold to a customer only on the condition that something else, usually less desirable, is purchased as well, this is known as a tying arrangement. This does not have to be an illegal act, and there is no one law that specifically outlaws tying arrangements. They were always in the mind of lawmakers who imposed the Sherman Antitrust Act, the Clayton Act, the FTC Act, and others, but trade laws do not by and large prosecute specific defined actions because it is too hard to define the actions. Rather, trade legislation asks whether harm is done.
In the case of a tying arrangement, several issues are considered. Is the party creating the tying arrangement attempting to do something malicious? Does that party have the power (market share or other influence) to enforce a tying arrangement so that the subject of the arrangement either has no choice or faces economic harm? Is the subject of the arrangement in an economically disadvantaged position, or does the subject face economic harm from the arrangement (this is different from the prior question, because the courts can ask separately whether the enforcer or the subject is a basis for prosecuting the enforcer)? Then there are questions such as whether the tying party gains appreciably in the deal, or whether the subject party loses appreciably. Next, can the two tied products be purchased separately, or do they really have to belong together (a left and a right shoe would not be construed as a tying arrangement, nor would the pants and the jacket of a suit, but forcing a store to buy shirts because the store wants to buy jeans might be considered tying)? And there can be many other questions raised.
When a tying arrangement is prosecuted, the court has to examine the specifics of each individual case. Even if the enforcer of the tying arrangement has great power over the subject, if he can't actually cause significant economic or anticompetitive harm, there is no case. If the dollar value or competitive value of the tying arrangement is fundamentally weak, it is hard to prove a case. Any particular case will be tried in part on prior case law that sets expectations for what the courts will tolerate or not, and in part on whether damage is done and to what degree. Sometimes an egregious tying act can prompt a court to find against the enforcer even if it is relatively irrelevant. And cases can be incredibly complex, such as tying arrangements involving purchase of cell phones and provision of service.
Often technical issues dominate a case, as with cell phones tying arrangements (which occur incessantly). The nature of tying arrangements has changed demonstrably over the past thirty years or so; they are less about selling two pieces of merchandise and more about selling service with a product (as in the case of cell phones). This is partly because the classic two-pieces-of-merchandise cases have extensive case law to guide businesses, and partly because technology and services are open to many more ambiguous interpretations of what might be tying. Tying arrangements are not always called such but are often the underlying argument in major international cases involving technology competition.
As the first answer notes, tying arrangements are not inherently anti-competitive, and thus may or may not be illegal under the Sherman Antitrust Act. However, the focus is not likely to be on the relative bargaining power of the two parties, but rather the market power of the party that is doing the tying.
Under case law, the Court's decision in Jefferson Parish is likely to be controlling. In that decision, the court elucidates the basic analysis of a tying arrangement. The crucial issue is whether a party has enough market power in the tying product (in this case, the syrup), that forcing the other party to buy the tied product (pancake mix), has anticompetitive consequence in the market for the tied product.
Our cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all or might have preferred to purchase elsewhere on different terms. When such "forcing" is present, competition on the merits in the market for the tied item is restrained, and the Sherman Act is violated.
So the central issue here would be the extent to which Maple Corporation exercises power in the syrup market. Do buyers practically have other choices, or is their market power in syrup strong enough that the tying arrangement is imposing constraints on competition in the market for pancake mix.
Tying arrangements are used to tie products, leases, services or franchises together between buyers and sellers. In cases involving a product, the seller sells the product to a buyer only if the buyer agrees to purchase an additional service or product. Although this practice is common, it might be considered in violation of the Sherman Antitrust Act and other laws.
Under What Laws Can Tying Be Challenged?
Tying can be challenged using several acts, including the Sherman Antitrust Act. In section one, the Sherman Antitrust Act precludes restraining trade in contracts. Further, in section two, the act prohibits monopolization. Others, such as the Federal Trade Commission Act, which forbids methods that unfairly block competition, and the Clayton Act, which disallows methods that foster exclusive arrangements that limit competition, may be used to challenge tying.
Are All Tying Arrangements Illegal?
The courts have evolved somewhat in their approach toward tying. Generally, the thought is that tying might not be anticompetitive, and in some cases, it might benefit competition. Some courts request proof that a particular tying arrangement has an anticompetitive outcome associated with it.
Tying is considered illegal only if certain conditions are met. If the buyer is coerced into a tying agreement in order to buy the product or the seller’s influence is capable of altering commerce to a substantial degree, the situation is illegal. In addition, illegality demands that two separate entities, services or products be involved. This means that the products are customarily bought separately by consumers. The Supreme Court ruled on this in Jefferson Parish Hospital v. Hyde in 1984 saying that if the items were not purchased separately then the possibility of the arrangement affecting competition would be eliminated.
Tying arrangements may or may not be illegal. The courts will evaluate tying arrangements on a case-by-case basis to determine if each individual case meets the necessary criteria to consider it so. In the event that it does, the tie may be broken. A defense may be raised that tying items together enables lower production costs and other benefits. The courts are generally willing to hear applicable arguments before making a decision.