Tying and bundled discounts

• Pages: 163-221

CHAPTER V

TYINGANDBUNDLEDDISCOUNTS

A.Introduction

Thischapteraddresses the law,policy,and economics oftying and

bundled discounts. Tyingand bundled discounting areoftenclosely

relatedpracticesfrom a business and economics perspective.Theyare,

however, analyzedquitedifferently under the antitrustlaws.Tyingis

addressedprimarily under Section 1 of the ShermanAct,whichappliesto

concertedaction(contracts or combinations inrestraint of trade). Bundled

pricing, incontrast,isaddressed under Section 2, whichappliesto

unilateralconduct, specificallymonopolization or attempted

monopolization. Tyingisoneoftheoldest doctrines ofantitrustlaw,and

historicallywasconsidered one of the moreperniciousantitrustviolations,

whereas bundled discounting isa relatively novel issueinantitrustlaw and

generally considered to be anticompetitiveonlyrarely.

A tyingarrangement(or a “tiein”)isoneinwhich a seller conditions

the purchase ofoneproduct upon the purchase of a second, separate

product. The principal antitrustconcernwithtying arrangements isthat a

sellercaninsomecircumstancesleverage power inone marketto

foreclosecompetitionin another market.Onthe other hand, tying

arrangementsoftenareefficiency-enhancing. Thus,juristsand

commentators alikehave struggled overtimetoestablishappropriatelegal

standardsthatdistinguish tyingarrangementsthataretrulyanticompetitive

from those thatarenot.

A typicalbundled discount involvesoffering the saleoftwodifferent

products together ata lowerpricethanthe combined pricesof the two

products whensoldseparately. “Bundled discountsarepervasive and

examples abound. Season tickets,fastfoodvaluemeals,all-in-one home

theatresystems—allare bundled discounts.” 1 A bundled discountis

distinctfrom a tyingarrangementinthattheconsumer hasthe optionof

1. SeeCascadeHealthSolutionsv.Peacehealth,502F.3d895,905(9thCir.

2007).

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164AntitrustLawandEconomicsofProductDistribution

buying one or more of the products inthe bundle separately;whileshe

maybe enticed by the discount totakethe entire bundle, sheisableto

purchaseless than theentire bundle. Whilecommentatorsagreethatmany

bundled discountsareefficientand procompetitive,2 the potential antitrust

concern issimilartothatwithtying: a sellercaninsomecircumstances

leverage power inonemarkettoforeclosecompetitionin another market.

Currently,the antitrust standard for evaluating bundled discountsis

uncertain; thetwofederal courts ofappealstoaddress bundled discounts

havetaken quite different approaches.

The followingsectionsdiscuss thecompetitive concerns and caselaw

relevanttothe treatmentof tying and bundled discountsinfederalantitrust

law.Section B of this Chapter addressestying,Section C addresses

bundled discounts, and Section D addressesantitrustinjury and damages.

B.Tying

A tyingarrangementis“anagreement by a partytosellone product

[the tying product] butonly on the condition thatthebuyeralsopurchases

a different (ortied) product, or atleastagreesthathewillnotpurchasethat

product from any other supplier.”3Tyingarrangementsmay be challenged

under Section 1 oftheShermanAct,Section 3 oftheClaytonAct,and

Section 5 oftheFTCAct.4Injudicialdecisions,the substantiveanalysis

has beenthesame under each of those provisions.

Section 1 appliestotyingarrangementsbecausethearrangementis

considered a “contract”betweenthe buyer and seller that “satisfiesthe

concertedactionelement of section 1.”5

2. Seeid. at906n.6; ANTITRUSTMODERNIZATIONCOMMISSION, REPORTAND

RECOMMENDATIONS95(2007).

3. NorthernPac.Ry.Co.v.UnitedStates,356U.S.1, 5-6 (1958).

4. SeeIll.ToolWorksv.Indep.Ink,547U.S.28,34(2006)(notingtying

arrangementshavebeencondemnedunderSection 1 oftheShermanAct,

Section 3 oftheClaytonAct,Section 5 oftheFTCAct,andunderthepatent

misusedoctrine).

5. Systemcare,Inc.v.Wang Labs.Corp.,117F.3d1137,1140-42(10thCir.

1997).(rejectinganargumentthattyingshouldbeviewedaspurely

unilateralconduct:“Theessenceofsection1’scontract,combination,or

conspiracyrequirementinthetyingcontextistheagreement, however

reluctant,of a buyertopurchasefrom a seller a tiedproductorservicealong

with a tyingproductorservice.Toholdotherwisewouldbetoreadthe

words‘contract’and‘combination’outofsection1.”).

TyingandBundledDiscounts165

Section 3 of the ClaytonActstatesthat:

Itshallbeunlawful . . . toleaseormake a saleorcontractforsaleof

goods,wares,merchandise,machinery,suppliers,orother

commodities . . . onthecondition,agreement,orunderstandingthatthe

lesseeorpurchasershallnotuseordealinthegoods . . . ofa

competitor . . . wheretheeffect . . . maybetosubstantiallylessen

competition. . ..6

Section 3 appliesonlywhen both thetying and tiedproducts are “goods,

wares,merchandise,machinery,supplies, or other commodities,” thus

tyingarrangements involving servicesandintangibles (e.g., service

contracts,credit,warranties,franchises, and intellectualproperty licenses)

cannot be challenged under Section 3.7ThelimitedscopeofSection3,

however, ismostlyirrelevantbecause a tyingclaimbased on goods,

services,and otherintangibles may be brought under Section 1 of the

ShermanAct.8

Section 5 oftheFTCActis for themostpart coterminous with

Sections 1 and 2 of theShermanAct—albeititscontourscan be somewhat

more expansive—but Section 5 can be enforced only by the FTC.

Tyingarrangementsmayalsoconstitute conduct supporting a claim

for unlawful monopolization (or attempted monopolization) under Section

2 of the ShermanAct, in whichcase the analysisdiffersfrom a Section 1

claim. A Section 2 claimmayexistwheretyingisusedto unreasonably

maintain a monopoly position over the tying product, or wheretyingis

6. 15U.S.C. § 14.

7. See,e.g.,Martsv.Xerox,Inc.,77F.3d1109,1113n.6(8thCir.1996)

(classifyingwarrantiesasservicesthatareoutsidethereachof § 3);Advance

Bus.Sys. & SupplyCo.v.SCMCorp.,415F.2d55,61(4thCir.1969)(“the

saleofSCMpaperistiedtoSCMservicecontracts,whichdonotcome

withinthetermsoftheClaytonAct”);TeleAtlasN.V.v.NavteqCorp.,397

F.Supp.2d1184,1192(N.D.Cal.2005)(a“patentlicense”isnotwithin

thescopeof § 3).

8. See,e.g., JeffersonParishHosp.Dist.No. 2 v.Hyde,466U.S.2,24-26

(1984)(anesthesiologyservicestiedtootherfacilitiesandservicesof

hospital);FortnerEnters.v.U.S.SteelCorp.,394U.S.495(1969) (Fortner

I) (tyingproductwasfavorablecreditterms);NorthernPacific, 356U.S.at

7-8 (railwayservicestiedtoland);BookLocker.comv.Amazon.com,650

F.Supp.2d89,98(D.Me.2009)(onlinesaleschanneltiedtoprinting

services).