Tying and bundled discounts

• Pages: 163-221

CHAPTER V

TYING AND BUNDLED DISCOUNTS

A. Introduction

This chapter addresses the law, policy, and economics of tying and

bundled discounts. Tying and bundled discounting are often closely

related practices from a business and economics perspective. They are,

however, analyzed quite differently under the antitrust laws. Tying is

addressed primarily under Section 1 of the Sherman Act, which applies to

concerted action (contracts or combinations in restraint of trade). Bundled

pricing, in contrast, is addressed under Section 2, which applies to

unilateral conduct, specifically monopolization or attempted

monopolization. Tying is one of the oldest doctrines of antitrust law, and

historically was considered one of the more pernicious antitrust violations,

whereas bundled discounting is a relatively novel issue in antitrust law and

generally considered to be anticompetitive only rarely.

A tying arrangement (or a “tie in”) is one in which a seller conditions

the purchase of one product upon the purchase of a second, separate

product. The principal antitrust concern with tying arrangements is that a

seller can in some circumstances leverage power in one market to

foreclose competition in another market. On the other hand, tying

arrangements often are efficiency-enhancing. Thus, jurists and

commentators alike have struggled over time to establish appropriate legal

standards that distinguish tying arrangements that are truly anticompetitive

from those that are not.

A typical bundled discount involves offering the sale of two different

products together at a lower price than the combined prices of the two

products when sold separately. “Bundled discounts are pervasive and

examples abound. Season tickets, fast food value meals, all-in-one home

theatre systems—all are bundled discounts.” 1 A bundled discount is

distinct from a tying arrangement in that the consumer has the option of

1. See Cascade Health Solutions v. Peacehealth, 502F.3d 895, 905 (9th Cir.

2007).

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164 Antitrust Law and Economics of Product Distribution

buying one or more of the products in the bundle separately; while she

may be enticed by the discount to take the entire bundle, she is able to

purchase less than the entire bundle. While commentators agree that many

bundled discounts are efficient and procompetitive,2 the potential antitrust

concern is similar to that with tying: a seller can in some circumstances

leverage power in one market to foreclose competition in another market.

Currently, the antitrust standard for evaluating bundled discounts is

uncertain; the two federal courts of appeals to address bundled discounts

have taken quite different approaches.

The following sections discuss the competitive concerns and case law

relevant to the treatment of tying and bundled discounts in federal antitrust

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

bundled discounts, and Section D addresses antitrust injury and damages.

B. Tying

A tying arrangement is “an agreement by a party to sell one product

[the tying product] but only on the condition that the buyer also purchases

a different (or tied) product, or at least agrees that he will not purchase that

product from any other supplier.”3 Tying arrangements may be challenged

under Section 1 of the Sherman Act, Section 3 of the Clayton Act, and

Section 5 of the FTC Act.4 In judicial decisions, the substantive analysis

has been the same under each of those provisions.

Section 1 applies to tying arrangements because the arrangement is

considered a “contract” between the buyer and seller that “satisfies the

concerted action element of section 1.”5

2. See id. at 906 n.6; ANTITRUST MODERNIZATION COMMISS ION, REPORT AND

RECOMMENDATIONS 95 (2007).

3. Northern Pac. Ry. Co. v. United States, 356U.S. 1, 5-6 (1958).

4. See Ill. Tool Works v. Indep. Ink, 547U.S. 28, 34 (2006) (noting tying

arrangements have been condemned under Section 1 of the Sherman Act,

Section 3 of the Clayton Act, Section 5 of the FTC Act, and under the patent

misuse doctrine).

5. Systemcare, Inc. v. Wang Labs. Corp., 117F.3d 1137, 1140-42 (10th Cir.

1997). (rejecting an argument that tying should be viewed as purely

unilateral conduct: “The essence of section 1’s contract, combination, or

conspiracy requirement in the tying context is the agreement, however

reluctant, of a buyer to purchase from a seller a tied product or service along

with a tying product or service. To hold otherwise would be to read the

words ‘contract’ and ‘combination’ out of section 1.”).

Tying and Bundled Discounts 165

Section 3 of the Clayton Act states that:

It shall be unlawful . . . to lease or make a sale or contract for sale of

goods, wares, merchandise, machinery, suppliers, or other

commodities . . . on the condition, agreement, or understanding that the

lessee or purchaser shall not use or deal in the goods . . . of a

competitor . . . where the effect . . . may be to substantially lessen

competition. . ..6

Section 3 applies only when both the tying and tied products are “goods,

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

tying arrangements involving services and intangibles (e.g., service

contracts, credit, warranties, franchises, and intellectual property licenses)

cannot be challenged under Section 3.7 The limited scope of Section 3,

however, is mostly irrelevant because a tying claim based on goods,

services, and other intangibles may be brought under Section 1 of the

Sherman Act.8

Section 5 of the FTC Act is for the most part coterminous with

Sections 1 and 2 of the Sherman Act—albeit its contours can be somewhat

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

Tying arrangements may also constitute conduct supporting a claim

for unlawful monopolization (or attempted monopolization) under Section

2 of the Sherman Act, in which case the analysis differs from a Section 1

claim. A Section 2 claim may exist where tying is used to unreasonably

maintain a monopoly position over the tying product, or where tying is

6. 15U.S.C. § 14.

7. See, e.g., Marts v. Xerox, Inc., 77F.3d 1109, 1113 n.6 (8th Cir. 1996)

(classifying warranties as services that are outside the reach of § 3); Advance

Bus. Sys. & Supply Co. v. SCM Corp., 415F.2d 55, 61 (4th Cir. 1969) (“the

sale of SCM paper is tied to SCM service contracts, which do not come

within the terms of the Clayton Act”); Tele Atlas N.V. v. Navteq Corp., 397

F. Supp. 2d 1184, 1192 (N.D. Cal. 2005) (a “patent license” is not within

the scope of § 3).

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

(1984) (anesthesiology services tied to other facilities and services of

hospital); Fortner Enters. v. U.S. Steel Corp., 394U.S. 495 (1969) (Fortner

I) (tying product was favorable credit terms); Northern Pacific, 356 U.S. at

7-8 (railway services tied to land); BookLocker.com v. Amazon.com, 650

F. Supp. 2d 89, 98 (D. Me. 2009) (online sales channel tied to printing

services).