Tying conspiracies.

• Author: Leslie, Christopher R.

ABSTRACT

Antitrust law has long condemned tying arrangements when they are imposed by a single dominant firm. However, tying jurisprudence does not recognize that tie-ins can also occur as the result of a conspiracy among competitors. Consequently, antitrust doctrine fails to appreciate the unique anticompetitive dangers of concerted tying arrangements. After providing real-world examples of tying conspiracies, Professor Leslie explains how concerted tying arrangements present a far greater threat to competitive markets than traditional, unilaterally imposed tying arrangements. Because tying jurisprudence evolved without considering the existence or effects of concerted tie-ins, the current test for evaluating the legality of tying arrangements is inappropriately lenient to tying conspiracies. This is completely inconsistent with one fundamental principle of American antitrust law: concerted action should be treated more harshly than unilateral conduct. Finally, the Article advocates per se illegality for tying conspiracies and argues that greater appreciation of concerted tie-ins can inform the ongoing academic debate about tying arrangements more generally.

TABLE OF CONTENTS INTRODUCTION I. THE EVOLUTION OF TYING DOCTRINE AND THE FAILURE TO RECOGNIZE TYING CONSPIRACIES II. THE INHERENT ANTICOMPETITIVE DANGER OF TYING CONSPIRACIES A. Examples of Tying Conspiracies B. The Anticompetitive Effects of Tying Conspiracies 1. Exclusionary Effects 2. Anticompetitive Consequences for Consumers a. Price Effects b. Choice Effects c. Reduced Innovation 3. Conspiracies and the Probability of Tying III. THE FAILURE TO APPRECIATE THE ANTICOMPETITIVE THREAT OF TYING CONSPIRACIES IV. THE PROPER LEGAL TREATMENT OF TYING CONSPIRACIES A. Per Se Principles B. The Case for Condemning Tying Conspiracies as Per Se Illegal C. Naked Tying Conspiracies Versus Ancillary Restraints D. Traditional Tying Defenses and the Absence of Legitimate Business Justifications for Tying Conspiracies E. Aggregate Market Effects and the Need To Limit Safe Harbors in Tying Law V. AN ANTITRUST CAUSE OF ACTION FOR TYING CONSPIRACIES A. Elements for Per Se Illegal Tying Conspiracies 1. Agreement a. Agreement Among Competitors b. Agreement with Buyer Unnecessary 2. Two Products B. Elements the Plaintiff in a Tying Conspiracy Case Need Not Prove 1. Market Power 2. Coercion 3. Anticompetitive Effects CONCLUSION INTRODUCTION

Tying arrangements, or tie-ins, exist when a firm refuses to sell a desired product (the tying product) unless the consumer agrees to purchase another product (the tied product) as well. The standard definition of a tie-in assumes that a single firm is unilaterally imposing the requirement on its customers. This is misleading. (1) While there is much confusion within individual antitrust doctrines, the broad contours of antitrust law are well-established. Concerted action is evaluated under section 1 of the Sherman Act, whereas section 2 focuses on unilateral conduct. (2) When confronted with an alleged antitrust violation, the first question that antitrust practitioners and judges will ask is whether the conduct is concerted or unilateral. (3) This informs the observer whether to employ the apparatus of section 1 or section 2. (4)

Tying arrangements violate this most basic precept of antitrust law--the distinction between concerted and unilateral conduct. Most tying arrangements are unilaterally imposed, with no agreement among co-conspirators. Yet courts evaluate these tying arrangements under section 1 of the Sherman Act. Because tying law mischaracterizes unilaterally imposed tying arrangements as concerted action, antitrust law currently fails to recognize that tying arrangements can actually be the result of concerted action and that such tying conspiracies can create a greater anticompetitive threat than a traditional tying requirement imposed by a single dominant seller.

Although much ink has been spilled on the problems of tying arrangements jurisprudence generally, no scholarship has directly confronted the issue of tying conspiracies. A tying conspiracy exists when a firm that sells both the tying and tied products agrees with a competing firm that sells the same products that each will impose a tying requirement on its customers. By entering into such agreements with these other firms, a tying seller can significantly increase the anticompetitive effects of a tying arrangement. This Article seeks to fill this gap in the antitrust literature and case law by explaining the anticompetitive risks of tying conspiracies and by advocating a true per se rule for such conspiracies.

Part I will lay out the current state of the law on tying arrangements. American tying jurisprudence requires no separate inquiry into whether the challenged tie-in is the result of concerted action among different firms. This is a significant oversight. Part I will explore the origins of the current legal test for evaluating tying arrangements and then explain the distinction between unilateral and concerted tying arrangements. Finally, Part I identifies the three varieties of concerted arrangements, which are analyzed more thoroughly in Parts II through IV.

Part II introduces the discussion of tying conspiracies. A tying conspiracy exists when two or more firms--who are competitors in both the tying and tied product markets--agree to impose tying arrangements on their respective customers. After giving real-world examples of such tying conspiracies, Part II will explain the anticompetitive effects of tying conspiracies on both competitors and consumers. Efficient competitors could be kept out of the market for the tying product, the tied product, or both. Consumers will face higher prices and reduced choice. Further, tying conspiracies could decrease firms' incentives to innovate.

Part III shows how current antitrust doctrine fails to appreciate the anticompetitive risks inherent in tying conspiracies. As a result, concerted tying arrangements are sometimes treated more leniently than unilateral tying arrangements--an outcome completely at odds with antitrust theory and jurisprudence.

Part IV advocates that courts treat tying conspiracies as per se illegal. After discussing the criteria that the Supreme Court has applied in determining whether a particular type of restraint falls in a per se category, Part IV explains how tying conspiracies satisfy all of the criteria for per se condemnation. Given the severity of per se condemnation, it is important to distinguish between a naked tying conspiracy and an ancillary restraint that may only appear to be concerted tying; only the former deserves per se treatment. Next, Part IV discusses the defenses that courts have considered in traditional tying cases and explains why these arguments do not apply to tying conspiracies.

Finally, Part V lays out the elements that should be necessary to prove a tying conspiracy cause of action under section 1 of the Sherman Act. While a tying conspiracy plaintiff must demonstrate an agreement among competitors to link two products, there should be no need for the additional elements of market power, coercion, and anticompetitive effects that courts consider in traditional tying litigation.

1. THE EVOLUTION OF TYING DOCTRINE AND THE FAILURE TO RECOGNIZE TYING CONSPIRACIES

   Antitrust law is premised on the fundamental distinction between unilateral conduct and concerted action, Under section 2 of the Sherman Act, "the conduct of a single firm [is] unlawful only when it actually monopolizes or dangerously threatens to do so." (5) In contrast, section 1 of the Sherman Act condemns agreements in restraint of trade if they are unreasonable. (6) This means that concerted action "is judged more sternly than unilateral activity." (7) As a result, a firm can engage in anticompetitive acts unilaterally that it cannot do pursuant to an agreement with others. The Supreme Court bases this differential treatment on the fact that "[c]oncerted activity inherently is fraught with anticompetitive risk. It deprives the marketplace of the independent centers of decision making that competition assumes and demands." (8) Because of this dichotomy, the first inquiry in almost all antitrust cases is whether the defendant engaged in the challenged conduct unilaterally or in concert with others. Not so in tying cases. Tying law developed on a separate track from nontying jurisprudence and, as a result, tying law does not embrace the fundamental unilateral-concerted distinction.

   Though Congress enacted the Sherman Act in 1890, the origins of Sherman Act tying law lie in the Clayton Act of 1914. (9) In the Supreme Court's first foray into tying requirements in 1912, the Court upheld the legality of tying arrangements under the Sherman Act. (10) In response, Congress enacted section 3 of the Clayton Act, which proscribed those tying arrangements that "substantially lessen competition or tend to create a monopoly in any line of commerce." (11) Instead of treating tying arrangements as merely a Clayton Act violation, the Supreme Court took the congressional enactment as a directive to condemn tying agreements under section 1 of the Sherman Act as well. (12) Thus, tie-ins are condemned under section 1 of the Sherman Act because Congress condemned them under section 3 of the Clayton Act.

   These awkward origins of the section 1 tying claim may help explain why tying jurisprudence developed along a separate path from other section 1 causes of action. Most section 1 claims grew organically from the common law on agreements in restraint of trade. But section 1 tying claims had a distinct origin. Tying claims matured in their adoptive home of section 1 of the Sherman Act but they never completely shed the influence of their birth parent, section 3 of the Clayton Act. And the structure of section 3 was quite different than that of section 1.

   The language of section 3 of the Clayton Act describes a tie-in...