Tying Arrangement - Explained
What is a Tying Arrangement?
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Table of ContentsWhat is a Tying Arrangement?Why is a Tying Arrangement Illegal?Academic Research on Tying Arrangements
What is a Tying Arrangement?
A tying arrangement is a market agreement where a seller agrees to sell a tying product to a customer on a condition that the customer purchases another product. A tying arrangement is regarded as a mandatory way of adding to the initial purchase of a product or service.
It is a conditional sales agreement reached between a seller and a buyer, once this agreement is in place, the buyer is mandated to purchase a different and additional product from the seller. A tying arrangement can be used for products, services, leases, franchises and some other exchanges. Sellers often use this arrangement to force or coerce a customer to purchase an unpopular or slow-selling product.
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Why is a Tying Arrangement Illegal?
In a tying arrangement, customers are also made to agree not to purchase a tied product from another seller, it must be from the seller who made the arrangement. This arrangement has however been challenged as illegal as some acts condemns its practices. Tying arrangement as described by some acts places restraint of free trade, leads to unfair market competition and also reduce market competition.
For instance, Section 1 of the Sherman Act, Section 3 of the Clayton Act, and Section 5 of the FTC Act all challenged this practice. Despite the condemnations of tying arrangement, courts have begun to realize that tying arrangement can promote competition in the marketplace. Over the past decades, the competitive effects of tying arrangement have been observed. However, tying arrangement can be declared unlawful if any of these events occur;
- When two distinct products are services are involved.
- When there is coercion of customers to purchase a particular product.
- When there is restraint in market competition because of the tied product.
- When a non-substantial amount of commerce is affected.
In a typical tying arrangement, to products must be tied together by the seller, these products are often two different products. For example, a house and a land, a laundry service and transport service. But there are separate products which will create ambiguity when tied by a seller. Hence, the question of whether separate products are compatible to be tied seem a bit complex.
According to the U.S Supreme Court, two separate products or service should not only be viewed based on the functional relation between them but also on the character of demand they both exhibit. Separate products tied together can also be viewed in the aspect of whether customers want to purchase them separately or not.
Coercion is another key feature that is present in tying arrangement and this is seen as per se unlawful. This is because customers are forced or coerced to purchase a second (separate) product that they might be unwilling to purchase at the first instance. Aside that the customer has no intention of the buying the second product, they may have a preferred seller from who the purchase is to be made.
But once there is a tying arrangement the customers are coerced to buy a distinct product as against their intentions or desires. When two distinct products are tied, it is mandatory that the customer buys the other product.
A tying arrangement can also be regarded as unlawful under the per se approach if the seller has a sufficient economic power which is evident in largeness of market. Sufficient economic power is also market power, this allows a seller to put the tied product unresponsive to market competition. This is however seen legally as a restraint of free competition in the market where the tied product exists.
Sufficient economic power can also exist when a seller provides a service or products that other sellers in the market cannot provide. Furthermore, a tying arrangement can be regarded as per se illegal if it has little requisite effect on commerce or if it affects a not insubstantial amount of commerce.
While Supreme Court has found a value for the requisite effect that a tying arrangement must have on commerce, lower courts are unable to establish this requisite effect on commerce. Supreme Court considers whether the effect of a tied arrangement is in a minimal aspect of commerce or whether it has substantial effects in terms of dollar value, for the Supreme Court, an amount as little as $60,000 was not insubstantial to the commerce.
Despite the criticisms and legal challenges leveled against tying arrangement, there are still come basis or grounds of its defense and justifications for its practices. Certain tying arrangements are perceived justifiable. Although, there has been a per se illegal ruling against tying arrangement, the Supreme Court still remains attentive to a defendants justification of a tying arrangement. For instance, a claim or defense that predicates on legal bundling by the seller can lead to justification, because bundling of products or services can help reduce cost and enhance an improved distribution.
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