Tying + Exclusive Contracting ((Vertical Restraints II)

12 important questions on Tying + Exclusive Contracting ((Vertical Restraints II)

When are two products "separate" - Tying Test Prong 1

Two products are "separate" if one of the products could be profitably marketed separately. Jefferson Parish (US 1984)

Jefferson Parish (US 1984)

The tying test should not turn on the functional relationship between the two products, but rather on the character of consumer demand for them. Products are separate if "there is sufficient consumer demand such that it is efficient for a firm to provide them separately.

What is key evidence to prove that two products are "separate"

plaintiffs have done well when they put on evidence that one of the products had, in fact, been previously sold separately.
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Coerced Purchase of Both Products - Tying Test Element 2 (P must prove)

There must be either (a) some refusal by the seller to provide the products separately or (b) some onerous penalty for buyers who elect to take them separately

General Idea: Tying Test Element 3 (P's Burden) The D has "Power" in the Tying Product Market

The idea of the antitrust "harm" resulting from tying arrangements is that buyers are forced to buy the "tied" product. That implies that the seller must have power in the "tying" product's product market, otherwise the buyer would purchase elsewhere.

Tying Test Element 3 (P's Burden) The D has "Power" in the Tying Product Market: What must P show

Strictly speaking, SCOTUS's cases require only "appreciable economic power" in the tying product market, but the recent decisions have interpreted that to require a showing of "market power" of a kind sufficient to satisfy SA 1 ("the ability of a single seller to raise price or restrict output," a power that ordinarily is inferred from the seller's possession of a predominant share of the market" Eastman Kodak (US 1984).

One indication of "power" in the tying product market would be the fact that the product is patented and has no close substitutes.

Tying Test Element 4: A "Substantial Amount" of commerce is effected

The tying arrangement must affect a "not insubstantial amount of commerce," Northern Pacific Ry (US 1958), but substantiality is solely measured in by absolute dollar amount, regardless of large/small the relevant market. Absolute dollar amounts as low as $60K have satisfied this requirement (see Loews, US 1961). Most ties challenged in federal court will easily meet.

Examples of exclusive contracts

  1. A requirements contract, requiring the buyer to take its entire need of the good from a single supplier
  2. An agreement forbidding a buyer form purchasing form the supplier's competitors, or with penalties for purchasing elsewhere q
  3. An output contract requiring the buyer to take all of the supplier's output

General Rule on Exclusive Contracts

Exclusive Ks are subject to ordinary RoR (The plaintiff must show MP in a relevant market and likely anticompetitive effects).

Two specific rules for exclusive contracts:

1. The Foreclosure Test - Standard Stations (US 1949)
2. The "Qualitative Substantiality" Test. Tampa Electric (US 1961).

Foreclosure Test for Exclusive Ks - Standard Stations (US 1949)

Exclusive dealing contracts are illegal if they foreclose some "substantial" percentage of distribution in a given market. Today, ordinarily P must show that the challenged contract covers at least 30% of the market. See Ryko (8th 1987)

The "Qualitative Substantiality Test" - Tampa Electric (US 1969)

Fact rich inquiry: whether the foreclosure caused by the K is likely to impede entry by new competitors or expansion by existing competitors. Applying this rule, some courts hold that exclusive Ks are presumptively legal if their term is less than 1 year. Overall, moreover, if an exclusive K--even one foreclosing a very large share of distribution in the market--has either a short term or is easily terminated, then it is very unlikely to be held illegal

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