Tying Arrangement

TYING ARRANGEMENT

An agreement in which a vendor conditions the sale of a particular product on a vendee's promise to purchase an additional, unrelated product.

In a tying arrangement, the product that the vendee actually wants to purchase is known as the "tying product," while the additional product that the vendee must purchase to consummate the sale is known as the "tied product." Typically, the tying product is a desirable good that is in considerable demand by vendees in a given market. The tied product is normally less desirable, of poorer quality, or otherwise difficult to sell. For example, motion picture distributors frequently tie the sale of popular video cassettes to the purchase of second-rate films that are piling up in their warehouses for lack of demand.

Tying arrangements are governed by the law of unfair competition. Such arrangements tend to restrain competition by requiring buyers to purchase inferior goods that they do not want or more expensive goods that they could purchase elsewhere for less. In addition, competitors may reduce their prices to below market level to attract purchasers away from prospective tying arrangements. Competitors who sell their products at below-market prices for an extended period can suffer enormous losses or go out of business.

Not every tying arrangement is illegal under the law of unfair competition. Four elements must be proved to establish that a particular tying arrangement is illegal. First, the tying arrangement must involve two different products. Manufactured products and their component parts, such as an automobile and its engine, are not considered different products and may be tied together without violating the law. However, the law does not permit a shoe manufacturer to tie the purchase of promotional T-shirts to the sale of athletic footwear because these items are considered unrelated.

Second, the purchase of one product must be conditioned on the purchase of another product. A buyer need not actually purchase a tied product in order to bring a claim. If a vendor refuses to sell a tying product unless a tied product is purchased, or agrees to sell a tying product separately only at an unreasonably high price, a court will declare the tying arrangement illegal. If a buyer can purchase a tying product separately on nondiscriminatory terms, however, there is no tie.

Third, a seller must have sufficient market power in a tying product to restrain competition in a tied product. Market power is measured by the number of buyers the seller has enticed to enter a particular tying arrangement. Sellers expand their market power by enticing additional buyers to purchase a tied product. However, sellers are prohibited from dominating a given market by locking up an unreasonably large share of prospective buyers in tying arrangements.

Fourth, a tying arrangement must be shown to appreciably restrain commerce. Evidence of anticompetitive effects includes unreasonably high prices for tied products and unreasonably low prices for competing products in a tied market. A plaintiff need not establish that a business has actually controlled prices through a tying arrangement, as is required to establish certain monopolistic practices, but only that prices and other market conditions have been significantly influenced.

Tying arrangements are regulated at both the state and the federal level. At the federal level, tying arrangements are regulated by the sherman antitrust act (15 U.S.C.A. § 1) and the clayton act (15 U.S.C.A. § 14). At the state level, tying arrangements are regulated by analogous statutes and various common-law doctrines. At either level both purchasers and businesses that are injured by illegal tying arrangements have two remedies available: money damages (compensation for pecuniary losses) and injunctive relief (a court order restraining a business from tying its products).

further readings

Hancock, William A., ed. 2001. Special Study for Corporate Counsel on Tying Arrangements. Chesterland, Ohio: Business Laws.

Klarfeld, Peter J. 1994. Tying Arrangements and Exclusive Dealing. New York: Practising Law Institute.

cross-references

Antitrust Law.