The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject.(November 2012) |
Competition law |
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Basic concepts |
Anti-competitive practices |
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Enforcement authorities and organizations |
Tying (informally, product tying) is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. In legal terms, a tying sale makes the sale of one good (the tying good) to the de facto customer (or de jure customer) conditional on the purchase of a second distinctive good (the tied good). Tying is often illegal when the products are not naturally related. It is related to but distinct from freebie marketing, a common (and legal) method of giving away (or selling at a substantial discount) one item to ensure a continual flow of sales of another related item.
Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) in order to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components.
One effect of tying can be that low quality products achieve a higher market share than would otherwise be the case.
Tying may also be a form of price discrimination: people who use more razor blades, for example, pay more than those who just need a one-time shave. Though this may improve overall welfare, by giving more consumers access to the market, such price discrimination can also transfer consumer surpluses to the producer. Tying may also be used with or in place of patents or copyrights to help protect entry into a market, discouraging innovation.
Tying is often used when the supplier makes one product that is critical to many customers. By threatening to withhold that key product unless others are also purchased, the supplier can increase sales of less necessary products.
In the United States, most states have laws against tying, which are enforced by state governments. In addition, the U.S. Department of Justice enforces federal laws against tying through its Antitrust Division.
Horizontal tying is the practice of requiring consumers to pay for an unrelated product or service together with the desired one. [1] A hypothetical example would be for Bic to sell its pens only with Bic lighters. (However, offering a limited free item with another purchase as a promotion by a company does not constitute horizontal tying.[ citation needed ])
Vertical tying is the practice of requiring customers to purchase related products or services together, from the same company. [1] For example, a company might mandate that its automobiles could only be serviced by its own dealers. In an effort to curb this, many jurisdictions require that warranties not be voided by outside servicing; for example, see the Magnuson-Moss Warranty Act in the United States.
Certain tying arrangements are illegal in the United States under both the Sherman Antitrust Act, [2] and Section 3 of the Clayton Act. [3] A tying arrangement is defined as "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees he will not purchase the product from any other supplier." [4] Tying may be the action of several companies as well as the work of just one firm. Success on a tying claim typically requires proof of four elements: (1) two separate products or services are involved; (2) the purchase of the tying product is conditioned on the additional purchase of the tied product; (3) the seller has sufficient market power in the market for the tying product; (4) a not insubstantial amount of interstate commerce in the tied product market is affected. [5]
For at least three decades, the Supreme Court defined the required "economic power" to include just about any departure from perfect competition, going so far as to hold that possession of a copyright or even the existence of a tie itself gave rise to a presumption of economic power. [6] The Supreme Court has since held that a plaintiff must establish the sort of market power necessary for other antitrust violations in order to prove sufficient "economic power" necessary to establish a per se tie. [7] More recently, the Court has eliminated any presumption of market power based solely on the fact that the tying product is patented or copyrighted. [8]
In recent years, changing business practices surrounding new technologies have put the legality of tying arrangements to the test. Although the Supreme Court still considers some tying arrangements as per se illegal, the Court actually uses a rule-of-reason analysis, requiring an analysis of foreclosure effects and an affirmative defense of efficiency justifications. [9]
The tying of Apple products is an example of commercial tying that has caused recent controversy. When Apple initially released the iPhone on June 29, 2007, [10] it was sold exclusively with AT&T (formerly Cingular) contracts in the United States. [11] To enforce this exclusivity, Apple employed a type of software lock that ensured the phone would not work on any network besides AT&T's. [12] Related to the concept of bricking, any user who tried to unlock or otherwise tamper with the locking software ran the risk of rendering their iPhone permanently inoperable. [12] This caused complaints among many consumers, as they were forced to pay an additional early termination fee of $175 if they wanted to unlock the device safely for use on a different carrier. [13] Other companies such as Google complained that tying encourages a more closed-access-based wireless service. [13] [ failed verification ] Many questioned the legality of the arrangement, [14] and in October 2007 a class-action lawsuit was filed against Apple, claiming that its exclusive agreement with AT&T violates California antitrust law. [15] The suit was filed by the Law Office of Damian R. Fernandez on behalf of California resident Timothy P. Smith, [15] and ultimately sought to have an injunction issued against Apple to prevent it from selling iPhones with any kind of software lock. [16]
In July 2010, federal regulators clarified the issue when they determined it was lawful to unlock (or in other terms, "jail break") the iPhone, declaring that there was no basis for copyright law to assist Apple in protecting its restrictive business model. [17] Jail breaking is removing operating system or hardware restrictions imposed on an iPhone (or other device). If done successfully, this allows one to run any application on the phone they choose, including applications not authorized by Apple. [17] Apple told regulators that modifying the iPhone operating system leads to the creation of an infringing derivative work that is protected by copyright law. This means that the license on the operating system forbids software modification. [17] However, regulators agreed that modifying an iPhone's firmware/operating system to enable it to run an application that Apple has not approved is undoubtedly fair use. [17]
Another prominent case involving a tying claim was United States v. Microsoft . [18] By some accounts, Microsoft ties together Microsoft Windows, Internet Explorer, Windows Media Player, Outlook Express and Microsoft Office. The United States claimed that the bundling of Internet Explorer (IE) to sales of Windows 98, making IE difficult to remove from Windows 98 (e.g., not putting it on the "Remove Programs" list), and designing Windows 98 to work "unpleasantly" with Netscape Navigator constituted an illegal tying of Windows 98 and IE. [19] Microsoft's counterargument was that a web browser and a mail reader are simply part of an operating system, included with other personal computer operating systems, and the integration of the products was technologically justified. Just as the definition of a car has changed to include things that used to be separate products, such as speedometers and radios, Microsoft claimed the definition of an operating system has changed to include their formerly separate products. The United States Court of Appeals for the District of Columbia Circuit rejected Microsoft's claim that Internet Explorer was simply one facet of its operating system, but the court held that the tie between Windows and Internet Explorer should be analyzed deferentially under the Rule of Reason. [18] The U.S. government claim settled before reaching final resolution.
As to the tying of Office, parallel cases against Microsoft brought by State Attorneys General included a claim for harm in the market for office productivity applications. [20] The Attorneys General abandoned this claim when filing an amended complaint. The claim was revived by Novell where they alleged that manufacturers of computers ("OEMs") were charged less for their Windows bulk purchases if they agreed to bundle Office with every PC sold than if they gave computer purchasers the choice whether or not to buy Office along with their machines — making their computer prices less competitive in the market. The Novell litigation has since settled. [21]
Microsoft has also tied its software to the third-party Android mobile operating system, by requiring manufacturers that license patents it claims covers the OS and smartphones to ship Microsoft Office Mobile and Skype applications on the devices. [22] [23]
In 1970, Congress enacted section 106 of the Bank Holding Company Act Amendments of 1970 (BHCA), the anti-tying provision, which is codified at 12 U.S.C. § 1972. The statute was designed to prevent banks, whether large or small, state or federal, from imposing anticompetitive conditions on their customers. Tying is an antitrust violation, but the Sherman and Clayton Acts did not adequately protect borrowers from being required to accept conditions to loans issued by banks, and section 106 was specifically designed to apply to and remedy such bank misconduct.
Banks are allowed to take measures to protect their loans and to safeguard the value of their investments, such as requiring security or guaranties from borrowers. The statute exempts so-called “traditional banking practices” from its per se illegality, and thus its purpose is not so much to limit banks' lending practices, as it is to ensure that the practices used are fair and competitive. A majority of claims brought under the BHCA are denied. Banks still have quite a bit of leeway in fashioning loan agreements, but when a bank clearly steps over the bounds of propriety, the plaintiff is compensated with treble damages.
At least four regulatory agencies including the Federal Reserve Board oversee the activities of banks, their holding companies, and other related depository institutions. While each type of depository institution has a “primary regulator”, the nation's “dual banking” system allows concurrent jurisdiction among the different regulatory agencies. With respect to the anti-tying provision, the Fed takes the preeminent role in relation to the other financial institution regulatory agencies, which reflects that it was considered the least biased (in favor of banks) of the regulatory agencies when section 106 was enacted. [24]
Tying is the "practice of a supplier of one product, the tying product, requiring a buyer also to buy a second product, the tied product". [25] The tying of a product can take various forms, [26] that of contractual tying [27] where a contract binds the buyer to purchase both products together, refusal to supply until the buyer agrees to purchase both products, withdrawal or withholding of a guarantee where the dominant seller will not provide the benefit of guarantee until the seller accepts to purchase that party's product, [28] technical tying occurs when the products of the dominant party are physically integrated and making impossible to buy the one without the other [29] and bundling where two products are sold in the same package with one price. These practises are prohibited under Article 101(1)(e) and Article 102(2)(d) and may amount to an infringement of the statute if other conditions are satisfied. However, it is noteworthy that the Court is willing to find an infringement beyond those listed in Article 102(2)(d), see Tetra Pak v Commission. [30]
The Guidance on Article 102 Enforcement Priorities sets out in which circumstances it will be appropriate taking actions against tying practices. First, it must be established whether the accused undertaking has a dominant position in the tying or tied product market. [31] Subsequently, the next step is to determine whether the dominant undertaking tied two distinct products. This is important as two identical products cannot be considered tied under Article 102(2)(d) formulation that states products will be considered tied if they have no connects ‘by their nature or commercial usage’. This arises problems in the legal definition of what will amount to tying in scenarios of selling cars with tires or selling a car with a radio. Hence, the Commission provides guidance on this issue by citing the judgement in Microsoft [29] and states that "two products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product". [32] Next issue is whether the customer was coerced to purchase both the tying and the tied products as Article 102(2)(d) suggests: ‘making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations’. In situations of contractual stipulation, it is clear that the test will be satisfied; [33] for an example of a non-contractual tying see Microsoft. [34] Furthermore, for an undertaking to be deemed anti-competitive is whether the tie is capable of having foreclosure effect. [35] Some examples of tying practices having an anti-competitive foreclosure effect in case law are the IBM, [36] Eurofix-Bauco v Hilti, [37] Telemarketing v CLT, [38] British Sugar [39] and Microsoft. [29] Subsequently, the defence available for the dominant undertaking is that it can provide that tying is objectively justified or enhances efficiency and the commission is willing to consider claims that are tying may result in economic efficiency in production or distribution that will bring benefit to the consumers. [40]
United States of America v. Microsoft Corporation, 253 F.3d 34, was a landmark American antitrust law case at the United States Court of Appeals for the District of Columbia Circuit. The U.S. government accused Microsoft of illegally monopolizing the web browser market for Windows, primarily through the legal and technical restrictions it put on the abilities of PC manufacturers (OEMs) and users to uninstall Internet Explorer and use other programs such as Netscape and Java.
In the United States, antitrust law is a collection of mostly federal laws that govern the conduct and organization of businesses in order to promote economic competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice include telecommunications services, financial services, health care, information, and consumer electronics. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles many TV and movie channels into a single tier or package. The fast food industry combines separate food items into a "combo meal" or "value meal".
The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law; the act of pushing for antitrust measures or attacking monopolistic companies is commonly known as trust busting.
In United States patent law, patent misuse is a patent holder's use of a patent to restrain trade beyond enforcing the exclusive rights that a lawfully obtained patent provides. If a court finds that a patent holder committed patent misuse, the court may rule that the patent holder has lost the right to enforce the patent. Patent misuse that restrains economic competition substantially can also violate United States antitrust law.
The multinational technology corporation Apple Inc. has been a participant in various legal proceedings and claims since it began operation and, like its competitors and peers, engages in litigation in its normal course of business for a variety of reasons. In particular, Apple is known for and promotes itself as actively and aggressively enforcing its intellectual property interests. From the 1980s to the present, Apple has been plaintiff or defendant in civil actions in the United States and other countries. Some of these actions have determined significant case law for the information technology industry and many have captured the attention of the public and media. Apple's litigation generally involves intellectual property disputes, but the company has also been a party in lawsuits that include antitrust claims, consumer actions, commercial unfair trade practice suits, defamation claims, and corporate espionage, among other matters.
Microsoft Corp. v. Commission is a case brought by the European Commission of the European Union (EU) against Microsoft for abuse of its dominant position in the market. It started as a complaint from Sun Microsystems over Microsoft's licensing practices in 1993, and eventually resulted in the EU ordering Microsoft to divulge certain information about its server products and release a version of Microsoft Windows without Windows Media Player. The European Commission especially focused on the interoperability issue.
In United States antitrust law, monopolization is illegal monopoly behavior. The main categories of prohibited behavior include exclusive dealing, price discrimination, refusing to supply an essential facility, product tying and predatory pricing. Monopolization is a federal crime under Section 2 of the Sherman Antitrust Act of 1890. It has a specific legal meaning, which is parallel to the "abuse" of a dominant position in EU competition law, under TFEU article 102. It is also illegal in Australia under the Competition and Consumer Act 2010 (CCA). Section 2 of the Sherman Act states that any person "who shall monopolize. .. any part of the trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony." Section 2 also forbids "attempts to monopolize" and "conspiracies to monopolize". Generally this means that corporations may not act in ways that have been identified as contrary to precedent cases.
A core product or flagship product is a company's primary promotion, service or product that can be purchased by a consumer. Core products may be integrated into end products, either by the company producing the core product or by other companies to which the core product is sold.
Article 102 of the Treaty on the Functioning of the European Union (TFEU) is aimed at preventing businesses in an industry from abusing their positions by colluding to fix prices or taking action to prevent new businesses from gaining a foothold in the industry. Its core role is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for consumers and society. It is the second key provision, after Article 101, in European Union (EU) competition law.
Microsoft has been involved in numerous high-profile legal matters that involved litigation over the history of the company, including cases against the United States, the European Union, and competitors.
AppleCare+ is Apple's brand name for extended warranty and technical support plans for their devices. AppleCare+ extends the devices' one-year limited warranty and the ninety days of technical support. It allows the customer unlimited incidents of accidental damage with a deductible. AppleCare+ is available for many Apple products, including Mac computers and displays, Beats headphones, HomePods, iPhones and iPads, Apple Watches, and Apple TVs. AppleCare+ plans include Apple software associated with the covered hardware.
The bundling of Microsoft Windows is the installation of Microsoft Windows in computers before their purchase. Microsoft encourages original equipment manufacturers (OEMs) of personal computers to include Windows licenses with their products, and agreements between Microsoft and OEMs have undergone antitrust scrutiny. Users opposed to the bundling of Microsoft Windows, including Linux users, have sought refunds for Windows licenses, arguing that the Windows end-user license agreement entitles them to return unused Windows licenses for a cash refund. Although some customers have successfully obtained payments, others have been less successful.
Pre-installed software is software already installed and licensed on a computer or smartphone bought from an original equipment manufacturer (OEM). The operating system is usually factory-installed, but because it is a general requirement, this term is used for additional software apart from the bare necessary amount, usually from other sources.
Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), is a 1992 Supreme Court decision in which the Court held that even though an equipment manufacturer lacked significant market power in the primary market for its equipment—copier-duplicators and other imaging equipment—nonetheless, it could have sufficient market power in the secondary aftermarket for repair parts to be liable under the antitrust laws for its exclusionary conduct in the aftermarket. The reason was that it was possible that, once customers were committed to the particular brand by having purchased a unit, they were "locked in" and no longer had any realistic alternative to turn to for repair parts.
LePage's Inc. v. 3M, 324 F.3d 141, is a 2003 en banc decision of the United States Court of Appeals for the Third Circuit upholding a jury verdict against bundling. Bundling is the setting of the total price of a purchase of several products or services over a period from one seller at a lower level than the sum of the prices of the products or services purchased separately from several sellers over the period. Typically, one of the bundled items is available only from the seller engaging in the bundling, while the other item or items can be obtained from several sellers. The effect of the bundling is to divert purchasers who need the primary product to the bundling seller and away from other sellers of only the secondary product. For that reason, the practice may be held an antitrust violation as it was in the LePage's case, in which the Third Circuit held that 3M engaged in monopolization in violation of Sherman Act § 2 by (1) offering rebates to customers conditioned on purchases spanning six of 3M's different product lines, and (2) entering into contracts that expressly or effectively required dealing exclusively with 3M.
Software monetization is a strategy employed by software companies and device vendors to maximize the profitability of their software. The software licensing component of this strategy enables software companies and device vendors to simultaneously protect their applications and embedded software from unauthorized copying, distribution, and use, and capture new revenue streams through creative pricing and packaging models. Whether a software application is hosted in the cloud, embedded in hardware, or installed on premises, software monetization solutions can help businesses extract the most value from their software. Another way to achieve software monetization is through paid advertising and the various compensation methods available to software publishers. Pay-per-install (PPI), for example, generates revenue by bundling third-party applications, also known as adware, with either freeware or shareware applications.
Apple Inc. v. Pepper, 587 U.S. ___ (2019), was a United States Supreme Court case related to antitrust laws related to third-party resellers. The case centers on Apple Inc.'s App Store, and whether consumers of apps offered through the store have Article III standing under federal antitrust laws to bring a class-action antitrust lawsuit against Apple for practices it uses to regulate the App Store. The case centers on the applicability of the "Illinois Brick doctrine" established by the Supreme Court in 1977 via Illinois Brick Co. v. Illinois, which determined that indirect consumers of products lack Article III standing to bring antitrust charges against producers of those products. In its 5–4 decision, the Supreme Court ruled that since consumers purchased apps directly through Apple, that they have standing under Illinois Brick to seek antitrust charges against Apple.