Tying occurs when a consumer buys one product (the “tying product”) and is required to either purchase an additional product that exists in a separate market (the “tied product”), or agrees not to purchase the additional tied product from any other seller. Tied selling is only problematic where the practice is likely to have an anti-competitive effect.
A fundamental requirement of tying is the existence of two products, the tying product and the tied product (the “separate products criterion”). The separate products criterion is not always straight-forward because all value-adding activity involves a degree of bundling of separate components, however no economic test exists to determine where one product should end and another begin.
One can easily imagine situations where the existence of a stand-alone market for the tied product can coexist with a bundled product. For example, it is possible to buy shoelaces (tied product) as a stand-alone product in shoe stores, but sellers of new shoes sell their shoes bundled with laces (tying product). Other examples include cars and GPS systems, cars and satellite radio services, and computers and browsers. This distinction has led to debate and varying approaches across jurisdictions.
The Separate Products Criterion
Tied selling is a reviewable practice established in section 77 of Part VIII of the Competition Act. There is only one case on tied selling in Canada, Canada (Director of Investigation & Research) v. Tele-Direct (Publications) Inc., 1997 CanLII 11 (CT), which establishes the following requirements for unlawful tying:
- the alleged tied seller is a major supplier;
- there are two separate products;
- there is tying; and
- there is an exclusion of competitors resulting in a substantial lessening of competition.
It is implicit in the determination of whether there are one or two products that efficiency considerations must be taken into account. Demand for separate products and efficiency of bundling are the two “flip sides” of the question of separate products. Assuming there is demand for separate products, if efficiency is proven to be the reason for bundling, there is one product. If not, there are two products. Efficiency is also critical because the existence of separate demand should not govern if the benefits of providing those product separately for consumers is outweighed by the higher costs.
In the US, section 1 of the Sherman Act primarily governs tying arrangements. Tying is deemed per se unlawful if:
- two separate products are involved;
- the sale or agreement to sell one product is conditioned on the buyer’s agreement to purchase another product or service;
- the seller has sufficient market power for the tying product; and
- the tying arrangement affects a not insubstantial amount of commerce.
Canadian jurisprudence has adopted the leading approach as defined by the Supreme Court of the US in the 1984 case Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2. In assessing the separate products criterion, the court held that whether there are one or two products turns on the character of demand for the two items, rather than on the functional relationship between them. Thus, the most important factor in determining whether two distinct products are being tied together is whether customers want to purchase the products separately. If customers are not interested in purchasing the products separately, there is little risk the tie could foreclose any separate sales of the products.
Since Jefferson Parish, US courts have recognized that some tying arrangements have procompetitive benefits for consumers, such as reducing distribution costs. This has resulted in a shift towards a rule of reason approach, especially when the challenged conduct involves physically or technically integrating the tying and tied products (e.g., U.S. v. Microsoft, 253 F.3d 34, 89-95 (D.C. Cir. 2001)).
In the EU, Article 102 of the Treaty on the Functioning of the European Union regulates tied selling. The European Commission has outlined five requirements for an abuse of tied selling:
- the seller is dominant in the tying product market;
- the tying and tied products must be two separate products;
- the tying product is not offered without the tied product;
- the act of tying forecloses stand-alone competitors; and
- the tying conduct cannot be objectively justified.
The separate products criterion is addressed differently in Europe than in Canada and the US. The European Commission has held that the two products are distinct so long as consumers would purchase the tied product separately from the tying product (e.g., Case COMP/C-3/37.792 Microsoft). The concern with the EU’s approach is that the two products are considered separate so long as there is a separate demand for the tied product. For example, shoes and shoelaces could be considered separate products as long as there is a separate demand for shoelaces. The question should actually turn on whether there is a separate demand for shoes without shoelaces. There is in fact no separate market for shoes without shoelaces, so they ought not be considered separate products.
Implications on Innovation
The separate products criterion is not an efficient way to distinguish bundling that has anti-competitive effects from those which are benign or pro-competitive. Offering products together as part of a package can benefit consumers who like the convenience of buying several items at the same time, especially when it comes at a discounted price. Incorporating new features into products to increase their value to consumers is a hallmark of innovative competition, even if innovation makes obsolete separate standalone products designed to meet the same consumer needs.