Tie-In Arrangement in India

ANALYTICAL STUDY OF THE CONCEPT OF TIE-IN ARRANGEMENT IN INDIA

INTRODUCTION

Since attaining independence in 1947, India for the

better part of half a century thereafter adopted and followed

policies comprising of what are known as “Command-and-Control”

laws, rules, regulations and executive orders1. The then

competition law in India was the Monopolies and restrictive

Trade Practices Act, 1969 (MRTP Act in brief). It was in 1991

that there was widespread economic reform and consequently an

economy based on free market principles came into force.

Economic liberalisation in India was seeing the light of the

day and the need for an effective competition regime was

recognised. The new competition Act, 2002 was introduced in

replacement of the MRTP Act. The repeal of the MRTP Act was on

the ground that the act was not suited to deal with issues of

competition that may be expected to arise in the new liberal

business environment2.

In the MRTP Act, tie-up sales were dealt under

Restrictive Trade Practices (RTP). It was considered as a

practise which had the effect of preventing, distorting or

restricting competition or as a practise which tends to

obstruct the flow of capital or resource into the stream of

production. An entity, body or undertaking charged with the

practise of RTP had to plead for gateways provided in the MRT

Act to avoid being indicted.

1 Dr. Chakravarty, S., ‘MRTP Act metamorphoses into Competition Act’ pg no.52 Ramappa T., ‘Competition Law in India Policy, Issues and Development’ 12(2006) (New York, Oxford University Press)

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Under the Competition Act, Tie-in arrangement is dealt

with under the head Vertical Anti-Competitive Agreement. A

tie-in arrangement, under this Act, is not illegal per se but

if it has an appreciable adverse effect on the competition,

then it becomes illegal. Tie-in arrangements have both good

and bad effects on the competition. On one hand tie-in

arrangements may result in price discrimination, barriers to

new entry in the market, monopolisation of the tied and tying

products. On the other hand tie-in arrangement may benefit the

consumers by providing them with goods or services in a bundle

which are required and at lower price. But tie-in arrangements

are more likely to adversely affect the economy than being

beneficial to the economy. Its effects are discussed later in

the paper.

ANTI-COMPETITIVE AGREEMENTS

“People of the same trade seldom meet together, even for merriment and

diversion, but the conversation ends in a conspiracy against the public, or in some

contrivance to raise prices.”3

This statement of Adam Smith makes it abundantly clear

for a need to have a proper regulatory mechanism for

prevention of anti-competitive agreement which not only affect

3 Smith Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, London Publication (1776) Pg 88 in Parihar, Pratima ‘Anti-competitive Agreements – Underlying Concepts and Principles under the Competition Act, 2002’, (2012)Pg 16.

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the market economy leading to monopolistic approach but also

victimizes the consumers and thereby cause harm to the entire

economy creating hindrance to the competition in the market.

Anticompetitive agreements can be said to be agreements

that negatively or adversely impact the process of competition

in the market. According to an OECD/World Bank Glossary,

anticompetitive practices refer to a wide range of business

practices that a firm or group of firms may engage in order to

restrict inter-firm competition to maintain or increase their

relative market position and profits without necessarily

providing goods and services at a lower cost or higher

quality4. Similarly, it can be said that anticompetitive

agreements are agreements between firms or enterprises that

restrict or prevent or otherwise unfavourably affect

competition, and that may help increase the market position or

share of the parties and may also be to the disadvantage of

the consumer as the products and services may be available at

a higher cost than are available in a competitive market and

also may be of a lower quality.

Prohibition of anti-Competitive Agreements has been

provided under Section 3 Chapter II of the Competition Act,

2002 which besides prohibition of certain agreements also

deals with abuse of dominant position and regulation of

combinations of the Act. The provisions of the Competition Act

relating to anti-competitive agreements were notified on 20th

May, 2009.

4 World Bank/OECD: “Glossary of Industrial Organization on Economics and Competition Law”.

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Section 3 of the Act specifically deals with anti-

competitive agreements.

Sec. 3(1) of the Act is general and broad in scope. It

prohibits any agreement between enterprises or persons in

respect of production, supply, distribution, storage,

acquisition or control of goods or provision of services,

which causes or is likely to cause an appreciable adverse

effect on competition within India. there are no hard and fast

rules for anti-competitive practices or conduct i.e. each case

is to be decided on the basis of facts, under the rule of

reason, which means that adverse affect on competition has to

be established as a fact in each case.

Sec. 3(2) of the Act declares all such agreements as

void, which are entered into by persons or enterprises in

contravention of the provisions laid down in sub-section (1)

of Sec. 3.

Sec. 3(3) specifies certain anti-competitive agreements

that may be entered into, or practices that may be carried on,

by enterprises supplying similar or identical goods or

services, or cartels. Under sec. 3(3), those agreements or

practices carried on by that class of enterprises are presumed

to have an appreciable adverse effect on competition, then

they are per se violation of the Act.

Sec. 3(4) deals with vertical restraints. These are

restrictions among enterprises at different stages or levels

of production chain in different markets. This covers supply

of goods as well as services. Vertical agreements at different

levels of the production or supply chains often have strong

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efficiency rationales and enhance competition. However, they

may also have anti-competitive effects, unfairly eliminating

rivals or making them less effective competitors, or reducing

competition between buyers or sellers. Since, there is a great

chance that vertical anti-competitive agreements may not be

anticompetitive, regulators require a systematic economic

assessment of whether pro-competitive or anti-competitive

effects of a vertical agreement will dominate when these

agreements involve enterprises with a significant market

share. Vertical restraints are to be examined under the rule

of reason and appreciable adverse effect has to be established

in each case.

Sec. 3(5) provides certain exceptions. The exceptions

protects the rights of the owners of the intellectual

properties from the provisions listed in sec. 3 from

infringement of any of his rights and impose reasonable

restrictions for protection of any of those rights. The terms

of agreement relating to export of goods or supply of services

abroad are also exempted under this section.

Once an agreement is determined as causing or is likely

to cause an appreciable adverse effect on competition, such

agreement being void cannot be enforced by parties in a court

of law. This could lead to serious difficulties for a party in

trying to enforce any claim under such agreements in a court

of law. Therefore the consequences of an agreement being held

be anti-competitive could be far reaching for the enterprises.

TYPES OF ANTI COMPETITIVE AGREEMENTS

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Anti-competitive agreements are divided into two types:

1. Horizontal Agreements

2. Vertical Agreements

Horizontal Agreements – these are agreements between

independent undertakings operating and supplying to the same

market to fix prices or apportion markets or restrict output

with a view to control prices in a market.

For example between:

Manufacturer A – Manufacturer B

Supplier A – Supplier B

Dealer A – Dealer B

The types of Horizontal agreements are –

Cartels,

Bid-rigging agreements,

Output restrictions,

Price fixing and

Market allocation.

Vertical Agreements – these are agreements between business

entities operating at different level of chain.

For example between:

Supplier - Distributor

Manufacturer - Supplier

Distributor - Manufacturer.

The different types of vertical agreements are

Exclusive supply/purchase agreements,

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Tie-in arrangements,

Resale price maintenance,

Refusal to deal.

The Act does not specifically use the words Horizontal

agreements and vertical agreements but the agreements referred

to in Sec. 3(3) are horizontal agreements and those referred

to in Sec. 3(4) are vertical agreements. Usually horizontal

agreements are viewed more seriously than vertical agreements

because they are prima facie more likely to reduce competition

than agreements between firms in different levels of the

chain. Horizontal agreements have more anti-competitive effect

and are more likely to have appreciable adverse effect on the

competition than the vertical agreements5.

This research paper deals with one of the type of vertical

agreement i.e. tie–in arrangements. Its types, effects and

regulation in India are the main focus of this research paper.

5 Ramappa T., ‘Competition Law in India Policy, Issues and Development’ 12(2006) (New York, Oxford University Press)

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DIFFERENCE BETWEEN HORIZONTAL AND VERTICAL AGREEMENTS

Horizontal and Vertical Anti-Competitive Agreements are

very different and easily distinguishable. The differences

between the two are as follows:

HORIZONTAL ANTI-COMPETITIVE

AGREEMENT

VERICAL ANTI-COMPETITIVE

AGREEMENTIn Horizontal Agreements theparties to the agreement areenterprises at the same stage

In Vertical Agreements the parties to the agreements are non-competing enterprises at

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of the production chainengaged in similar trade ofgoods or provision of servicescompeting in the same market.For e.g. agreements betweenproducers or betweenwholesalers etc.

different stages of the production chain.For e.g. agreements essentially between manufacturers and suppliers i.e. between producers and wholesalers or between manufacturers and retailers etc.

Horizontal Anti-Competitive Agreements are entered into between rivals or competitors.

Vertical Anti-Competitive Agreements are entered into between parties having actual or potential relationship of purchasing or selling to each other.

Horizontal Anti-Competitive Agreements are per se void.

Vertical Anti-Competitive Agreements are not per se void.

The ‘rule of presumption’ is applied toHorizontal anti-competitive

agreement

The ‘rule of reason’ is applied to vertical anti-competitive agreements.

Horizontal Anti-Competitive Agreements that determine prices or limit/control production or share market/sources of production by market allocation or resultinbid rigging or collusive bidding arepresumed to have an appreciableadverse effect on competition.

Vertical Anti-Competitive Agreements are not presumed tohave an appreciable adverse effect on competition and automatically prohibited. Whether a vertical agreement is anti-competitive or not is to be decided on a case by case basis considering the consequences of the agreement and whether they substantiallyrestrict competition or not.

The burden of proof is on the defendant to prove that the agreement is not

The burden of proof is on the party alleging the anti-competitive practice to prove

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anticompetitive. that the agreement is anti-competitive.

Examples of Horizontal Anti-Competitive Agreements are cartels, bid-rigging, collusive tendering etc.

Examples of Vertical Anti-Competitive Agreements are resale price maintenance, tie-in agreements, exclusive supply and distribution agreements etc.

TIE-IN ARRANGEMENT

As defined in Explanation (a) to sub-section (4) of

Section 3, tie-in arrangement includes any arrangement

requiring a purchaser of goods, as a condition of such

purchase, to purchase some other goods. The product or service

that is required by the buyer is called the tying product or

service and the product that is forced on the buyer is called

the tied product or service.

A product or service is to be treated as being the

subject of a tie-in arrangement when its supply is offered on

the condition that the buyer who ordered for some product or

service required by him is also forced to purchase some other

product or service. The basic objection that would arise from

the point of view of the buyer is that he is required by

compulsion to buy a product or service that he does not need

and so is forced to incur unnecessary cost. From the point of

view of the law protecting competition in the market, this

would be objectionable on the ground that it reduces

competition in the supply of the tied product.

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An example of ‘tie-in’ or ‘tying’ arrangement is when

manufacturer of product ‘A’ and ‘B’ requires an intermediate

buyer who wants to purchase product ‘A’ to also purchase

product ‘B’. Tying may result on lower production costs and

may also reduce transactions and information costs for

producers and provide them with increased convenience and

variety. Tie-in arrangements need not necessarily be anti-

competitive. In India, due to the absence of the per se rule,

tying cannot be per se illegal. It can have negative effects

on competition if they fence off market efficiency

In case of tie-in arrangements, competition with regard

to the tied product may be affected as the purchaser may be

forced to purchase the tied product at prices other than those

at which it is available in a competitive market or he may be

forced to purchase a product which he does not require. But

in case the tied product is being sold at a lower price or at

the same price at which it is available in the market or if

the tied product is required by the purchaser, then such tie-

in arrangement cannot be said to be anti-competitive. It is

for this reason that tie-in arrangement cases are decided on

the basis of rule of reason after taking into consideration

the benefits and detriments of the arrangement on the market.

It is yet another requirement that the seller of the tied

product has dominance over the market, so that the sale of the

tied product has appreciable adverse effect on the competition

in the market.

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In Northern Pacific Railway Co. V. United States6, the Court

observed that, “They (tying arrangements) deny competitors

free access to the market for the tied product, not because

the party imposing the tying requirements has a better product

or a lower price but because of his power or leverage in

another market. At the same time, buyers are forced to forgo

their free choice between competing products”. For these

reasons, tying arrangements fare harshly under the laws

forbidding restraints of trade.

TYPES OF TIE-IN OR TYING ARRANGEMENTS

Tying can be classified into two types. They are:-

1. Static Tying – Static tying can be thought of as an

exclusive arrangement. In a static tied-sale, the buyer

who wants to buy product ‘A’ must also purchase product

‘B’. It is possible to buy product ‘B’ without product

‘A’ which explains why it is a tie. Thus, the items for

sale are product ‘B’ alone or an ‘A-B’ package.

For example: the video game Halo is exclusive to the Xbox

format. A buyer who wants to buy halo must also purchase

the Xbox hardware. The tie could arise from the

manufacturer’s power in the market of the Xbox hardware.

2. Dynamic tying – in case of this type of tying, in order

to purchase product ‘A’ the customer is also required to

purchase product ‘B’. In dynamic tying the quantity of

6 Northern Pacific Railway Co. et al. v. United States 356 US 1 (1958)

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product ‘B’ vary from customer to customer. Thus, the

item for sale are a package of ‘A-B’, ‘A-2B’, ‘A-3B’ etc.

For example: A seller of a photocopy machine (product A)

may require the purchaser of the machine to use a specific

brand of paper i.e. (product B). The paper sales occur

over time and vary across users, based on their demand

for the copies. A customer would not need to determine how

much paper to buy at the time the machine was bought. But

under the tying contract, whatever paper was required would

have to be bought from the machine seller.

The dynamic tied sale is different from the static tie in

another way. The good involved in a dynamic tie are

required to use the product. For example, one cannot use a

photocopy machine without a paper but one can enjoy Xbox

without the Halo game. Therefore, all the customers that buy

the product ‘A’ must also buy product ‘B’ in a dynamic tie.

FORMS OF TYING

Tying can take the following forms:

1. Contractual Tying – the tie may be the consequence of a

specific contractual stipulation. For example in the case

of Eurofix-Bauco v. Hilti7, hilti required users of its nail

guns and nail cartridges to purchase nails exclusively

from it.

7 Hilti v commission; T-30/89 [1990] ECR-II-163, [1992] 4 CMLR 16, CFI

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The commission held that this requirement of Hilti

exploited customers and harmed competition and was an

abuse of dominant position. A fine of 6 million was

imposed for this and other infringements.

2. Refusal to supply – the effect of tie may be achieved

where a dominant undertaking refuses to supply the tying

product unless the customer purchased the tied product.

3. Withdrawal of a guarantee – a dominant supplier may

achieve the effect of a tie by withdrawing or withholding

the benefits of a guarantee unless the customer uses the

supplier’s components as opposed to those of a third

party.

4. Technical tying – this occurs where the tied product is

physically integrated in to the tying product, so that it

is impossible to take one product without the other. This

is what happened in the Microsoft case.

US LAW ON TYING

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Section 1 of the Sherman Act, 1890 and Section 3 of the

Clayton Act, 1914 deal with the concepts of Tying. A tying

agreement is subject to both these provisions and although the

wording in the two sections differs, both of them apply a

similar substantive standard. Section 1 of the Sherman Act

prohibits “every” agreement in “restraint of trade” depending

upon the “unreasonableness” of such a restraint. Section 3 of

the Clayton Act forbids tying agreements when “the

effect....may be to substantially lessen competition or tend

to create a monopoly.” Though there appears to be no

difference between these two laws, the Courts, in their

approach have pointed out the difference between the two

statutes and standards applied therein. One point of

difference that was pointed out was that while the Clayton Act

requires only showing that the challenged conduct “may tend”

to substantially lessen competition, the Sherman Act requires

proof of an actual effect on competition. Also, the Clayton Act’s

coverage is more limited than the Sherman Act, since the

Clayton Act applies only when both the tying and the tied

products are tangible goods and commodities, rather than real

estate or intangibles such as franchises or services. Apart

from these slight differences, it was maintained that the

analysis applied under the Clayton Act to tying arrangements

is very much like the analysis typically used under Section 1

of the Sherman Act.

Tying under U.S. law has been defined as “an agreement by a

party to sell one product but only on the condition that the buyer also purchases a

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different (or tied) product, or at least agrees that he will not purchase that product

from any other supplier”.

The assessment of tying arrangements under U.S. Antitrust

law has undergone significant changes over the time. There are

three periods describing the change.

First, the early period of the per se approach: early cases

reflect a strong hostility towards tying arrangements that

were regarded as having hardly any purpose beyond the

suppression of competition.”

Second, the modified per se illegality approach: Jefferson Parish8

moved to an approach in which the criteria for tying are used

as proxies for competitive harm and, arguably, efficiencies.

Third, the rule of-reason approach: Microsoft III9 introduced a

rule-of-reason approach towards tying; recognizing that, at

least in certain circumstances, even the modified per se

approach would lead to an overly restrictive policy towards

tying arrangements.

In the early cases the per se approach played an important

role. In United States Steel v. Fortner, the court held that tying

arrangements “generally serve no legitimate business purpose

that cannot be achieved in some less restrictive way.”

In Northern Pacific Railway v. United States10, the railroad

was the owner of millions of acres of land in several North

western States and territories. In its sales and lease

agreements regarding this land, Northern Pacific had inserted

8 Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde,[ 466 U.S. 2 (1984)]9 United States v. Microsoft Corp., [253 F.3d 34 (D.C. Cir. 2001)]10 Northern Pacific Railway Co. v. United States,[ 356 U.S. 1 (1958)]

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“preferential routing” clauses. These clauses obliged

purchasers or lessees to use Northern Pacific for the

transportation of goods produced or manufactured on the land,

provided that Northern Pacific rates were equal to those of

competing carriers.

The Supreme Court took the view that Northern Pacific had

significant market power. The court declared that the Per-Se

rule applies “whenever a party has sufficient economic power with respect to

the tying product to appreciably restrain free competition in the market for the tied

product and a ―not insubstantial‘ amount of interstate commerce is affected. In

this case, the facts “established beyond any genuine question

that the defendant possessed substantial economic power by

virtue of its extensive land holdings”

In the International Salt Co., Inc. v. United States11 case it

was held by the court that “sufficient economic power” could

be established in a number of ways, not all of which were

related to the concept of “market power”. Sellers forcing

customers to accept unpatented products in order to be able to

use a patent monopoly, and the patent rights were deemed to

give the seller “sufficient economic market power”

In the second period of modified per se rule, the hostile

approach towards tying was revised. In the Jefferson Parish

Hospital Dist No. 2 v. Hyde12 case Supreme Court accepted that

tying could have some merit and struggled to devise a test

that distinguished “good tying” from “bad tying”. The US Supreme

11 International Salt Co., Inc. v. United States, [332 U.S. 392, 395-96 (1947)]12 Supra note 8 at 10

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Court observed that the essential characteristic of an invalid

tie-in arrangement lies in the seller‘s exploitation of its

control over the tying product to force the buyer into the

purchase of a tied product that the buyer either did not want

at all, or might have preferred to purchase elsewhere on

different terms. Under the modified per se rule it is per se

unlawful whenever the seller has sufficient economic power

with respect to the tying product to restrain appreciably free

competition in the market for the tied-in product.

The Rule of Reason co-exists with a per se rule in two

senses13. Firstly some courts have declined to find two

products tied together when the challenged arrangement seems

reasonable, either because it served legitimate functions or

because threats to competition seemed fanciful. Most

frequently, the courts have ended up classifying a practice as

exclusive dealing rather than tying, with the result that it

is made subject to the rule of reason.

Secondly, the per se rule do not exhaust the concerns of

antitrust law. A refusal to condemn a particular restraint per

se does not necessarily mean that antitrust law is indifferent

to that restrain or affirmatively approves it, the rule of

reason remains applicable.

Tying arrangements that do not meet all of the elements

of a per se tying claim may still be held unlawful as

unreasonable restraints of trade under a rule of reason

analysis. Unlike a per se analysis, where the focus of the13 Malik, Vikramaditya S., ‘The Doctrines of Tying and Bundling – Concept and the Indian Case’ (2010) Pg 21.

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inquiry is on the tying product, a rule of reason inquiry

looks at the competitive effect of the arrangement in the

relevant market for the tied product. However, it is unlikely

that a tying arrangement that passes muster under the strict

per se standard will be found to violate the less rigorous

rule of reason test

Although Jefferson Parish still represents the general

position in the U.S. with respect to tying, the Court of

Appeals’ judgment in Microsoft III indicates a preference, in some

circumstances at least, for a rule of reason approach, noting

the Supreme Court’s warning in Broadcast Music v. CBS that “it is

only after considerable experience with certain business

relationships that courts classify them as per se violations.”

In Microsoft III, the Court of Appeals concluded that a per

se rule was inappropriate, due to the fact that the

circumstances in Microsoft III differed from previous cases, and

that the “separate products” approach used in Jefferson Parish was

not a suitable approach given that it was backward looking.

The case was therefore referred back to the District Court

with a direction to conduct a rule of reason analysis which

balanced the anticompetitive effects and efficiencies.

EUROPEAN LAW ON TYING

Article 81(1) of the EC Treaty includes as agreements

that which are incompatible with the common market and the

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agreements that make the conclusion of contracts subject to

acceptance by the other parties of supplementary obligations

which, by their nature or according to commercial usage, have

no connection with the subject of such contracts. Article 82

includes tying as an abuse of dominant position, thus Article

81 is attracted when tying is part of an agreement concluded

by a non-dominant supplier and a buyer. However, Regulation

2790/1999 on Vertical restraints provides for a safe harbour

system whereby vertical agreements involving tying will be

presumed compatible with article 81 if the market share of the

supplier is below 30% in the relevant market.14

Tying agreements are not illegal per se. An illegal tying

agreement takes place when a seller requires a buyer to

purchase another, less desired or cheaper product, in addition

to the desired product, so that the competition in the tied

product would be lessened. Sherman act also pointed out that

there should be separateness of products which are tied

because if the products are identical and market is same then

there is no unlawful tying agreement.

The European Commission and European Courts have adopted

a “unified” approach to the different forms of tying and

bundling.15 In other words, contractual tying( including the

tying of primary products and consumables) and integration of14 Ioannis Lianos, Vertical Restraints, and the Limits of Article 81(1) EC: Between Hierarchies And Networks, 3 J.Competition L. & Econ. 625 in Sundararajan, Preethi, ‘An Analytical Study of Nature and Types of Vertical Anti-Competitive Agreements’, Pg. 21.

15 Gupta, Anisha, ‘Concept of Tying and Bundling and its Effect on Competition: A Critical Study of it in Various Jurisdictions’ (2010) Pg. 24

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products have been assessed in the same way without taking

into account the different underlying effects of them on

competition.

The formal framework of the tying analysis is almost a carbon

copy of the U.S. per se approach, following a four-stage

assessment:

1) To establish market power (dominance) of the seller in

relation to the tying product;

2) To identify tying which means to demonstrate that (a)

customers are forced (b) to purchase two separate products

(the tying and the tied product);

3) To assess the effects of tying on competition;

4) To consider whether any exceptional justification for tying exists

Market power

Article 82 of the E.C. Treaty is applicable only to the

extent that the commission is able to establish dominance in a

particular market. Dominance in the market for the tying

product has been a prerequisite for finding of abusive tying. Thus, the

first requirement in the case of an alleged tying abuse is to

establish that the firm has a dominant position in the market

for the tying product.

The Napier Brown v. British Sugar16 case arose from a complaint

by Napier Brown, a sugar merchant in the United Kingdom, which

alleged that British Sugar, the largest producer and seller of

sugar in the UK, was abusing its dominant position in an

attempt to drive Napier Brown out of the UK sugar retail

market. In the subsequent proceedings, the Commission

16 Napier Brown v. British Sugar, Commission Decision 88/519/EEC, 1988 O.J. (L 284) 41

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objected, among other things, to British Sugar’s practice of

offering sugar only at delivered prices so that the supply of

sugar was, in effect, tied to the services of delivering the

sugar.

Having concluded that British Sugar was dominant in the market

for “white granulated sugar for both retail and industrial

sale in Great Britain,” the Commission took the view that

“reserving for itself the separate activity of delivering the

sugar which could, under normal circumstances be undertaken by

an individual contractor acting alone” amounted to an abuse.

According to the Commission, the tying deprived customers of

the choice between purchasing sugar on an ex factory and

delivered price basis “eliminating all competition in relation

to the delivery of the products.”

The Tetra Pak II17 case also concerned the tying of

consumables to the sale of the primary product. Tetra Pak, the

major supplier of carton packaging machines and materials

required purchasers of its machines to agree also to purchase

their carton requirements from Tetra Pak. The Commission,

upheld by the Court, condemned the tying as abuse of a

dominant position.

Tying

Tying has been defined by the Commission as (a) bundling two

(or more) distinct products, and (b) forcing the customers to

buy the product as a bundle without giving them the choice to

buy the products individually.

17 Tetra Pak II, Commission Decision 92/163/EEC, 1992 O.J. (L 072) 1

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Separate products: The second requirement is establishing whether products A and

B are separate products. The main criterion to analyse in establishing whether two

products are separate or integrated is the potential user or consumer demand for

the tied product individually, from a different source than for the tying product.

If B is a separate product, the relevant question is whether

there is demand for A as a stand-alone product. Are there

consumers prepared to pay a price to acquire product A without

product B attached? If so, then A and B are separate products,

otherwise, there are two products AB and B, and A is just a

component of the first of the two products. When there is no

demand for acquiring the components separately from different

sellers, then no competition-related issues under Art. 82 EC

arises. Tying can only occur when the products are genuinely

distinct.

Coercion

Under E.C. law, as under U.S. law, coercion to purchase two

products together is a key element to establish abusive tying.

Coercion may take many forms. Coercion is clearly given where

the dominant firm makes the sale of one good as an absolute

condition for the sale of another good.

A contractual coercion occurs when the requirement to buy

product B is a condition for the sale of product A, i.e. a

refusal to supply the tying product separately.

Technical coercion is preventing the user from using the

dominant product without the tied product.

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Financial coercion, on the other hand, is a package discount

making it meaningless to buy the tied product separately.

This may be explicit in an agreement (for e.g. Tetra Pack II

case) or de facto (for e.g. Hilti case). However, lesser forms

of coercion, such as price incentives or the withdrawal of

benefits may also be sufficient.

Anti-competitive effects

Factual evidence of foreclosure is not necessary as a

constituent element of tying under Art. 82 EC, but it is

enough to show that tying may have a possible foreclosure

effect on the market

According to the British Sugar case, tying does not need to have

any significant effect on the tied market. British Sugar tied

the supply of sugar to the service of delivering the sugar.

The Commission did not regard it as necessary to assess

whether the delivery of sugar was part of a wider transport

market and whether the tying foreclosed any significant part

of such market. The fact that British Sugar had “reserved for

itself the separate activity of delivering sugar” was

sufficient as an anticompetitive effect.

In Hilti, the Commission went one step further. It took the view

that depriving the consumer of the choice of buying the tied

products from separate suppliers was in itself abusive

exploitation: “These policies leave the consumer with no

choice over the source of his nails and as such abusively

exploit him.”(Emphasis added.) In other words, as any tying by

definition restricts consumer choice in the way described

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above, the Commission’s position in Hilti strongly suggests that

foreclosure does not have to be established and that, hence,

tying is subject to a per se prohibition (with the possible

exception of an objective justification).

Justification of cases

The practice of tying and bundling can be justified on a

legitimate and proportionate basis. If the European Commission

manages to prove the existence of the first four requirements,

the burden of proof for objective justification for the

practice of tying and bundling shifts to the defendant.

Legitimate objectives put forward for practising tying and

bundling must be genuine. A legitimate objective is when tying

and bundling enhances efficiency because it is more costly to

produce, or distribute the tied products separately, or there

might be a need to ensure the quality or safety of the

products.

In the guidelines on Abusive Exclusionary Conduct, the

Commission noted that tying and bundling may give rise to an

objective justification by producing savings in production,

distribution and transaction costs. In addition, the Article

82 Staff Discussion Paper noted that “combining two

independent products into a new, single product may be an

innovative way to market the product(s),” and that such

“combinations are more likely to be found to fulfil the

conditions for an efficiency defence than is contractual tying

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or bundling.”18 The guidance on Abusive Exclusionary conduct,

however, simply notes that the Commission may also examine

whether combining two independent products into a new, single

product might enhance the ability to bring such a product to

the market to the benefit of customers

THE INDIAN LAW ON TYING

One of the objects of the Competition Act in India was to

prevent practices having adverse effect on competition. They

seek to achieve these by various means. Agreement for price

fixing, limited supply of goods or services, dividing the

market etc. is some of the usual modes of interfering with the

process of competition and ultimately, reducing or eliminating

competition. The law prohibiting agreements, practices and

decisions that are anti-competitive is contained in Section

3(1) of the Act.

Sec. 3(4) of the Companies Act deals with vertical anti-

competitive agreements. Sec. 3(4) says that “Any agreement

amongst enterprises or persons at different stages or levels of the production chain

in different markets, in respect of production, supply, distribution, storage, sale or

price of, or trade in goods or provision of services, including-- (a) tie-in

arrangement.......shall be an agreement in contravention of sub-section (1) if such

agreement causes or is likely to cause an appreciable adverse effect on competition

in India.”

18 Article 82 Staff Discussion Paper, Point 205 in Gupta, Anisha, ‘Concept of Tying and Bundling and its Effect on Competition: A Critical Study of itin Various Jurisdictions’ (2010)

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The Explanation to Section 3(4) defines “tie-in arrangements”

as “any agreement requiring a purchaser of goods, as a

condition of such purchase, to purchase some other goods.”

There are two important issues to be noted at this stage:

1) That tying is not an infringement of section 4, i.e. it is

not an abuse of dominant position in the Indian law.

2) That the definition excludes services since the word

“goods” is explicitly defined in section 2(i).

The law extends sub-section 4 of section 3 of the competition

act 2002 to vertical agreements by the usage of the expression

“agreements amongst.....at different stages or levels of

production chain in different markets......”

Vertical restraints are subject to the Rule of Reason

test. So, the benefits and the harm have to be weighted before

an act of tying can be declared anti-competitive or to have an

appreciable adverse effect on competition, in terms of the

language of the law.

Under section 19(3) of the competition act, 2002 six factors

are provided for consideration of competition by the authority

before coming to any conclusions.

Section 19(3) states that... “The Commission shall, while

determining whether an agreement has an appreciable adverse effect on

competition under section 3, have due regard to all or any of the following factors,

namely)

Creation of barriers to new entrants in the market;

b) Driving existing competitors out of the market;

c) Foreclosure of competition by hindering entry into the market;

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d) Accrual of benefits to the consumer

e) Improvements in production or distribution of goods or provision of services

f) Promotion of technical, scientific and economic development by means of

production or distribution of goods or provision of services.”

Three of these factors are indicative of the harm to

competition while the remaining three are pro-competitive and

enhance welfare.

The scheme of law is clearly for the application of the Rule

of Reason Test.

Case law

In Consumer online foundation v Tata sky Ltd & Ors19 it was said by

the Director General (DG) that “DTH service providers are forcing the

consumers to get into a tie-in arrangement with them. They require the purchaser

of their DTH Services to also buy/take on rent the STBs procured by them. They are

not giving DTH services to those who are not willing to buy/ take on rent their STBs.

This is a clear violation of section 3(4) of the Act under which a tie-in arrangement

would prime facie be considered violative of section 3 if it has an appreciable

adverse effect on competition in India‖. Further, as these four DTH

service providers control more than 80% of the market, any

anticompetitive practice would definitely have an appreciable

adverse effect on the market. Hence, this is a clear case of a

tie-in arrangement which is having not only an appreciable but

a „significant‟ adverse effect on competition in the market.

The supplementary report was considered by the Commission, in

its meeting held on 05.01.2010. After having gone through the

supplementary report, the Commission, vide its order dated

08.01.2010, sought additional supplementary report with regard19 Case no. 2 of 2009, Competition Commission of India, March 2011.

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to the issue of DTH service providers forcing the consumers to

enter into a tie-in arrangement.

This issue of tie-in sales of the consumer premises equipment

(Set Top Box, Smart Card and Dish Antenna) was examined by the

DG in detail including the reasons for the continuance of this

practice.

The said report focused on two major interfaces related to

„tie-in‟ arrangement.

These are:

Interface between the DTH service provider and STB

manufacturer

Interface between the customer and DTH service provider

On examination of the agreement between the DTH service

provider and the customer, it was noted by the DG that no such

clause which directly restricts or forces the customer to

enter into tie-in arrangement is there. However, on account of

the lack of customer awareness and lack of availability of Set

Top Boxes and other equipments in open market, the customer

does end up buying all the related equipments from the DTH

service providers only. The sale of Set Top Box, Smart Card

and Dish Antenna is tied-in as all the three equipments are

provided in one package and are not readily available for sale

in open market-independent of each other. These three

components are technically essential as each performs a

specific function for availing the DTH service transmission.

Owing to the lack of practical interoperability and lack of

consumer awareness, the customer has no alternative but to

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purchase these three equipments from the DTH service provider

whose service he is availing. This ultimately results in tie-

in arrangements of the Consumer Premises Equipment from the

DTH service provider. Except Dish TV, no other DTH service

provider, under investigation, has specifically and clearly

mentioned in its agreement with the customer that a customer

can avail or procure compatible Set Top Box from any other

source. This offer of Dish TV is also of no benefit to

customer as neither the compatible Set Top Box is commercially

and readily available in the open market, nor the consumer is

really aware of this possibility

Summing up the findings, the DG concluded as under:

―The entire forgoing discussion and the recent developments indicate that the ‗tie-

in‘ sale of the Customer Premises Equipment is happening on account of non-

availability of Conditional Access Module (CAM), Set Top Box etc. in the open market,

lack of consumer awareness as well as lack of enforcement of licensing conditions by

any regulatory authority. The recent development of the news of the likelihood of

availability of Conditional Access Module (CAM) in open market will be a positive step

towards achieving interoperability. This can be further enhanced and fully

interoperability, which is technically possible, can be achieved by the availability of

non proprietary Set Top Boxes in the open market and enforcement of the clause 7.1

of the DTH licensing agreement relating to achieving interoperability among the DTH

Service providers.

NEGATIVE EFFECTS OF TYING ON THE INDIAN ECONOMY

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The negative effects of tying may be discussed under the

following heads:-

(1) Price discrimination – Price discrimination that increases

monopoly profits is possible if the buyers do not use the tied

product in a fixed proportion to the tying product. Here, the

discrimination is between the persons having different levels

of usage of the tied product.

To illustrate with an example, assume that a monopolist is

selling a capital product like a printer with its correlated

consumable say paper. Obviously, usage of paper varies from

one consumer to another depending on the number of print-outs

that they need. The monopolist could in such a situation lower

the cost of the printer to marginal cost contingent on the

buyers purchasing all their paper from him. The monopolist

could then set the price of the paper well above the marginal

cost and profit from that transaction.

This way, the consumers using more paper shall pay a higher

price than those using a lesser amount of paper. Hence, the

monopolist engages in price discrimination between persons

depending on their usage of the tied product in situation

where all consumers do not use the same ascertained amount of

the tied product.

Another form of price discrimination that might occur in

cases of tying takes place when the buyers do not necessarily

use the bundled products together. Assuming again that the

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firm is a monopolist in two products, A and B whose cost of

manufacture is the same.

Suppose that there are a bunch of buyers who value A at 20 Rs.

and B at 12 Rs. and there

are some buyers who value A at 12 Rs. and B at 20 Rs. If the

monopolist has to price the products separately then he cannot

distinguish between buyers who value the product differently,

and shall have to sell both the products for 20 Rs.

respectively and he will earn 20.00 Rs. However, if the

monopolist is bundling the two products together then he will

sell both A and B for 32 Rs. and will earn 24,000 Rs.

Therefore, this bundling allows the monopolist to profitably

price discriminate when buyer preferences between product A

and product B are not positively correlated.

However, for both the above types of price discrimination

to take place, it is a prerequisite that the firm has market

power in the tying market. However, such price discrimination

can have ambiguous effects in efficiency and consumer welfare.

These agreements may also at times allow an increase in output

that will efficiently serve marginal buyers who would

otherwise have not been able to buy the tying product if it,

were just sold at a separate price. However, it has to be kept

in mind that been tying can increase monopoly profits.20

(2) Another worrisome outcome of tie-in arrangements is when

there is a demand for multiple units of the tying product and

20 Einer Elhuage, ‘Tying, Bundled Discounts and the Single Monopoly Profit Theory’, 123 Harv. L. Rev. 397

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not the tied product. In such a scenario, the seller might use

bundling as a means to push off slow moving products as tied

products. Alternatively, a monopolist of the tying product can

thus maximize profits by squeezing out that consumer surplus

without losing customers by making the tying product

unavailable unless buyers take a tied product form it at a

price above the tied market price. Hence, either ways, however

the monopolist decides to handle the situation, the consumer

will either be faced to pay a premium for the product or pay

for and buy products that he does not need.

(3) Tying can also increase market power in the tied market by

foreclosing enough of the tied market to reduce rival entry,

efficiency, existence or expandability. Tying can create the

afore-mentioned anticompetitive effects if one relaxes the

unrealistic assumption that tied market rivals face no fixed

costs, have constant marginal costs that do not at all depend

on output, and can expand instantaneously to supply to the

whole market. For instance, if there are costs to entering a

market, it is profitable for a firm that makes two products to

bundle them to deter entry by an equally efficient rival that

can only enter one of those markets. The reason is that the

bundle leaves less of the market available to then rival, and

thus can make the profits of entry lower than the costs of

entry. 21

21 Edwin Hughes, ‘The Left Side Of Antitrust: What Fairness Means And Why ItMatters’, 77 Marq. L. Rev. 265

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(4) Tying can increase tying market power by impeding entry

and expansion from the tied market or buyer substitution to

it. Suppose that, instead of being fixed, a firm’s current

tying market power is vulnerable to an increased threat of

future entry if successful rival producers exist in the tied

market. If so, then the firm has incentives to engage in

defensive leveraging, foreclosing the tied market with

bundling in order to deter or delay entry in to the tying

market, thus maintaining its market power or preserving for

longer than it otherwise could. Thus, if successful producers

in the tied market are more likely to evolve into producers in

the tying market in future periods, then it can be profit

maximizing for a firm to use bundling to foreclose rivals in

the tied market in order to prevent or reduce the erosion of

its tying market power over time. It would also be pertinent

to highlight here that defence leveraging has even stronger

and more immediate anticompetitive effects if a firm’s tying

market power is constrained by the fact that the tied product

is a partial substitute to it or if the technological trend is

from the market where the firm has market power to the market

where the foreclosure is occurring.

However, if there is neither a tying market power nor

substantial tied market foreclosure, then none of the

anticompetitive effects may occur. Sometimes, tying may take

place solely due considerations of efficiency. At times,

bundling two products might lower cost or increase value. Two

products may be cheaper to make or distribute together, or

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they may be more valuable to the buyer if the seller bundles

them than if the buyer does. Another benefit that might arise

from bundling is the improvement of quality. Sometimes the

seller of the tying product might require that buyer use its

tied product with it because they worry that buyers will

otherwise use an inferior substitute and they will make the

tying product work less well and lower its brand reputation.

Lastly, tying may also be used as a mechanism to shift

financing or risk-bearing costs by the firm that can minimize

them.22

CONCLUSION

This research paper attempts to explain the basic concept

of tying along with a critical study of it across various

jurisdictions. The U.S. and E.U. positions have been

considered along with the difference in their approaches, to

bring out the advantages and disadvantages of these

approaches. Case laws have been analysed to understand the

working and enforcement of the Competition/Antitrust Laws.

22 Einer Elhauge & Damien Geradin, ‘Global Competition Law and Economics’, (Hart Publishing, USA), First Edn. Reprint, 2008, 498-505 in

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It can be concluded from this research that the initial

Per-Se Illegality Approach in respect of tying is not a correct stand.

Every case of tying should be judged on its own merits and

demerits and not in regard with straight- line jacket formulae. A Per

Se Approach prohibits certain acts without regard to the

particular effects of the acts, i.e. no investigation into the

question of possible pro-competitive effects. The Per-Se

prohibition is justified for types of conduct that have

manifestly anti-competitive implications and a very limited

potential for precompetitive benefits.

A Rule of Reason Approach on the other hand is about

investigating the effects of the challenged conduct, taking

into account the particular facts of the case. The Courts

decide whether the questioned practice imposes an unreasonable

restraint on competition taking into account a variety of

factors. The Rule of Reason Approach which considers the pros

and cons of each case is more favourable to the Indian legal

system.

This paper also highlights the various effects that a

tying arrangement has on the competition and economy of the

country. It can be said that tying arrangement has widespread

adverse affect on the economy of the country.

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Tie-In Arrangement in India

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