ANALYTICAL STUDY OF THE CONCEPT OF TIE-IN ARRANGEMENT IN INDIAANALYTICAL STUDY OF THE CONCEPT OF TIE-IN ARRANGEMENT IN INDIAINTRODUCTION

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 orders[footnoteRef:2]. 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 environment[footnoteRef:3]. [2: Dr. Chakravarty, S., MRTP Act metamorphoses into Competition Act pg no. 5] [3: Ramappa T., Competition Law in India Policy, Issues and Development 12(2006) (New York, Oxford University Press)]

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.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.[footnoteRef:4] [4: 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.]

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 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 quality[footnoteRef:5]. 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. [5: World Bank/OECD: Glossary of Industrial Organization on Economics and Competition Law. ]

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. 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 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 AGREEMENTSAnti-competitive agreements are divided into two types:1. Horizontal Agreements2. 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 BSupplier A Supplier BDealer 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, 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 agreements[footnoteRef:6]. [6: Ramappa T., Competition Law in India Policy, Issues and Development 12(2006) (New York, Oxford University Press)]

This research paper deals with one of the type of vertical agreement i.e. tiein arrangements. Its types, effects and regulation in India are the main focus of this research paper.

DIFFERENCE BETWEEN HORIZONTAL AND VERTICAL AGREEMENTSHorizontal and Vertical Anti-Competitive Agreements are very different and easily distinguishable. The differences between the two are as follows:

HORIZONTAL ANTI-COMPETITIVE AGREEMENTVERICAL ANTI-COMPETITIVE AGREEMENT

In Horizontal Agreements the parties to the agreement are enterprises at the same stage of the production chain engaged in similar trade of goods or provision of services competing in the same market.For e.g. agreements between producers or between wholesalers etc.In Vertical Agreements the parties to the agreements are non-competing enterprises at 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 agreementThe 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 result inbid rigging or collusive bidding arepresumed to have an appreciable adverse effect on competition.Vertical Anti-Competitive Agreements are not presumed to have 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 substantially restrict competition or not.

The burden of proof is on the defendant to prove that the agreement is not anticompetitive.The burden of proof is on the party alleging the anti-competitive practice to prove 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.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.

In Northern Pacific Railway Co. V. United States[footnoteRef:7], 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. [7: Northern Pacific Railway Co. et al. v. United States 356 US 1 (1958) ]

TYPES OF TIE-IN OR TYING ARRANGEMENTSTying 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 manufacturers 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 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. Hilti[footnoteRef:8], hilti required users of its nail guns and nail cartridges to purchase nails exclusively from it. [8: Hilti v commission; T-30/89 [1990] ECR-II-163, [1992] 4 CMLR 16, CFI]

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 suppliers 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

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 Acts 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 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 Parish[footnoteRef:9] moved to an approach in which the criteria for tying are used as proxies for competitive harm and, arguably, efficiencies. [9: Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde,[ 466 U.S. 2 (1984)]]

Third, the rule of-reason approach: Microsoft III[footnoteRef:10] introduced a rule-of-reason approach towards tying; recognizing that, at least in certain circumstances, even the modified per se [10: United States v. Microsoft Corp., [253 F.3d 34 (D.C. Cir. 2001)]]

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 States[footnoteRef:11], 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 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. [11: Northern Pacific Railway Co. v. United States,[ 356 U.S. 1 (1958)]]

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 States[footnoteRef:12] 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 [12: International Salt Co., Inc. v. United States, [332 U.S. 392, 395-96 (1947)]]

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. Hyde[footnoteRef:13] 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 Court observed that the essential characteristic of an invalid tie-in arrangement lies in the sellers 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. [13: Supra note 8 at 10]

The Rule of Reason co-exists with a per se rule in two senses[footnoteRef:14]. 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. [14: Malik, Vikramaditya S., The Doctrines of Tying and Bundling Concept and the Indian Case (2010) Pg 21.]

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 the 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 Courts 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 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.[footnoteRef:15] [15: 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.]

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.[footnoteRef:16] In other words, contractual tying( including the tying of primary products and consumables) and integration of products have been assessed in the same way without taking into account the different underlying effects of them on competition. [16: Gupta, Anisha, Concept of Tying and Bundling and its Effect on Competition: A Critical Study of it in Various Jurisdictions (2010) Pg. 24]

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 existsMarket powerArticle 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 Sugar[footnoteRef:17] 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 objected, among other things, to British Sugars 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. [17: Napier Brown v. British Sugar, Commission Decision 88/519/EEC, 1988 O.J. (L 284) 41]

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 II[footnoteRef:18] 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. [18: Tetra Pak II, Commission Decision 92/163/EEC, 1992 O.J. (L 072) 1]

TyingTying 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.

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.

CoercionUnder 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. 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 effectsFactual 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 marketAccording 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 above, the Commissions 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 casesThe 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 or bundling.[footnoteRef:19] 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 [19: Article 82 Staff Discussion Paper, Point 205 in Gupta, Anisha, Concept of Tying and Bundling and its Effect on Competition: A Critical Study of it in Various Jurisdictions (2010)]

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.

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;d) Accrual of benefits to the consumere) Improvements in production or distribution of goods or provision of servicesf) 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 lawIn Consumer online foundation v Tata sky Ltd & Ors[footnoteRef:20] 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. [20: Case no. 2 of 2009, Competition Commission of India, March 2011.]

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 regard 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 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

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 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 thereare 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.[footnoteRef:21] [21: Einer Elhuage, Tying, Bundled Discounts and the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397 ]

(2) Another worrisome outcome of tie-in arrangements is when there is a demand for multiple units of the tying product and 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. [footnoteRef:22] [22: Edwin Hughes, The Left Side Of Antitrust: What Fairness Means And Why It Matters, 77 Marq. L. Rev. 265 ]

(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 firms 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 firms 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 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.[footnoteRef:23] [23: Einer Elhauge & Damien Geradin, Global Competition Law and Economics, (Hart Publishing, USA), First Edn. Reprint, 2008, 498-505 in ]

CONCLUSIONThis 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.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.1 | Page

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