Tie-in agreements

Introduction

A tying arrangement is a conditional sale by the seller which requires that a customer may purchase a "tying" (desirable) product only by also purchasing its "tied" (separate, not so desirable) product. While tying may be harmless if the markets for 'tying' and 'tied' product are both structurally competitive since undesirable tying by a seller may result in loss of customers, the situation is more concerning and complex if the seller has market power in one or both of the tying and tied markets as then there are fears that tying becomes an anti-competitive practice which may cause harm to consumers. In India, Tie-in arrangements are regulated by the Competition Act, 2002.

Indian Legislative Framework

Competition Act 2002

Section 3(4), which deals with vertical agreements, prohibits agreements amongst enterprises or persons at different levels of the production chain in different markets in respect of production, supply, distribution, storage, sale or price of, in goods or provisions (including tie in arrangements, exclusive dealing agreements, exclusive distribution agreements, refusal to deal, and resale price maintenance) if such an agreement causes or is likely to cause appreciable adverse effect on competition (AAEC) in India.

Furthermore, the explanation clause (a) to Section 3 (4) specifically defines tie-in arrangements as follows:

" “tie-in arrangement” includes any agreement requiring a purchaser of goods or services, as a condition of such purchase, to purchase some other distinct goods or services;"

Before the Competition (Amendment) Act, 2012, the definition of "tie-in arrangement" only included goods, but post the Amendment which was based on the Standing Committee on Finance Eighty-third report on the Competition (Amendment) Bill, 2012, "services" was also included in the definition of "tie-in arrangement". This is significcant because the addition of "services" in the definition widens the ambit of tie-in arrangements, bringing even services provided by digital platforms into its ambit.

It must be noted that vertical agreements such as tie in arrangements are thus not per se anti-competitive, but are considered to be so only if they cause AAEC.

Section 19 (3) of the Competition Act, 2002 lays down the factors that the Competition Commission must consider while determining whether an agreement has an AAEC under Section 3 as follows:

(a) creation of barriers to new entrants in the market;

(b) driving existing competitors out of the market;

(c) foreclosure of competition

(d) benefits or harm to consumers;

(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

The Indian Statutory framework does not have any "safe harbour" rule like the EC for vertical agreements. The safe harbour rule in the guidelines related to vertical restraints stipulates that if the market share of the supplier and the buyer is less than 30%, the agreement is presumed not to have an Appreciable Adverse Effect on Competition (AAEC). However, the Competition Commission of India has often looked at the EC guidelines on vertical agreements for guidance. For instance, in Automobile Dealers Association vs. Global Automobile Limited & Ors. the CCI cited the safe harbour rule of the EC guidelines on vertical restraints in support of its observation that in order for vertical agreements to cause an AAEC, there has to be a significant presence in the market. However, in reply, the Ministry of Corporate Affairs had stated in their written replies to the Standing Committee that there was no necessity to incorporate the "safe harbour provisions" from EC jurisdiction in section 3 (4) since section 19 (4) provided was flexible and "robust enough to allow the Commission to balance the pro competitive and anti competitive effects of vertical agreements to determine appreciable adverse effect on competition" arising out of such vertical agreements and thus were not required in the Indian Context, the Ministry did mention that they could be built into the Regulations of the Commission as and when required.

Types of Tie-in Arrangements

Broadly, Tie-In Arrangements can be classified into two types:

1. Static Tying: This is a type of exclusive arrangement. In a static-tying sale, the buyer who want to buy product A must also purchase product B, although it is possible to buy product B without buying product A. Thus, the items for sale are either product B individually, or a tied A-B package. For example: if a certain video game is exclusive to the XBox format, while the XBox hardware can be purchased individually, in order to purchase the particular video game, the buyer must necessarily purchase the XBox hardware.
2. Dynamic Tying: in this type of a tie-in arrangement, in order to purchase product A, the customer must also purchase product B, but in dynamic tying, the quantity of product B may vary from customer to customer. Thus, the packages for sale are A-B, A-2B, A-3B and so on. This type of tying may also be called as a variable proportion tie. For example, a person might purchase a single printer, but based on the contract or design, may be required to also purchase varying number of cartridges from the same manufacturer.

Tie-in Arrangements and Bundling

Furthermore, Tie-in arrangements must not be confused with the concept of bundling, in which two products are sold by the seller as a package at one price. Bundling and tying are dealt with as different practices in India, unlike other foreign jurisdictions such as the European Union (EU), the United States (US) and the United Kingdom (UK) which treat the two practices similarly. In India, while Section 3(4) of the Competition Act, 2002 deals with tie-in arrangements while Section 4(2)(d) deals with bundling. Some important differences between tying and bundling are as follow:

1. In a tying arrangement, the tied product is available independently of the tying product although the tying product is not available independently. However, in Bundling, both the products are sold as a package and are not available independently.
2. Presence of distinct products is necessary for a tying arrangement.

In Shri Sonam Sharma v Apple Inc USA and Ors, while observing that there is a subtle distinction between tying and bundling, the CCI said as follows:

"The term "tying" is most often used when the proportion in which the customer purchases the two products is not fixed or specified at the time of purchase, as in a "requirements tie-in" sale. A bundled sale typically refers to a sale in which the products are sold only in fixed proportions (e.g., one pair of shoes and one pair of shoe laces or a newspaper, which can be viewed as a bundle of sections, some of which may not be read at all by the customers). Bundling may also be referred to as a "package tie-in. It is also true that various foreign courts have occasionally used the two terms interchangeably."

Motives and Effects of Tying

1. Leverage Theory:

According to this theory, the harm to consumers was based on the belief that the tying monopolist would extract higher prices from consumers. This view was largely explored by Ward S Bowman who noticed that "in the case of two complementary products, the profit maximisation is computed by reference to the combination. One can raise the price of the second product only by reducing the price of the first product." However, the leverage theory would not work in situations wherein the tying product is monopolised and the tied product is competitive, and in cases in which both the tying and tied product have some market power. It must be noted that a type of leveraging may occur when a dominant firm ties sequential rather simultaneous monopolies. For example, if Microsoft senses a future threat from a rival's internet browser with operating system capabilities, it might tie its own operating system and browser to prevent the perceived threat from actualising. However, this is different from the type of leveraging envisaged by proponents of the leveraging theory, and may even be considered as a form of foreclosure rather than leveraging.

2. Price Discrimination

Many litigated cases related to tie-in arrangements involve a price reduction from the non-tied level of the tying product (which may even be sold below cost), but a mark-up on the tied product. This pricing strategy is known as "metering". Price discrimination occurs when the ratio of the average price to marginal cost (MC) (cost of each additional unit) varies among buyers of the same product. If MC is same for all customers, then price discrimination occurs whenever two consumers pay different unit prices for the same product. When demand for the tied product (eg: printer cartridges) varies significantly among buyers of the tying product (eg: printer), variable proportion tying may be used to discriminate among buyers with packages of different quantities of tied products, allowing the seller to increase his returns especially from buyers who have higher demand. Further, the reduction in the price of the tying good also enables the seller to earn greater profit from buyers with lower demand, as they may not have otherwise even purchased the product under separate provision. Since all consumers face the same price schedule, metering can be considered as an example of second-degree price discrimination, whose objective is the combined use of the two products.

3. Foreclosure

This is the most widely used defense of the anti-trust tying doctrine which says that tying unreasonably forecloses and excludes other firms (generally rivals) particularly in the tied product market. For example, once a major company which has a very high market share enters into an exclusive arrangement with a supplier, rival suppliers will be denied the opportunity to supply to that major company, and is thus anti-competitive and must be guarded against.

However, several writers have also been skeptical of the foreclosure claims. First, they argue that tying may require just a realignment of purchasing patterns. For example, if a major hospital enters into an exclusive arrangement with a cardiologist, other independent cardiologists who lost the right to practice in that hospital due to the tie, will have to practice at a different hospital, but market competition need not be impacted by this. Second, one of the same critiques of the leverage theory is also applicable here: even if tying forecloses rivals, the profit maximizing price of the tying-tied combination is not higher than it was before.

It is pertinent to note that the impact of tying on the competition in a market is also dependent on the barriers to entry or mobility of the resources of that market, such as Intellectual property rights, government and licensing restrictions, economies of scale in the markets for the tied and tying products etc.

International Experiences

Legal Framework

Section 1 of the Sherman Act, 1980 and Section 3 of the Clayton Act 1914 are the relevant sections of US law on tying. Although tying arrangements are subject to both these provisions, Courts have differentiated between the two provisions and the standards applicable to them:

1. While the Clayton Act only requires showing that the conduct/arrangement "may tend" to substantially reduce competition, the Sherman Act has a higher standard and proof of an actual effect on competition.
2. Furthermore, Clayton Act has a much more limited coverage because than the Sherman Act because the Clayton Act applies on when both the products (tied and tying products) are tangible goods and commodities, rather than real estate or intangibles such as franchises or services.

3 Approaches of US law to Tying:

1) Per se Approach: primarily seen in early cases, they reflect a strong hostility towards Tying Arrangements as they were regarded as having nearly no other purpose beyond the suppression of competition

2) Modified per se illegality Approach: the judgement of the US Supreme Court in the case of Jefferson Parish Hospital Dist No. 2 v Hyde moved to an approach in which the criteria for tying were used as proxies for competitive harm. In this case, while the Court accepted that there could be some merit to tying, it struggled to devise a test to distinguish "good tying" from "bad tying". However, it observed that an essential characteristic of an invalid tie lies in exploitation of a seller's control over the tying product to force the buyer to buy the tied product (which he either did not want, or would have preferred purchasing on different terms). Under the modified per se rule, it is thus only per se unlawful to enter into a tying arrangement when the seller has sufficient economic power in respect to the tying product that it appreciably restrains competition in the market for the tied product.

3) Rule of Reason Approach: This approach which was introduced in the case of United States v Microsoft Corp ('Microsoft III') recognises that even the modified per se approach as evolved in Jefferson could lead to an overly restrictive policy towards tying arrangements at least in some circumstances. In Microsoft III, the Court of Appeals held that the per se rule was inapplicable due to different facts and circumstances, the modified per se rule of Jefferson was not suitable since it was backward looking. Therefore, the case was sent back to the District Court with the direction to conduct a rule of reason analysis.

Unlike the per se analysis, the RoR looks at the competitive effect of the arrangement in the relevant market for the tied product rather than looking at the enquiry from the perspective of the tying product which is the focus of the enquiry in the per se rule. Furthermore, the RoR approach tries to balance anticompetitive effects and efficiencies brought in by tying arrangements.

Legal Framework

Article 81(1) of the EC Treaty includes as agreements that which which are incompatible with the common market and the agreements that make contracts subject to acceptance of supplementary obligations by other parties which (by their nature/commercial usage) have no connection with the subject of such contracts.

Article 83 includes tying as an abuse of dominant position. Thus, Article 81 is effected when tying is part of an arrangement concluded between a non-dominant supplier and buyer.

Regulation 2790/1999 on Vertical restraints provides for a "safe harbour" system, as discussed above, in which vertical agreements involving tying are presumed to be compatible with Article 81 if the market share of the supplier/seller is below 30% in the relevant market.

Approaches to Tying

The EC and European Courts have adopted a "unified" approach to different forms of tying and bundling- both contractual tying and integration of products have been assessed similarly without consideration of their different underlying effects on competition.

However, the formal framework of the tying analysis in the EC is very similar to the US per se approach, but requires a four stage assessment:

1. Establishment of market power (dominance) of the seller in the market for the tying product
2. Identification of tying: demonstration that a) purchasers are forced b) to purchase two separate products.
3. Assessment of the effect of tying on competition
4. Consider whether there is any exceptional justification for tying.

Significant Case Laws and Examples

Consumer Online Foundation v Tata Sky and Others:

In this case, the Director General of the Commission states that DTH service operators were forcing providers to enter into a tie in arrangement with them as they required the purchasers of their DTH Services to also buy/rent the Set-Top Boxes (STBs) procured by them and were refusing to provide their DTH Services to those not willing to buy/rent their STBs. The Competition Commission mentioned that this would be a clear violation of Section 3(4) of the Act as there was prima facie an AAEC in the market since the 4 service providers controlled more than 80% of the market. Supplementary reports were filed and considered by the Commission. The DG examined in detail the issue of tie-in sales of consumer premises equipment (STBS, Dish Antenna, Smart Card) and the DTH services. On examination of the agreements between DTH service providers and customers, the DG noted that while there was no clause that directly restricts or forces customers to enter into tie-in arrangements, due to lack of availability of the Consumer Premises Equipment in the open market and the lack of customer awareness, and lack of practical interoperability, the consumer ends up entering the tie-in agreement.

Shri Sonam Sharma v Apple Inc and Ors:

The allegations in this case pertained to distribution agreements between Apple India Pvt Limited and Vodafone Limited and Bharati Airtel Limited. As a consequence of this agreement, Apple iPhones (3G/3GS) could only be purchased on the GSM network of Airtel or Vodafone, and only through their distributors. The allegations claimed that this was both a violation of Section 3(4) and 4 (abuse of dominant position) of the Competition Act, 2002. The arrangement was recognised a a "contractual" tie-in under Section 3(4)(a) of the Competition Act, 2002 by the CCI, wherein the cellular phone manufacturer (Apple) and service provider (Vodafone, Airtel) had collaborated to provide a packaged product to the customer.

However, due to the extremely low market share of Apple in the 'Smartphone' market of India at that time (2008-2010), such a tie-in could not have caused any AAEC in the market in India in terms of Section 19(3) of the Competition Act, 2002 and holds that the arrangement did not violate Section 3(4) of the Act.

However, the CCI order reiterate that tie-ins are not per se anti-competitive, noting that economic literature suggests that there are 'pro-competitive' rationales (such as assembly benefits such as economies of scale and scope, addressing price inefficiencies) for product tying.

The CCI order identifies the "necessary and essential conditions: of anti-competitive tying as follows:

1. Presence of two separate products or services capable of being tied: In order to have a tying arrangement, there must be two products that the seller can tie together. Further, the requirement is that purchase of a commodity was conditioned upon the purchase of another commodity.

2. The seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product: The seller must have sufficient economic power in the tying market to leverage into the market for the tied product.

3. The tying arrangement must affect a "not insubstantial" amount of commerce: Linked with the above requirement, tying arrangements are generally not perceived as being anti-competitive when substantial portion of market is not affected.

The CCI order also gives the following examples of tying: the tied sales of machines and complementary products, the tied sales of machines and maintenance services, as well as technological ties that force consumers to buy two or more products from the same supplier due to compatibility reasons. More often, tying is a sales strategy usually adopted by the companies to promote / introduce a slow-selling or unknown brand when it has in its portfolio a fast-selling or well known product, over which it has certain market power.

Ramakant Kini v Dr. L.H. Hiranandani Hospital:

This case is significant because the CCI confirmed that there was no requirement of "dominance" to be a prerequisite for a claim of anti-competitiveness under Section 3 of the Competition Act, 2002. In this case, the Hiranandani Hospital entered into an exclusive agreement with Cryobanks International India to offer stem cells banking services on its premises which gave rise to this dispute. The informant, being unaware of this arrangement, had approached another Stem Cells Organisation M/s Life Cells India Pvt Ltd. earlier for its services and had engaged Hiranandani for maternity related services for the birth of her child. On later being informed about the arrangement between Hiranandani and Cryobank, she requested the hospital to allow Life Cell to collect the umbilical chord of her child which was denied and Cryobank was suggested as an alternative. Based on this, allegations under Section 3(4) and some clauses of Section 4 of the Competition Act, 2002 were enlisted under CCI.

The DG's investigation under Section 26 (1) of the Act came to the conclusion that the agreement between Hiranandani and Cryobank was anti-competitive under Section 3 and was likely to have AAEC in the market, particularly because Hiranandani was viewed as a dominant player in the market of maternity services.

It must be noted that the Commission noted that Section 3 (1) of the Competition Act has only been violated as the agreement caused AAEC, but it did not fall within section 3(3) or 3(4)- the claim for it being a tie-in arrangement was not accepted.

The order also opined on the scope of Section 3(1) with respect to Section 3 (3) and Section 3(4) of the Competition Act, 2002 as follows:

"While section 3(3) gives an exhaustive categories of agreements presumed to have appreciable adverse effect on competition and does not leave it to the Commission to include any other category of agreement under section 3(3), section 3(4) is illustrative of the agreements among enterprises at different stages or levels of production chain which are considered anti-competitive, if they cause or are likely to cause appreciable adverse effect on competition in India. Section 3(3) and section 3(4) are expansion of section 3(1) but are not exhaustive of the scope of section 3(1)"

It further elaborates on this as follows:

"This makes it abundantly clear that scope of section 3(1) is independent of provision of section 3(3) & 3(4). Sections 3(3) & 3(4) do not limit the scope of section 3(1). Also, for the purpose of section 3, the Commission is not supposed to enter into a discussion of market dominance, which exercise is necessarily to be done in respect of violation of section 4"

Recent Developments In Indian Law on Tying

Tying in the Digital Age

The Standing Committee on Finance (2022-2023) of the Seventeenth Lok Sabha published a report on the Anti-Competitive Practices by Big Tech Companies in which it considered the anti-competitive practices

In this report, the Standing Committee noted that "bundling and tying are prevalent across sectors in the digital market creating asymmetry in pricing, binding developers into taking all services from app store operators and removing competition from the market thus harming innovation and consumer interest Further, bundling and tying enable leading players to leverage their market power in one core platform service to another".

Apart from tying and bundling, due to other anti-competitive practice by big tech firms, the Committee was of the view that some of the leading players or market winners who can negatively impact competition in the digital eco-system be recognised as "Systematically Important Digital Intermediaries (SIDIs)" based on their revenues, market capitalisation, and number of active business and end users.

These SIDI, according to the Committee must not force business/end users to subscribe to/register with any further services as a condition to be able to use/access/sign up/register with any of the platform's core platform service.

Exclusive Tie-Ups:

The Standing Committee noted that exclusive tie-ups by major digital platforms can foreclose markets and constrict competition. Consequently, this may lead to increased prices for the end-users/consumers. Thus, the Committee recommended that SIDI "should not prevent business users from offering the same products or services to end users through third-party online intermediation services or through their own direct online sales channel at prices or conditions that are different from those offered through the online intermediation services of the platform" (Recommendation 9). This would be in order to ensure that fair market conditions prevail in the digital eco-system.