Antitrust/ Competition Law: Abuse of Dominant Position in Light of Tying Arrangements or Tie-in Sales

Antitrust/ Competition Law: Abuse of Dominant Position in Light of Tying Arrangements or Tie-in Sales*

Have you ever experienced a situation wherein your purchase of one product requires you to buy another product? This practice may be classified as a tying arrangement or a tie-in sale which may be considered a violation of Republic Act No. 10667, otherwise known as the Philippine Competition Act (“PCA”).  In fact, Section 15 (f) of the PCA prohibits the supply of particular goods or services dependent upon the purchase of another goods or services from the supplier which has no direct connection with the main goods or services to be supplied.

There are no Supreme Court cases at present about tying arrangements in the Philippines.  Thus, it may be helpful to refer to the United States and European Union for guidance on these matters.

US Treatment of Tying Arrangements

A tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer’s agreement to take a second product or service.[i] Tying can be objectionable under Section 2 of the US Sherman Act of 1890.[ii] In Northern Pacific R Co v. United States[iii], the US Supreme Court declared tying as per se unreasonable and unlawful under the Sherman Act. In the years that followed, tying has retained its status as per se illegal.

However, in the seminal case of United States Steel Corp. v. Fortner Enterprises, Inc.[iv], the US Supreme Court upheld an arrangement wherein a credit company agreed to provide financing to real estate developers provided that the latter purchase prefabricated houses from the former’s subsidiary.  The ruling was founded on the fact that the real estate developers failed to prove the appreciable economic power of the credit company in the tying product (credit facilities).  This paved the way to relaxing the instant condemnation of tying arrangements, and instead, mandated a prior finding of substantial market power of the defendant in the tying product.

Subsequently, in the case of Jefferson Parish Hosp. Dist. v. Hyde[v], the US Court held as valid a contract of a hospital with a firm of anesthesiologists whereby the latter are the only ones allowed to render anesthesiological services to the patients of the former.  When such agreement was questioned by an anesthesiologist who was refused admission to the hospital medical staff for not being a member of the aforementioned firm, the US Supreme Court required proof showing that the hospital has significant market power in the tying product, in order to apply the per se rule of illegality.

In United States v. Microsoft Corp.[vi], the Court applied a rule of reason rather than the per se illegality in assessing technological tying.

Despite the recent precedents, tying remains per se illegal.  However, there is a notable relaxation of the rule. US courts and federal antitrust enforcement agencies increasingly focus on the actual economic effects of particular tying and bundling arrangements, in assessing their legality.[vii] In fact, the US DOJ concurs that the per se illegality rule for tying is misguided because tying has the potential to help consumers and cannot be said with any confidence to be anticompetitive in almost all circumstances.[viii]

Although not a formula adopted by the US Supreme Court, a treatise, as cited by the US Department of Justice, spelled out the elements of an illegal tie as follows[ix]:

(1) two separate products or services are involved

(2) the sale or agreement to sell one product or service is conditioned on the purchase of another

(3) the seller has sufficient economic power in the market for the tying product to enable it to restrain trade in the market for the tied product

(4) a not insubstantial amount of interstate commerce in the tied product is affected

EU Treatment of Tying Arrangements

In Art. 102 of the European Union’s Treaty on the Functioning of the European Union (“TFEU”), abuse is present when a dominant undertaking makes the conclusion of contracts subject to the 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. Traditionally, tying is prohibited per se in the EU. Thus, in Tetra Pak v. Commission[x], the act of Tetra Pak, a dominant manufacturer of cartons, in tying the sale of its machineries for packaging to its cartons, violated Art. 102 of the TFEU.  There, the Court held that “where an undertaking in a dominant position directly or indirectly ties its customers by an exclusive supply obligation, that constitutes an abuse since it deprives the customer of the ability to choose his source of supply and denies other manufacturers access to the market”. Also, in Hilti v. Commission[xi], the act of Hilti in requiring the users of its of nail cartridges (of which it is a dominant manufacturer thereof) to buy only its nails, was considered as a violation of Art. 102 of the TFEU.

However, with the advent of General Electric v. Commission of the European Communities[xii] and Tetra Laval BV v. Commission of the European Communities[xiii], the EU focused on looking at the effect of the tying arrangement and the foreclosure brought thereon. Hence, it was incorporated in the EC Guidelines that, in order for a tying arrangement to be considered illegal, the following elements must be shown[xiv]:

1.  an undertaking is dominant in the tying market

2.  The tying and tied products are distinct products

3.  The tying practice is likely to lead to anticompetitive foreclosure

Guided by the wisdom from the US and the European Union, Philippine companies have to ensure that their business schemes do not fall under the category of illegal tie-in sales.  Otherwise, they run the risk of being sued for anti-competitive conduct and be subjected to administrative fines up to P250,000,000.00 or worse, imprisonment of up to seven (7) years.

* This is part of the Research Paper submitted by NDV Law’s Atty. Norieva “Nikki” de Vega to the University of Melbourne, in partial fulfillment for the completion of a Master of Laws Degree (Global Competition and Consumer Law).