I’m happy to be speaking on “Discounted Pricing Clauses: Drafting Enforceable and Compliant Provisions After Collins.” We’ll be addressing potential pitfalls in drafting discounted pricing clauses in commercial contracts, particularly in light of the Sixth Circuit’s decision in Collins Inkjet Corp. vs. Eastern Kodak, 14-3306 (6th Cir. 2015). The panel will review the efficacy of bundled pricing provisions, minimum requirements contracts, and tiered or volume-based pricing schemes and provide best practices for drafting compliant clauses.
In Collins Inkjet Corp. v. Eastman Kodak Co., No. 14-3306 (6th Cir. March 16, 2015), the U.S. Court of Appeals for the Sixth Circuit held that differential pricing – charging more for one product when the customer does not also purchase a second product – can constitute an unlawful tying arrangement only when the price differential in effect discounts the second product below the seller’s cost.
Eastman Kodak sells refurbished printer components for industrial printers. It also sells ink. Its competitor, Collins, competes for the sale of ink. In 2013, Kodak announced a new pricing policy – it discounted print heads for customers that also buy Kodak ink. Collins sought, and obtained in the district court, a preliminary injunction against the pricing policy.
The Sixth Circuit affirmed the grant of the preliminary injunction, but clarified the test for what it termed “non-explicit tying via differential pricing.” In the Court’s view, differential pricing becomes equivalent to an unlawful tying arrangement when the price discount, as applied to the original price of the second (or “tied”) product, in effect lowers the price of the tied product below the seller’s cost. “[D]ifferential pricing . . . is unlawful only if it might [force] a more efficient competitor out of business.” The below-cost test is required because
differential pricing, unlike other forms of indirect coercion, can be employed legitimately without illegal anticompetitive influence from the defendant’s control over the tying product market . . . . [I]f the defendant merely offers a discount on the tying good to buyers who also purchase the tied good, then buyers are only ‘forced’ to buy the tied good elsewhere at a price low enough to offset the forgone discount for the tying product. The defendant uses its market power over the tying good to shift the discount from the tied good to the tying good, but this in itself does not ‘force’ buyers to purchase the tied product any more than a discount on the tied product would.
In applying a below-cost screen, the Sixth Circuit followed the Ninth Circuit’s approach to bundled discounts in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 906 (9th Cir. 2008), and criticized the Third Circuit’s approach in LePage’s, Inc. v. 3M, 324 F.3d 141, 154-57 (3d Cir. 2003 (en banc).
Application of a cost screen has the obvious advantage of providing a relatively bright line test that firms can apply themselves to avoid potential violations in the first instance.
In Smith v. eBay Corp., No. C 10-03825 JSW (N.D. Cal. May 29, 2012) (White, J.), the court refused to dismiss tying claims against eBay and PayPal where the plaintiffs alleged that eBay had tied national on-line auction services to the national on-line payment services provided by PayPal.
Distinguishing the Ninth Circuit’s recent cable TV channel tying case, Brantley v. Universal, Inc. 675 F.3d 1193 (9th Cir. 2012), which I covered here, the court noted that plaintiffs had alleged that defendants’ tying of auction services to on-line payment services had denied alternative payment systems such as Google Checkout access to the largest online marketplace (eBay). Plaintiffs thus alleged, in essence, that they had been precluded from offering Google Checkout as an alternative to PayPal. “It is reasonable to assume from these allegations that the alleged tying arrangement caused consumers of on-line auction services to forego substitutes for PayPal.”
The plaintiffs in Brantleywere tripped up because they didn’t allege (and apparently couldn’t allege) that independent TV networks had been foreclosed by the tying/bundling practices at issue in that case. The competitor foreclosure allegations in Smith v. eBay, while thin, were apparently enough to avoid a similar result.
I recently covered a Ninth Circuit decision that denied consumers the opportunity to insist upon unbundled cable TV channels. See this post.
Is this the end of the road for unbundling efforts? Maybe not. As this recent article suggests, the much-rumored next generation Apple TV may be a truly disruptive technology that enables consumers to unbundle channels and bypass the cable TV companies — or at least bypass them as content providers. (They still would provide bandwidth.)
I have no idea whether there really is a new Apple TV in the works, or if so, when it might appear. Nor do I know whether it will be the holy grail of new TV technology. However, the article does illustrate an important principle: today’s dominant or entrenched market players can be reduced to empty shells by disruptive technology that no one (or almost no one) can foresee. Remember Kodak and RIM? In not many more years, they may be nothing more than historical footnotes. These possibilities must be kept in mind when analyzing antitrust markets and market power issues. Exactly how to do that is a non-trivial problem.
In the meantime, maybe cable TV companies should learn more about these potential threats; at least some may be caught off guard.
I’ve posted a new file in the Downloads section — my PowerPoint presentation covering tying arrangements. It addresses how to leverage market power arguments and seller defenses, and specifically examines the development and history of U.S. tying law. If you haven’t checked out the Downloads section yet, now’s a good time to do so. Just click the Downloads navigation button in the menu bar above. Or you can click here.
P.S.: to answer the question in my post below: regarding the webinar where I presented this file, a 50% discount doesn’t implicate the Robinson-Patman Act for several reasons: (i) the webinar is a service, not a commodity, and so R-P doesn’t apply; (ii) differential pricing to end-users not in competition with each other is usually not problematic; (iii) pricing offered days or weeks ago may not be contemporaneous with last-minute discounts; and (iv) the changing conditions defense probably also attaches.
As I blogged recently, I’ll be speaking at a webinar tomorrow on tying arrangements. (It’s at 1:00 p.m. Eastern Time.)
If you use this link to register for the program, you’ll receive a 50% discount. I hope you can make it.
P.S. For readers of the blog, here’s a bonus question: why doesn’t the 50% discount offer above implicate the Robinson-Patman Act? Answer later this week; feel free to comment and leave an answer.
I will be speaking at an upcoming Strafford live telephone / Internet seminar on “Tying Arrangements: Avoiding Antitrust Liability.” The seminar will take place Tuesday, May 1 from 1:00 p.m. to 2:30 p.m. EDT. You can find more information about the seminar, and also register for it, by following the link above.
This CLE webinar will offer guidance to sellers of technological or other bundles of products on avoiding antitrust violations, discuss approaches based on regulations and jurisprudence for sellers of all kinds, and will outline special considerations for intellectual property owners.
As readers of this blog know, tying arrangements are offers by sellers to sell two or more products together, on the condition that both/all the products are purchased. The U.S. Supreme Court and lower federal and state courts have frequently addressed claims of tying arrangements that run afoul of antitrust laws.
Confusion over the legality of tying arrangements persists, despite rulings that tying can be illegal per se. The Supreme Court has focused on an analysis of tying based on a Rule of Reason, examining the seller’s market power among other factors.
The nature of the product involved presents other challenges, such as IP and products in the aftermarket setting. Opportunities exist in the form of special defenses that can shield some tying arrangements from antitrust liability.
The panel will examine the current state of antitrust issues affecting tying practices, and offer approaches to sellers for avoiding violations and seeking legal alternatives. We will have a question and answer period at the end.
I hope that you can join.
Are you disappointed with cable and satellite television channel bundles? Do you wish you could order channels a la carte? You will, unfortunately, have to endure your limited choices. In Brantley v. NBC Universal, Inc., No. 09-56785 (9th Cir. Mar. 30, 2012), the Ninth Circuit affirmed dismissal of an antitrust claim challenging TV networks’ tying of “must-have” channels to a group of less desirable, low-demand channels.
The plaintiffs lost their bid to challenge the tying practice because they did not (and apparently could not) allege that the tying caused any competitive foreclosure, that is, prevented independent programmers from participating in the market involving the sale of programs to cable and satellite providers.
The case is noteworthy because in it the Ninth Circuit expressly distinguishes between two familiar antitrust principles: harm to competition and reduction of consumer choice/increased prices to consumers. In the Ninth Circuit’s view, these principles are two, separate elements of an antitrust claim, and allegation and proof of the latter is not sufficient to establish the former. That is why the court affirmed the dismissal of the plaintiffs’ complaint.
The court included an interesting footnote to its opinion: “A rule to the contrary could cast doubt on whether musicians would be free to sell their hit singles only as a part of a full album, or writers to sell a collection of short stories. Indeed, such a rule would call into question whether Programmers and Distributors could sell cable channels at all, since such channels are themselves packages of separate television programs.”
If the facts were otherwise — if the TV networks’ practices in fact foreclosed independent programmers — then presumably the result would be (or could be) different.
(This is the second post in a series on the nine potential “no-nos” of patent licensing. Click here for the prior post.)
Patent / product tying is no longer an automatic “no-no.” It is subject to an analysis that takes into account market power, as well as, at least in some cases, pro-competitive benefits and anti-competitive effects.
A “tying” or “tie-in” or “tied sale” arrangement has been defined as “an agreement by a party to sell one product . . . on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that [tied] product from any other supplier.” Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992). As the DOJ and FTC Antitrust Guidelines for the Licensing of Intellectual Property state, “[c]onditioning the ability of a licensee to license one or more items of intellectual property on the licensee’s purchase of another item of intellectual property or a good or a service has been held in some cases to constitute illegal tying.” However, although tying arrangements may result in anticompetitive effects, such arrangements can also result in significant efficiencies and procompetitive benefits.
For many decades the courts have considered tying arrangements involving patents – in particular, ties where a patented product is offered only on the condition that the buyer also purchase an unpatented product. Courts have been concerned that the tie could expand the patentee’s rights or powers beyond the statutory patent monopoly grant into related products or adjacent markets and interfere with competition in those markets.
Ties are potentially problematic when the firm imposing the tie has market power in the tying product market, and can use that power to “force” the consumption of tied products. For a number of decades, patents were presumed to confer market power. This presumption meant that patent / unpatented product ties were particularly troublesome. However, on the patent / patent misuse side of the law, the patent laws were reformed in the 1980s, and under 35 U.S.C. § 271(d)(5):
No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: … (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.” 35 U. S. C. § 271(d)(5) (emphasis added).
On the antitrust side of the law, a patent also no longer creates a presumption of market power – market power must be proven as in any other antitrust case. See Illinois Tool Works v. Independent Ink, Inc., 547 U.S. 28 (2006). Thus, ties imposed by licensors without market power are unlikely to pose significant concerns.
There remains the question of whether, if the patentee indeed has substantial market power, a tie is “per se” unlawful or whether it is evaluated under the rule of reason (which balances pro-competitive benefits and anti-competitive effects). I suggest that this is often a somewhat academic question. Once courts start examining market power issues, they are necessarily inquiring into effects or potential effects issues, whether they say so or not. Compare NCAA v. Board of Regents, 468 U.S. 85 (1984) at 104 n.26 (“there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct. For example, while the Court has spoken of a ‘per se’ rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis.”). Even those courts that still treat market power ties as per se unlawful sometimes accept business justifications for the ties.
So the bottom line? Tying a patent to an unpatented product can still be unlawful. It’s just not always so.
The above discussion assumes that we are talking about the tie of a patent or patented product to an unpatented, staple product. I’ll discuss tying of non-staple products in an upcoming post.
The antitrust laws sometimes forbid product “tying.” A tying arrangement is an agreement by a party to sell one product on the condition that the buyer also purchases a different (or tied) product. In the franchise context, franchisors sometimes require franchisees to buy products from them or affiliated companies. Are these arrangements lawful?
Franchisors and franchisees see these arrangements differently. The franchisees – perhaps upset with the pricing of the franchisor-supplied products – may allege an antitrust violation, claiming that the franchise is the “tying” product and the required supplies or ingredients are the “tied” products. (Such ties can hurt competition in the tied product market – for example, if fast food franchises are at issue, ties could deny an important customer base to a competing supplier of food ingredients. That is what makes ties potentially anti-competitive.) The franchisor, of course, will argue that it is entitled on quality, reputation, uniformity, and consistency grounds to require that only certain supplies, ingredients, or products be used in its franchised operations.
The courts’ treatment of these claims has been somewhat complicated and not entirely uniform. It’s probably safe to say that these claims will fail if the franchisor lacks “market power” in the tying product market, or if the plaintiff does not adequately allege product market definitions. In the past, these market power and market definition requirements have stymied plaintiffs. But, as I note below, these claims have not been entirely foreclosed.
In Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, reh’g denied, 129 F.3d 724 (3d Cir. 1997), the Third Circuit took a strict view of how to determine the relevant product markets. The plaintiff franchisees argued that Domino’s had tied the franchise to the purchase of ingredients and supplies, and that the ingredients and supplies used in the operation of a Domino’s pizza shop constituted a relevant market. (The plaintiffs also alleged, among other things, that Domino’s had power in the market for “Domino’s approved” pizza dough and used that power to force plaintiffs to buy unwanted ingredients and supplies in the “aftermarket” for sales of supplies to Domino’s franchisees, and that Domino’s had monopolized the market for ingredients and supplies used in Domino’s stores.)
The court disagreed, holding that the relevant product market could not be limited to Domino’s franchisees. The ingredients and supplies used in a Domino’s franchise were interchangeable with products from other suppliers used in the broader market. The question was not whether a Domino’s franchisee could use both approved and non-approved products, but whether pizza makers generally could use such products interchangeably. They could. The franchise agreement’s contractually-imposed exclusivity restraints could not amount to or create market power; the question was whether the franchisor had pre-contract market power, not whether it had post-contractual “power” under the franchise agreement.
However, two relatively recent cases illustrate that the law in this area may not be entirely settled, or at least that tying claims in the franchise context are not completely dead. For example, in Burda v. Wendy’s International, Inc., 659 F. Supp. 2d 928 (S.D. Ohio 2009), the court refused to dismiss a franchise tying claim. Wendy’s had allegedly insisted that franchisees purchase foods or ingredients from it (or its affiliates) after franchisees entered into a franchise agreement that, at least according to the pleadings, did not contemplate such exclusivity. The lack-of-disclosure-at-time-of-franchising allegation was significant. Because the Wendy’s franchisees allegedly did not know that the “market power” was contractually established by the franchise agreements, the court concluded that Queen City Pizza was not controlling. (In Queen City Pizza, the standard form franchise agreement expressly provided that Domino’s reserved the right to require ingredients and supplies to be purchased exclusively from it.)
Compare Burda with Martrano v. The Quizno’s Franchise Co., L.L.C. (W.D. Pa. 2009). There, the court rather quickly dismissed a tying claim, reasoning that the alleged market for “Quick Service Toasted Sandwich Restaurant Franchises” was improper as a matter of law. Before plaintiffs signed their franchise agreements, they could have chosen among other fast food franchises, or, more narrowly, among other fast-food sandwich franchises. In such markets, Quizno’s did not have market power. Therefore, plaintiffs had no tying claim.
So what’s the upshot? First, franchisors still have broad abilities to impose supply and ingredient restrictions. But they are much safer if they do so as part of the franchise disclosures and the franchise agreement, rather than imposing them later. Such surprise restrictions may stimulate arguments that franchisees are suddenly “locked in” to exclusive sources of supply in connection with a market where the franchisor has market power, and ultimately prompt the filing of antitrust claims.
Second, in rejecting an aftermarket claim, the Queen City Pizza court stressed that the ingredients and supplies at issue were interchangeable with other ingredients and supplies on the broader market. The only factor that differentiated them was that they were approved by Domino’s. There may be cases, however, where products are not interchangeable. If the franchisor supplies truly unique products, and requires franchisees to purchase the products exclusively from it, some caution and further analysis is warranted.