bigstock-Dollars-Background-from-packs-45251779Corporate antitrust compliance programs often spotlight the dangers of tying arrangements. Those risks arise when a seller with a dominant position in one product coerces its customers by offering that must-have product only if customers buy a second product that they don’t want (or at least would rather buy elsewhere).

Tying arrangements are easy for risk managers to spot when the link between the two products is explicit – if you want product A, you have to buy product B too. A recent federal court of appeals decision focuses on a different kind of linkage: when a company sells product A by itself, but offers deep discounts if customers buy product B as well.

In that case, Eastman Kodak was the only source of refurbished replacement printheads for large commercial printers that it originally sold new. Kodak also sold ink for the printers, in competition with Collins, the plaintiff. Kodak did not expressly condition the sale of its printheads on the purchase of Kodak ink, but it gave customers significant bundled discounts on printheads if they also bought ink from Kodak. The United States Court of Appeals for the Sixth Circuit in Cincinnati upheld a preliminary injunction against Kodak’s differential pricing on printheads that favored its ink customers.

The court acknowledged that differential bundled prices are not inevitably anticompetitive; that’s a truism, given that bundled discounts are common (e.g., “Buy a suit, get shirts for 50 percent off!”). The court also said that bundled pricing isn’t necessarily anticompetitive even when a seller has a degree of market power over one of the products in the bundle, if customers can still buy the other (tied) product elsewhere at a price low enough to offset the discount they don’t receive on the first (tying) product. In that instance, the court said, the pricing policy is merely “the equivalent of offering an above-cost discount on ink…”

The court held, however, that if the discounts offered on the tying product (printheads) are attributed to the tied product (ink), and if those discounts bring the price of the tied product below the seller’s incremental cost, then customers can’t practically obtain the tied product elsewhere, making the arrangement potentially anticompetitive because it could exclude an equally efficient competitor in the market for the tied product. The court thus transplanted bundled pricing principles previously applied only in predatory pricing cases, articulating a new legal standard for tying arrangements.

The case was not the first to recognize that bundled pricing can create a tying arrangement as surely as an outright requirement that two products must be bought together.  Earlier cases had found bundled pricing problematic where very few products were sold outside the bundle, or where no “rational buyer” would buy the products separately. But the case broke new ground by formulating a more rigorous analytical framework to separate anticompetitive price bundles from bundles that simply indicate vigorous competition.