Response of U.S. Department of Justice ( DOJ ) November 18, Tying & Bundled Discounting

Transcription

1 Response of U.S. Department of Justice ( DOJ ) November 18, 2008 Tying & Bundled Discounting This part of the questionnaire seeks information on ICN members analysis and treatment of tying and bundled discounting. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding tying and bundled discounting in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For the purposes of this questionnaire, tying is defined as a dominant firm (or firm with substantial market power) selling one product (the tying product) only on the condition that the buyer also purchases a different (or tied) product, or agrees that it will not purchase the tied product from another supplier. It also includes the sale of products or services that could be viewed as separate but are sold only together as a bundle. For the purposes of this questionnaire, bundled discounting is defined as discounts or rebates based on a buyer s purchase of two or more different products or services. Unlike tying, bundled discounting arrangements do not prevent buyers from purchasing individual products separately, although the aggregate price of the individual components is typically higher than the price of the bundle. This part of the questionnaire covers only tying and bundled discounting, and not other practices such as exclusive dealing, single branding, and single-product loyalty discounts and rebates. Your responses should therefore not address these practices unless they have a clear and relevant connection to the analysis and treatment of tying and bundling. You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis for your agency to address tying and bundled discounts. Are tying and bundled discounts a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? U.S. antitrust law regarding tying and bundled discounts has developed through a common-law process in U.S. courts. That process provides U.S. antitrust law with flexibility to evolve and account for changing market dynamics and improved understanding of economic principles. See Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, 688 (1978); see also, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2720 (2007); ANTITRUST MODERNIZATION COMMISSION, REPORT AND RECOMMENDATIONS 39 (2007), available at 1

2 port.pdf. 1 Thus, U.S. judicial decisions provide the best guidance regarding when tying and bundled discounts are illegal under U.S. law. Those decisions arise under four U.S. statutes: 1. Section 1 of the Sherman Act, which provides that Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade... is declared to be illegal. 15 U.S.C Section 2 of the Sherman Act, which makes it illegal to monopolize, or attempt to monopolize, or combine or conspire... to monopolize. 15 U.S.C Section 3 of the Clayton Act, which makes it illegal to lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies, or other commodities, whether patented or unpatented, for use, consumption, or resale... or fix a price charged therefor, or discount from, or rebate upon, such price, on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies, or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract for sale or such condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce. 15 U.S.C Section 5 of the Federal Trade Commission Act, which declares unlawful [u]nfair methods of competition. 15 U.S.C. 45(a)(1). These statutes are applied in civil, not criminal, litigation when addressing tying and bundled discounting. Tying and bundled discounting are legal under U.S. antitrust law when engaged in by firms lacking market or monopoly power. See generally Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, (1984); Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, (9th Cir. 2008). 2. If your jurisdiction has specific criteria for analyzing tying or bundled discounting, please describe them and state their source. (e.g., legislation, 1 The Antitrust Modernization Commission was established by Congress to examine whether the need exists to modernize the antitrust laws and to identify and study related issues and to prepare and submit to Congress and the President a report containing a detailed statement of the findings and conclusions of the Commission, together with recommendations for legislative or administrative action the Commission considers to be appropriate. Antitrust Modernization Commission Act of 2002, Pub. L. No , 11053, 11058, 116 Stat. 1856, amended by Antitrust Modernization Commission Extension Act of 2007, Pub. L. No , 121 Stat

3 court decisions, or agency policy statements). U.S. courts consider a variety of factors to determine whether a tying or bundled discounting arrangement is illegal under the U.S. antitrust laws. For conduct alleged to constitute unlawful tying, the primary considerations are whether the tie has allowed a monopolist or dominant firm to maintain or acquire a monopoly. Other key considerations include (1) whether defendant has some special ability--usually called market power --to force a purchaser to do something that he would not do in a competitive market, (2) whether the tie forecloses a substantial volume of commerce, (3) whether defendant exploit[s]... its control over the tying product to force 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, and (4) whether there is a sufficient demand for the purchase of [the tied product] to identify a distinct product market in which it is efficient to offer [the tied product] separately. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, (1984). There have been very few U.S. federal court decisions -- and no Supreme Court decisions -- analyzing bundled discounts under section 2. The handful of judicial decisions (some of which are described in response to question 5) have developed conflicting standards. A paper submitted by the United States in June 2008 to the OECD Working Party No. 3 on Co-operation and Enforcement Roundtable on Bundled and Loyalty Discounts and Rebates (available at stressed the need for clear, administrable standards for evaluating bundled discounts ( 33): While a monopolist offering bundled discounts or rebates may, in certain circumstances, produce anticompetitive effects, pricing that benefits consumers may be inhibited by legal uncertainty. Clear and administrable standards are needed to enable firms to know in advance if bundled discounting that they are considering may subject them to antitrust liability. The development of clear, administrable standards for analyzing bundled discounts would be furthered by use of an appropriate price-cost safe harbor. That OECD Paper went on to suggest particular price-cost safe harbors that should be used and how to analyze conduct falling outside a safe harbor ( 34-36). The Department of Justice suggested substantially the same analysis in Chapter 6, Part 1 of its September 2008 Report, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (available at In particular, the DOJ Section 2 Report (pp ) suggested: 3

4 The particular price-cost safe harbor that should be used depends on whether bundle-to-bundle competition is reasonably possible. If it is, the potential competitive harm of bundled discounting mirrors that caused by predatory pricing, so the appropriate price-cost safe harbor should look to whether the discounted price of the entire bundle exceeds an appropriate measure of cost of all the products constituting the bundle. For pricing outside this safe harbor, a plaintiff should have to show harm to competition sufficient to establish a likelihood of recoupment. Where bundle-to-bundle competition is not reasonably possible, the potential competitive harm more closely resembles the harm that can arise from tying. Such harm may occur where the bundled discounting would cause customers to purchase the monopolist s bundle instead of buying only the monopoly product from the monopolist and purchasing the competitive product from an equally efficient competitor. The discount-allocation safe harbor is an appropriate screen for determining whether those consequences are possible. The discount-allocation safe harbor compares an appropriate measure of defendant s cost for the competitive product (or products) in a bundle to the imputed price of that product (or products), which is the price after allocating all discounts and rebates attributable to the entire bundle to the competitive product (or products). If the conduct falls outside the discount-allocation safe harbor, further analysis is required. Failure to come within the safe harbor should not create a presumption of anticompetitive effects. Where bundle-to-bundle competition is not reasonably possible, bundled discounting should only be condemned with an adequate showing of actual or probable harm to competition. A significant factor in this regard is whether rivals remain or are likely to remain in the market and, if so, whether the bundling significantly increases their marginal costs. Further, the Department believes that a proven procompetitive explanation for such a bundled discount should defeat a section 2 challenge to the bundled discount unless the anticompetitive harms are substantially disproportionate to the benefits. Previously, the Antitrust Modernization Commission in 2007 had concluded that the lack of clear standards regarding bundled discounts may discourage conduct that is procompetitive and had proposed a test for bundled discounts, requiring a showing, inter alia, that after all allocating all discounts and rebates to the competitive product, that product was sold below its incremental cost and that the bundled discount or rebate program has had or is likely to have an adverse effect on competition. See ANTITRUST MODERNIZATION COMM N, REPORT AND RECOMMENDATIONS 94, 99 (2007). 3. How many in-depth investigations (i.e., beyond a preliminary review) of tying arrangements and (separately) of bundled discounting arrangements has your 4

5 agency conducted during the past ten years? Please describe what prompted the investigations (e.g., competitor complaints). Over the past ten years, approximately 11 in-depth unilateral conduct investigations conducted by DOJ have included an examination of tying. Over the past ten years, approximately 4 in-depth unilateral conduct investigations conducted by DOJ have included an examination of bundled discounting. DOJ investigations are prompted in various ways, including other DOJ investigations, competitor complaints, and customer complaints. 4. State the number of tying arrangements and the number of bundled discounting arrangements your agency found to be unlawful over the past ten years (1999 to date); include cases resolved informally as well as those that led to a formal decision. If your agency has found any tying and bundled discounting arrangements to be unlawful, please describe the anticompetitive effect and the circumstances that led to the finding. For administrative systems (i.e., the agency issues its own decisions on the legality of the conduct, which may be appealable in court), please state the number of agency decisions finding a violation or settlements that were challenged in court and, of those, the number upheld and overturned. For judicial systems (i.e., the agency challenges the legality of the conduct in court and the court issues a decision), please state the number of cases your agency has brought that resulted in a final court decision that the program violates the competition law or a settlement that includes relief. Also state the number of cases that resulted in a final court decision that the conduct did not violate the competition law. DOJ litigated one case involving illegal tying allegations. As described below, the DOJ brought a case involving illegal tying against Microsoft. DOJ did not bring any cases involving bundled discounting. Please state whether any of these cases were brought under a criminal antitrust law. Not Applicable. See response to Question 1. Please provide a short English summary of the leading tying and bundleddiscounting cases in your jurisdiction, and, if available, a link to the English translation, an executive summary, or press release. Key Tying Cases Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984): The Court found that a tie was legal in an action brought by an anesthesiologist seeking hospital staff privileges. The hospital had denied the anesthesiologist privileges on the ground that it had granted to others the exclusive right to perform anesthesiology 5

6 services at the hospital. The anesthesiologist sued, claiming that the arrangement resulted in an impermissible tie between anesthesiology services and other hospital services provided by the hospital. The Court upheld the arrangement, citing plaintiff s failure to offer evidence that any patients were unable to use a competing hospital that would provide them with the anesthesiologist of their choice. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006): Illinois Tool required that customers use its patented printing systems only with Illinois Tool ink. Rejecting the lower court s use of a presumption that a patent always gives the patentee significant market power in the market for the tying product (here, printing systems), the Court held that in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc) (per curiam): The D.C. Circuit reversed a trial court s finding that Microsoft s contractual and technological bundling of its Internetbrowsing software to its operating-system software was impermissible under section 1 of the Sherman Act and remanded. On remand, the United States decided to no longer pursue those tying claims. Key Bundled-Discounting Cases SmithKline Corp. v. Eli Lilly & Co., 427 F. Supp (E.D. Pa. 1976), aff d, 575 F.2d 1056 (3d. Cir. 1978): Before SmithKline entered the market, Lilly had used a volume-rebate plan to sell four patented antibiotics known as cephalosporins to nonprofit hospitals. Id. at When SmithKline licensed a fifth cephalosporin from a foreign firm and sold it in competition with Lilly, Lilly responded by licensing the same drug and selling it as Kefzol. Id. at Lilly then modified its rebate plan by simultaneously reducing the rebate offered by roughly three percent and adding a bonus dividend of three percent provided that a hospital bought specified minimum quantities of three specific cephalosporins. Id. at Lilly expected that hospitals would meet the target on its two dominant cephalosporins and would have to purchase the minimum quantities specified for Kefzol to qualify for the bonus dividend. Id. at The court found that SmithKline would have had to offer a rebate of more than twenty percent on its one product to match Lilly s bundled rebate. Id. If SmithKline had lowered its price to Lilly s effective level, the court concluded, SmithKline s drug would not have been sufficiently profitable to justify remaining in the market, even if SmithKline had been able to reduce its costs of goods to Lilly s level. Id. at Thus, Lilly s bundled rebates would have excluded SmithKline even if the latter firm were an equally efficient producer, and the court held that Lilly had violated section 2 when it used its monopoly power in two products to exclude the slightly less efficient SmithKline from the market for the competitive product. Id. at

7 29. Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, Inc., 920 F. Supp. 455, 458 (S.D.N.Y. 1996): Only defendant Abbott made and sold all five assays that blood donor centers (BDCs) required to test blood for various viruses, and it had seventy to ninety percent of sales of four of them. Id. at 459. The Council of Community Blood Bank Centers solicited bids on a contract to supply assays to member BDCs, asking for different pricing schedules depending on whether the BDC bought all five assays from the chosen seller. Id. at Abbott won the contract with pricing schedules that gave significant discounts on each assay if a BDC bought all five from Abbott. Id. at Ortho alleged that BDCs felt that they had to buy at least two assays from Abbott and maintained that the discount plan created a significant incentive to buy all five from Abbott. Id. at 461 (quoting court papers). Drawing on SmithKline, the court framed the key question as whether a firm that enjoys a monopoly on one or more of a group of complementary products, but which faces competition on others, can price all of its products above average variable cost and yet still drive an equally efficient competitor out of the market. Id. at 467. The court explained that a plaintiff must allege and prove either that (a) the monopolist has priced below its average variable cost or (b) the plaintiff is at least as efficient a producer of the competitive product as the defendant, but that the defendant s pricing makes it unprofitable for the plaintiff to continue to produce the product. Id. at 469. Because Ortho did not claim that it could not sell its products at a profit as a result of Abbott s bundled discounting, the court found no section 2 violation. Id. at Virgin Atlantic Airways Ltd. v. British Airways PLC, 69 F. Supp. 2d 571 (S.D.N.Y. 1999), aff d, 257 F.3d 256 (2d Cir. 2001): While primarily viewed as a single-product loyalty discount case, the case also involved a bundled-discount claim. British Airways had entered into incentive agreements with travel agents and corporate customers that bundled routes by setting various targets for all British Airways routes or regional groups of routes and providing incentive payments each time a target was met. Id. at 574. Virgin Atlantic alleged that a corporate customer that purchased tickets on British Airways monopoly routes thus had an incentive to purchase British Airways tickets on routes where Virgin Atlantic competed, even though Virgin Atlantic charged less on those routes. Id. at 580. The court cited Ortho as holding that there would be an antitrust violation if the competitive product in the bundle were sold for a price below average variable cost after the discounts on the monopoly items in the bundle were subtracted from the price of that competitive product. Id. at 580 n.8. However, Virgin had little or no factual evidence that this situation had ever arisen in the varied bundling patterns, and the court refused to impose liability merely on the theoretical possibility of below-cost 7

8 pricing. Id. at LePage s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc): LePage s, a manufacturer of private-label transparent tape, charged that 3M maintained a monopoly in the market for transparent tape through a bundled-rebate program for large retail chains. Id. at 147. That program conditioned certain rebates on retail customers meeting multiple target-growth rates for their purchases of 3M products in diverse product lines, such as home-care products, homeimprovement products, and stationery products. Id. at 154. The rebate program allegedly shifted purchases away from LePage s private-label tape and towards 3M s branded and private-label tape by inducing customers to meet targets for purchases of 3M tape or risk losing rebates on 3M s other products. Id. at 157, LePage s alleged that it would have to compensate customers for the loss of rebates across those product lines, not just for the loss of tapespecific rebates, to defeat this shift. Id. at 161. LePage s also argued that 3M s bundled rebates and other conduct shielded 3M s higherpriced Scotch brand tape against competition from LePage s privatelabel tape and thereby helped to maintain 3M s transparent-tape monopoly. Id. at 162. The jury found 3M liable for monopoly maintenance in violation of section 2. Id. at 163. The Third Circuit ultimately affirmed the judgment in an en banc decision. Notably, the court did not require LePage s to prove that either it or a hypothetical equally efficient competitor could not meet the discount without pricing below cost. Rather, the jury instructions, which the Third Circuit upheld, provided that conduct is illegal under section 2 when it has made it very difficult or impossible for competitors to engage in fair competition. Id. at 168 (quoting trial court). The Supreme Court denied certiorari. Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008): PeaceHealth and McKenzie (the predecessor to Cascade Health Solutions) were competing providers of primary and secondary acutecare hospital services. PeaceHealth also provided tertiary-care services, in which it had a very high market share (approaching ninety percent in certain sub-specialities); McKenzie did not provide tertiary services. Id. at 891. McKenzie, which asserted that it could provide primary- and secondary-care services at a cost lower than PeaceHealth s (Id. at 897), brought monopolization and attemptedmonopolization claims against PeaceHealth based on evidence that PeaceHealth offered bundled-service packages to some customers (insurance companies). These bundled offerings provided discounts on all services if insurance companies made PeaceHealth their sole preferred provider for primary, secondary, and tertiary care. Id. at 892. In analyzing PeaceHealth s bundled offerings, the Ninth Circuit rejected the Lepage s non-cost based approach in explaining that the fundamental problem... is that it... concludes that all bundled discounts 8

9 offered by a monopolist are anticompetitive with respect to its competitors who do not manufacture an equally diverse product line and that it fails to consider whether such discounts may be procompetitive. Id. at 899. The Ninth Circuit also noted that the Supreme Court, which in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), and Weyerhaeuser Co. v. Ross- Simmons Hardware Lumber Co., 167 S. Ct (2007), applied a costbased test to predatory-pricing and predatory-bidding claims, respectively, forcefully suggested that we should not condemn prices that are above some measure of incremental cost. PeaceHealth, 515 F.3d at 901. The court reviewed various applications of a price-cost test and ultimately adopted a discount attribution standard, under which defendant is not liable under section 2 where, when the full amount of its discount on the bundled offering is allocated to the competitive product or products, the resulting price is above defendant s incremental cost to produce the competitive product or products. Id. at It is not entirely clear whether the court s standard was for a safe harbor or for liability. 5. Does your jurisdiction allow private parties to challenge tying or bundled discounting in court? Yes/No. If yes, please provide a short description of representative examples of these cases. If known, indicate the number of cases (or an estimate thereof) brought by private parties. Yes. Private parties can challenge tying or bundled discounting and recover treble damages pursuant to Section 4 of the Clayton Act, 15 U.S.C. 15(a). Two important tying cases brought by private parties Jefferson Parish and Independent Ink are described in the answer to question 4. In addition, a business practice that was once the frequent subject of private tying litigation under the antitrust laws is franchising. One important franchising case is Queen City Pizza, Inc. v. Domino s Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), which involved a Domino s pizza franchisee s assertion that Domino s (the franchisor) had engaged in an illegal tie by requiring the franchisee to buy several spices from Domino s in order to buy fresh dough. The court upheld the arrangement, noting that [c]ourts and legal commentators have long recognized that franchise tying contracts are an essential and important aspect of the franchise form of business organization because they reduce agency costs and prevent franchisees from freeriding offering products of substandard quality insufficient to maintain the reputational value of the franchise product while benefitting from the quality control efforts of other actors in the franchise system. Id. at Crucial to the court s analysis was the fact that Domino s did not possess market power before the franchise agreement was reached. The bundled discount cases discussed in response to question 4 are examples of private challenges. 9

10 In general, there have been relatively few challenges to bundled discounting under U.S. antitrust law. Evaluation of Tying Arrangements 6. In your jurisdiction, is the term tying used in a manner different from the definition in the introductory paragraphs above? If so, how? Under U.S. antitrust law, the term tying is generally used in the way that it is defined in the introductory paragraphs above, although the term is sometimes used to describe other conduct as well. For instance, conduct is sometimes analyzed as tying even when the purchase of a second product is not required, as when, for example, a firm prohibits the use of one of its machines with complementary machines made by other manufacturers. See, e.g., United Shoe Mach. Corp., v. United States, 258 U.S. 451, 459 (1922). 7. Please explain the competitive concern(s), if any, generally associated with tying in your jurisdiction, e.g. maintaining dominance/substantial market power in the tying market, distortion of or harm to competition in the tied product market, exploitation of consumers, exclusion of competitors, price discrimination, other. There are two competitive concerns with tying under U.S. law. First, in some circumstances, tying can allow a competitor with monopoly power or market power over one product to acquire monopoly power or market power in the tied-product market. Second, in some circumstances, tying can allow a competitor to maintain monopoly power or market power in the tying product market. 8. What specific tests, if any, are applied to determine under the competition law whether two products or services are separate rather than a single integrated product? There are many decisions addressing whether (1) a tie exists under U.S. antitrust law or (2) the allegedly tied products constitute a single product. A key consideration is whether there is a sufficient demand for the purchase of [the tied product] to identify a distinct product market in which it is efficient to offer [the tied product] separately. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, (1984). Numerous factors are considered, including the nature of the tie, industry characteristics, consumer preferences, and a firm s cost structure. See, e.g., Times-Picayune Publ g Co. v. United States, 345 U.S. 594, 614 (1953); Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698, (7th Cir. 1984) (Posner, J.); 10 PHILLIP E. AREEDA ET AL., ANTITRUST LAW (2d ed. 2004). The issue of whether two separate products exist can be implicated when a firm s product-design decisions are challenged as an illegal tie composed of products that should be offered separately. In general, U.S. antitrust law grants firms significant flexibility with regard to the design 10

11 of their products, reflecting the understanding that the innovative introduction of new and improved products combining new features or features that were previously only available with the purchase of separate products is one of the major ways that consumer welfare is enhanced. For instance, computers today combine many features (such as disk drives) that were once considered separate products. Cars are another example; today, cars routinely include features (like air conditioning) that were once viewed as distinct products. Thus, in general, product-design decisions are not considered illegal ties under U.S. antitrust law unless the product design both serves no purpose other than to disadvantage rivals and harms the competitive process. See generally Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756, (7th Cir. 1996) (Easterbrook, J.); Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1179 (1st Cir. 1994). 9. In what market(s) e.g., the tying or the tied market must effects, if any, be shown to demonstrate an illegal tie? A tie can be illegal under U.S. law if it harms competition in either the tied-product market or the tying-product market. a. What specific types of effects must be shown, e.g. market distortion, market foreclosure, harm to consumer welfare? For a tie to be illegal under U.S. antitrust law, harm to competition, as opposed to mere harm to a competitor, must be demonstrated. b. What degree of proof is required? Must the effect be actual, likely, or potential? The harm to competition must be actual or probable. 10. Does intent play a role, and if so what role and how is it demonstrated? Intent to increase sales by taking competitors customers or otherwise is not relevant to whether a tie is legal under U.S. antitrust law. Indeed, rivalry among firms is the hallmark of healthy competition under U.S. law. Evidence of the business purpose behind the conduct is relevant, however, in assessing the competitive effects of challenged conduct. One problem with intent evidence, however, is that it is capable of being misconstrued. s among a firm s employees, for instance, may include warlike analogies (for instance, we re going to kill our competitor ) to describe conduct that helps competition and increases consumer welfare (for instance, offering better terms to customers than those offered by rivals). Evaluation of Bundled Discounting 11. In your jurisdiction, is the term bundled discounting used in a manner different from the definition in the introductory paragraphs above? If so, how? 11

12 The term bundled discounting is generally used in substantially the same manner as defined in this questionnaire. The OECD Paper and the DOJ Section 2 Report have use the term to refer to the practice of offering discounts or rebates contingent upon a buyer s purchase of two or more different products, including instances in which the amount of rebates a customer receives is based on the quantities of multiple products bought over some period. See OECD Paper at 1 n. 1; DOJ Section 2 Report at Please explain the competitive concern(s), if any, generally associated with bundled discounting in your jurisdiction, e.g. maintaining dominance/ substantial market power, distortion of or harm to competition, exploitation of consumers, exclusion of competitors, price discrimination, other. Section 2 of the Sherman Act bars conduct that harms the competitive process by improperly facilitating the acquisition or maintenance of monopoly power, or the dangerous probability of achieving monopoly power. There are two main theories of how bundled discounting can be anticompetitive when engaged in by a firm with monopoly power (or the prospect thereof) with respect to one or more products in the bundle. One theory of harm from bundled discounts is similar to the theory of harm from price predation of a single product and applies where bundleto-bundle competition is reasonably possible whether because an individual competitor can provide all the products in the bundle, multiple competitors can team together to provide their own bundle, or sophisticated customers can assemble their own bundles. The primary difference is that with bundling there are multiple products, in contrast to one product in the predatory-pricing context. In either case, the belowcost pricing may force competitors to exit the market, after which a firm potentially could charge supracompetitive prices. Without below-cost pricing, equally efficient competitors would be able to match the bundled price, and competition would not be harmed. A second theory of competitive harm may apply when no rival can offer a competing bundle, and the bundled discounting would cause customers to purchase the monopolist s bundle instead of buying only the monopoly product from the monopolist and purchasing the competitive product from an equally efficient competitor. In the simplest case, Firm A has a monopoly in Product X and bundles X with Product Y, at a discount. Firm B only sells Product Y, and no one other than Firm A sells X. In this situation, Firm A s bundled discounting can have anticompetitive effects similar to those flowing from some anticompetitive ties. Specifically, it may allow Firm A to use its monopoly power in X to obtain a second monopoly in Y, or it may assist Firm A in maintaining its monopoly in X. The tying theory of bundled-discounting harm can further be illustrated with a hypothetical from the Ortho opinion, 920 F. Supp. 455, 467 (S.D.N.Y. 1996). The hypothetical assumes that only A makes conditioner, that both A and B make shampoo, and that consumers must use both 12

13 products. A s average variable costs are $2.50 for conditioner and $1.50 for shampoo, while B s average variable cost for shampoo is $1.25. A prices conditioner and shampoo at $5 and $3 if bought separately, but offers a bundled price of $5.25 if the products are bought as a package. This is above A s average variable cost of $4 for both products. However, in order for B to compete for shampoo sales, it must persuade the customer to buy its shampoo while paying the unbundled price of $5 for A s conditioner; this means that B can charge no more than $0.25 for shampoo, which is below both A s average variable cost for shampoo and B s own lower average variable cost. The harm to the competitive process in this hypothetical does not come about in the same way as it does with predatory pricing, because A is not charging a price either for the goods that make up the bundle or for the bundle itself that is less than its average variable cost for both products. Rather, the structure and level of A s prices result in all or most purchasers buying both products from Firm A, because the price of the bundle is lower than the prices customers would have to pay to acquire the bundled goods outside the bundle. Because the anticompetitive potential of such conduct does not arise from the monopolist charging below-cost prices, but from linking the two products, the impact of the conduct described in the hypothetical resembles that of tying more than that of predatory pricing. 13. Does price-cost comparison play a role in the evaluation of bundled discounting? Yes/No. If yes, please describe the comparison used and the role that it plays. Please also indicate if recoupment plays a role and, if so, what role it plays. Yes, price-cost comparisons have played a role in most of the judicial decisions evaluating bundled discounting and should play a role in the evaluation of bundled discounting (see responses to questions 2 and 4). As noted in response to question 2, the DOJ Section 2 Report concludes that the particular price-cost comparison that should be used depends on whether bundle-to-bundle competition is reasonably possible. If so, as noted in response to question 12, the potential competitive harm mirrors that of predatory pricing. The price-cost comparison in this instance should therefore mirror the predatory-pricing safe harbor: the bundled discount should be lawful if the price of the bundle is not below an appropriate measure of the cost of the bundle. (For a discussion of the appropriate cost measure to apply in predatory pricing cases, see Chapter 4, Part I(C)(3) of the DOJ Section 2 Report.) In addition, as in ordinary predatory-pricing analysis, a showing that recoupment is likely should be required. Where bundle-to-bundle competition is not reasonably possible because of the inability of any substantial competitor or group of competitors to provide a similar range of products, the potential competitive harm, as discussed in response to question 12, more closely resembles tying than that from predatory pricing. In these circumstances, the relevant price- 13

14 cost comparison should compare an appropriate measure of a monopolist s cost for the competitive product in the bundle to its imputed price of that product the price after allocating to the competitive product all discounts and rebates attributable to the entire bundle. A plaintiff would therefore be required to show that defendant sold the competitive product at an imputed price that was below its incremental cost of that product. This discount allocation should function as a safe harbor, so that the pricing should be lawful if price is above cost under this comparison; if the imputed price of the competitive product is below an appropriate measure of its cost that is, if the pricing falls outside the discount allocation safe harbor there should be no presumption of anticompetitive effects and further analysis is required. See response to question What sort of effects, if any, must be shown to demonstrate an illegal bundled discount? For example, must market distortion, market foreclosure, harm to consumer welfare or any other effect be shown? For bundled discounting to be illegal under U.S. antitrust law, actual or probable harm to competition, as opposed to mere harm to a competitor, must be demonstrated. As noted in response to question 2, the DOJ Section 2 Report concludes that where bundle-to-bundle competition is reasonably possible, harm to competition would be demonstrated by showing both that the price of the bundle is below an appropriate measure of cost of the bundle and that recoupment is likely. Where bundle-to-bundle competition is not reasonably possible and the pricing falls outside the discount allocation safe harbor described in response to question 13, anticompetitive effects cannot be presumed, and an adequate showing of actual or probable harm to competition is required. A significant factor in this regard is whether rivals remain or are likely to remain in the market and, if so, whether the bundling significantly increases their marginal costs. a. What degree of proof is required? Must the effects be actual, likely, or potential? The harm to competition must be actual or probable. 15. Does intent play a role, and if so what role and how is it demonstrated? Intent to increase sales by taking competitors customers or otherwise is not relevant to whether bundled discounting is legal under U.S. antitrust law. Indeed, rivalry among firms is the hallmark of healthy competition under U.S. law. Evidence of the business purpose behind the conduct is relevant, however, in assessing the competitive effects of challenged conduct. 14

15 Presumptions and Safe Harbors 16. Are there circumstances under which tying or bundled discounting is presumed illegal? Yes/No If yes, please explain, including whether the presumption is rebuttable and, if so, what must be shown to rebut the presumption. No. 17. Are there any circumstances under which there is a safe harbor? Are there any circumstances under which there is a presumption of legality? Please explain the terms of any presumptions or safe harbors. Neither tying nor bundled discounting is illegal under U.S. law unless engaged in by a monopolist or by a firm with market power. While the lack of a Supreme Court decision on bundled discounting and the relative paucity of lower court decisions make it difficult to state whether there is a price-cost safe harbor for bundled discounting (see responses to questions 2, 4, and 5), as is stated in the OECD Paper at 33 and DOJ Section 2 Report at 105, the development of clear, administrable standards for analyzing bundled discounts would be furthered by use of an appropriate price-cost safe harbor. The particular price-cost safe harbor that should be used depends on whether bundle-to-bundle competition is reasonably possible. See response to question 13 for a description of these safe harbors. Justifications and Defenses 18. What justifications or defenses, if any, are permitted (e.g., reduced manufacturing or distribution costs, meeting competition, product reputation, technological linkages) for tying or bundled discounting? a. Please specify the types of justifications and defenses that your agency considers in the evaluation of tying arrangements, the role they play in the competitive analysis, and who bears the burden of proof. Tying offers many potential efficiencies. A firm that ties can have lower costs than a firm offering each product separately because, for a variety of reasons, only offering two products together can cost less than offering them separately. Moreover, if relatively few customers strongly prefer to purchase one product without the other, it may not be profitable to incur the additional costs of meeting that limited demand. For a recent description of these economic phenomena, see, e.g., David S. Evans & Michael Salinger, Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law, 22 YALE J. ON REG. 37, (2005). Moreover, tying may also reduce consumers costs, including the costs of negotiating terms of sale, transportation costs, and integration costs. Tying may also benefit consumers by improving or controlling quality. 15

16 U.S. antitrust law takes into account potential efficiencies when assessing the legality of a tie. A tie that helps consumers should not be condemned as anticompetitive. In general, the plaintiff always bears the ultimate burden of proof in an antitrust action under U.S. antitrust law. In the context of efficiencies, however, courts frequently impose on defendant the burden of demonstrating a claimed efficiency in cases where harm to competition already has been established. See United States v. Microsoft Corp., 253 F.3d 34, 59 (D.C. Cir. 2001) (en banc) (per curiam). b. Please specify the types of justifications and defenses that your agency considers in the evaluation of bundled discounts, the role they play in the competitive analysis, and who bears the burden of proof. While bundled discounting by a firm with monopoly power (or the prospect thereof) can harm competition (see response to question 12), as an antitrust treatise has stated, Discounting is presumptively procompetitive and should be condemned only in the presence of significant market power and proven anticompetitive effects. 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 749b, at 245 (Supp. 2007) (citing id (2d ed. 2002)). In particular, the DOJ observed in its Section 2 Report: Commentators have pointed out many efficiencies potentially associated with bundled discounting. In much the same way that tying can lower a firm s costs, bundled discounting can lower a firm s costs. As one commentator explains, many of these discounting practices are explained by economies of scale or scope in either manufacturing or transacting. Bundled discounting also can allow businesses both to induce existing customers to try new product or service offerings and give retailers incentives to promote particular products and services. Firms may also use bundled discounting to price discriminate in a way that increases output and economic efficiency. DOJ Section 2 Report at (footnotes omitted). That Report (at 106) concludes that a proven procompetitive explanation for a bundled discount should defeat a section 2 challenge to that discount unless the anticompetitive harms are substantially disproportionate to the benefits. (See the response to part a. above for discussion of burden of proof). 19. What policy considerations does your jurisdiction consider with respect to tying and bundled discounts? You may wish to address the following sorts of issues: Are tying and bundled discounting common? Does your jurisdiction generally consider them to be procompetitive? Does your answer depend on whether the firm is dominant? Does your jurisdiction view tying and bundled discounting by a dominant firm 16

17 as generally anticompetitive? What competitive concern(s), if any, are generally associated with tying and bundled discounts in your jurisdiction? Nearly every item for sale arguably is composed of what could be viewed as distinct tied products, making tying one of the most common business practices from an economic perspective. Bundled discounting is also very common in the United States. For example, restaurants often offer diners a choice between a la carte items and complete meals priced at a discount compared to a la carte, and telecom companies may offer a package of multiple services at a reduced price. Both tying and bundled discounting are procompetitive in most instances. They are common business practices in competitive markets, reflecting their potential to lower costs and maximize consumer welfare. The benefits of tying and bundled discounting, and the frequency of their use by firms with little or no market power, lead some commentators to conclude that similar consumer benefits are likely to result from those practices when employed by firms with significant market power. Thus, there is no presumption under U.S. antitrust law that either tying or bundled discounting is anticompetitive even if employed by a dominant firm. As mentioned above, there are two competitive concerns with tying under U.S. law. First, in some circumstances, tying can allow a competitor with monopoly power or market power over one product to acquire monopoly power or market power in the tied-product market. Second, in some circumstances, tying can allow a competitor to maintain monopoly power or market power. As discussed in response to question 12, there are two primary competitive concerns with bundled discounting: where bundle-tobundle competition is reasonably possible, the concern resembles that from predatory pricing; where bundle-to-bundle competition is not reasonably possible, the competitive concerns resemble those that can flow from tying. 20. Please provide any additional comments that you would like to make on your experience with tying and bundled discounting and enforcement in your jurisdiction. This may include, but is not limited to, whether there have been or whether you expect there to be major developments or significant changes in the criteria by which you assess tying and bundled discounting. Tying For many years, tying has been treated under a rule of modified per se illegality under U.S. antitrust law. See generally Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 9 (1984). Many view this as a vestige of the historical misunderstanding of tying s frequent procompetitive effects and believe that per se treatment will be overturned by the Supreme Court. See generally Sherman Act Section 2 Joint Hearing: Tying Session 17

18 Hr g Tr. 23, 36, 76, 98 (Nov. 1, 2006), available at 06.pdf. Bundled Discounting Although there is general agreement that bundled discounting by a monopolist can be anticompetitive, there is less consensus on how likely that is. The Supreme Court has not yet rendered a bundled-discounting decision, and challenges to this conduct have all been private treble damage cases. Court and commentators have been grappling with the question of a how a court and a business deciding whether to offer bundled discounting should go about determining whether a bundled discount is anticompetitive. There are only a few federal court decisions, and the standards they have used are not entirely consistent. The DOJ Section 2 Report and the United States recent OECD Paper explored whether appropriate standards for analyzing bundled discounting by a monopolist are becoming more discernable and suggested that there are appropriate price-cost safe harbors that can be used in that analysis. 18

19 U.S. Department of Justice November 18, 2008 Single-Product Loyalty Discounts and Rebates This part of the questionnaire seeks information on ICN members analysis and treatment of loyalty discounts and rebates. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding loyalty discounts and rebates in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For this questionnaire, loyalty discounts and rebates are defined as discounts or rebates on units purchased of a single product, conditioned upon the level or share of purchases. This part of the questionnaire concerns only treatment of single-product discounts rather than pricing practices involving multiple products (bundling, tying, and related practices). You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis that allow your agency to address loyalty discounts and rebates. Are loyalty discounts and rebates a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? U.S. antitrust law regarding loyalty discounts and rebates has developed through a common-law process in U.S. courts. That process provides U.S. antitrust law with flexibility to evolve and account for changing market dynamics and improved understanding of economic principles. See Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, 688 (1978); see also, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2720 (2007); ANTITRUST MODERNIZATION COMMISSION, REPORT AND RECOMMENDATIONS 39 (2007). Thus, U.S. judicial decisions provide the best guidance regarding loyalty discounts and rebates. Those decisions arise under the U.S. antitrust statutes pertaining to unilateral conduct, primarily Section 2 of the Sherman Act, which makes it illegal to monopolize, or attempt to monopolize U.S.C. 2. Cases could also be brought by the FTC under Section 5 of the Federal Trade Commission Act, which declares unlawful [u]nfair methods of competition. 15 U.S.C. 45(a)(1). These statutes are applied in civil, not criminal, litigation when 19