Tying Arrangements

A TYING arrangement is an agreement by a party to sell one product or service only if the potential buyer: a) also purchases a different product or service, or b) agrees she will not purchase that product or service from another seller. The item the buyer wants to buy is the tying item, and the one she is required to buy in order to get it is the tied item.

A Louisiana hospital required that all surgical patients use the services of one of four anesthesiologists. A competing anesthesiologist charged that this violated the Sherman Antitrust Act, which “prohibits contracts, combinations, and conspiracies in restraint of trade, and monopolization, [and] includes criminal penalties when enforced by the government. Violation can result in substantial fines and, for individual transgressors, prison terms.” The U.S. Supreme Court's 1984 decision that this case did not represent an illegal tying arrangement was based on the hospital's lack of dominant position; it only housed 30 percent of the area's hospitalized patients. If a patient did not want to use any of the four anesthesiologists, he could easily go to another hospital.

For many years prior to this Jefferson Parish Hospital v. Hyde decision, federal courts had considered tying arrangements to be illegal per se, that is, automatically illegal. However, in that landmark decision, five justices retained the traditional per se rule but only if an analysis of the market affected by the tying arrangement indicated a “substantial potential for impact on competition.” The other four justices were in favor of abandoning per se altogether. Associate Justice John Paul Stevens said in the majority opinion that “there is nothing inherently anticompetitive about packaged sales.” He went on to say that to have a tying arrangement, there must be two products with distinct markets, and the seller must have sufficient market power for the first product to compel the customer to buy the second product.

The key is the market power. A company that only holds a small share of market for a product or service will not endanger other companies, products, or consumer resources by tying its product or service with another. On the other hand, a company that has a large portion of the market would be much more likely to run afoul of illegal tying charges because consumers would have much less recourse, or other products to choose instead. Because of the actual market conditions and required effect on commerce, each case must be studied on an individual basis. A classic example of a tying arrangement involves Sandoz Pharmaceuticals. The company manufactured Clozaril, which is used in[Page 821] treatment of schizophrenia, and required that the medicine be bought only as a package with an expensive blood-monitoring system and lab-testing services operated by Caremark, Inc.

It was ruled that this was an illegal tying because, although Clozaril patients should have their blood monitored for side effects, those side effects were rare. More importantly, the tests could be performed more quickly and equally effectively by personnel by any hospital or laboratory service provider.

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