Tying contracts are agreements in which a producer requires a buyer (usually a retailer) to purchase one or more other products as a condition of purchasing the product the buyer wants to acquire. Tying contracts potentially limit competition and can be challenged under the Sherman Antitrust Act and the Clayton Antitrust Act. Under the Clayton Act, only tying contracts that “substantially lessen competition or tend to create a monopoly” are illegal.
Sometimes manufacturers have required retailers to carry a full line of a company’s products as a condition for selling any of their products. For example, a buildingmaterials manufacturer refuses to sell contractors wallboard (the tying product), unless they also agree to buy its joint compound, steel studs, and nails (the tied products). The potential anticompetitive effect of the tying agreement reduces competition in the sale of the tied products. During a 1980s shortage of wallboard, sellers raised prices and still had contractors begging for product. Contractors, whose building projects were stopped due to a lack of wallboard, offered a variety of incentives to sellers to get the needed materials. If, however, the manufacturer required the purchase of other products as a condition for the purchase of wallboard, the manufacturer could be accused of requiring a tying contract.
To be illegal per se under the Sherman Act, (1) a tying contract must involve two separate and distinct items rather than integrated components of a larger product, (2) the tying product cannot be purchased unless the tied product is also purchased, (3) the seller must have sufficient power to restrain competition in the tied product, and (4) a “not insubstantial” amount of commerce in the tied product must be affected by the agreement. In a widely discussed case in 2000, a federal court held that Microsoft unlawfully tied its Internet Explorer Web browser to its Windows operating system. However, in a case involving McDonalds, a franchising agreement requiring the franchisee to lease a store from the franchiser as a condition for the acquiring the franchise was considered an integral part of a business plan and not a tying contract.
Further reading
Mallor, Jane P., A. James Barnes, Thomas Bowers, Michael J. Philips, and Arlen W. Langvardt. Business Law and the Regulatory Environment, 11th ed. Boston: McGraw-Hill, 2001.