Buy One Get One (Discounted) Only Violates The Sherman Act If The Discount For The “Tied” Product Is Below Cost.
In a recent opinion, Collins Inkjet Corp. v. Eastman Kodak Co., the Sixth Circuit held that differential pricing in a tying arrangement (i.e., “I will charge you less for printer replacement parts, but only if you buy all of your printer ink from me.”) only violates the Sherman Act if the “tied” product is discounted below the seller’s cost. In short, Collins argued that Kodak was offering below-cost pricing on replacement parts in exchange for customer’s commitment to purchase Kodak’s ink, with the long-term effect that Collins would be driven out of the ink market. In this case, the Sixth Circuit affirmed a preliminary injunction against Kodak which required Kodak to cease charging customers different rates for Kodak’s refurbished printer components depending on whether the customers bought Kodak ink.
Two of the central elements of a tying claim, both addressed in this opinion, are 1) market power in the tying market product, and 2) coercion, through pricing, of buyers of the tying product to buy the tied product.
- Kodak’s Market Power
Kodak conceded that it had a 100% share of the printer replacement parts market, the “tying market product.” Kodak, however, argued, unsuccessfully, that its customers were sophisticated businesses that could switch to other brands of printers that had competitive markets for replacement parts. The court rejected this argument because, even though Kodak’s customers were sophisticated, the information costs to the customer were still extremely high because the customers have been locked in to high aftermarket prices without prior warning.
- “Discount Attribution”
The Sixth Circuit agreed with the Ninth Circuit’s analysis related to the “discount attribution” standard to determine whether a bundled discount is an unlawful “attempt to monopolize” under § 2 of the Sherman Act:
[T]he full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products. If the resulting price of the competitive products is below the defendant’s incremental cost to produce them, the trier of fact may find that the bundled discount is exclusionary for the purpose of § 2. This standard makes the defendant’s bundled discounts legal unless the discounts have the potential to exclude a hypothetical equally efficient producer of the competitive product.
Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 906 (9th Cir. 2008).
Judge Daughtrey concurred in the decision, but wrote separately to disagree with the “majority’s formulation of a decisional framework applicable to all tying arrangement. She further stated that this case should be limited to the specific set of facts before the court: “where a defendant has a 100% monopolistic share of the market for a tying product, it may not price a tied product. for which it does not control the relevant market, below its costs without running afoul of the provisions of the Sherman Act.
* Note: This case dealt with one specific type of printer – Versamark (http://graphics.kodak.com/us/en/product/printers_presses/comm_web/versamark/default.htm.)
– D. Gil Schuette