DAMODARAM SANJIVAYYA

NATIONAL LAW UNIVERSITY

SABBAVARAM, VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE
Evolution of the law relating to tying - In the United States

SUBJECT
Competition Law

NAME OF THE FACULTY

Mr. R Bharat Kumar
Name of the Candidate: Abdul Quadir
Roll No.: 18LLB001
Semester: VIIIth
 ACKNOWLEDGEMENT

It is my privilege to express our sincerest regards to our faculty for his support valuable ideas,
cooperation, and his wonderful experience in Competition Law which helped me all the way
in making my Project. I would like to take this opportunity to show my heartfelt gratitude to
Mr. R. Bharat Kumar Sir for providing me with this interesting and wonderful opportunity
to do research on the topic of “Evolution of the law relating to tying - in the United States”
This would have not been completed without his guidance.
 TABLE OF CONTENTS

ABSTRACT .................................................................................................................................. 1

INTRODUCTION ........................................................................................................................... 2

THE ANTI-TRUST LAWS IN UNITED STATES ............................................................................... 3

THE HISTORY & DEVELOPMENT OF SHERMAN AND CLAYTON ACTS ......................................... 5

JUDICIAL DEVELOPMENT OF LAW .............................................................................................. 7

1. MOTION PICTURE PATENTS CO. V. UNIVERSAL FILM MANUFACTURING CO. .................. 7

2. UNITED STATES V. UNITED SHOE MACHINERY COMPANY OF NEW JERSEY ..................... 9

3. UNITED STATES V. UNITED SHOE MACHINERY COMPANY OF NEW JERSEY ................... 10

4. FEDERAL TRADE COMMISSION V. SINCLAIR REFINING COMPANY ................................. 11

5. PICK MANUFACTURING CO. V. GENERAL MOTORS CORP .............................................. 12

6. INTERNATIONAL BUSINESS MACHINES CORP. V. UNITED STATES ................................. 13

7. INTERNATIONAL SALT COMPANY V. UNITED STATES .................................................... 15

8. UNITED STATES V. PARAMOUNT PICTURES, INC. ........................................................... 15

9. JEFFERSON PAR. HOSP. DIST. NO. 2 V. HYDE ................................................................. 17

10. UNITED STATES V. MICROSOFT CORP. ....................................................................... 18

CONCLUSION............................................................................................................................. 20
 ABSTRACT

The initial tying cases to reach the Supreme Court after the passage of section 3 reveal that the
attitudes of the Court’s members on antitrust enforcement were divided much like those of the
participants in the current debate about antitrust goals. Statutes cannot be applied without
interpretation of their language, and legislators rarely draft a statute with perfect clarity.
Statutory phrases such as may substantially lessen competition and legislators use of words
such as great and powerful or independent must be translated into more concrete concepts
before they can be applied with any precision. It has essentially been through this process of
translation that the Supreme Court has developed the antitrust law of tying arrangements. The
various translations adopted by the Court since the adoption of the Clayton Act reflect the
shifting judicial attitudes regarding the boundaries of legitimate antitrust enforcement.

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 INTRODUCTION

Tying takes place simpliciter when a seller conditions the sale of a desirable product (tying)
upon the sale of a not so desirable one (tied), thereby abusing the need of a consumer for the
desirable product in order to facilitate sales of the not so desirable one. What is inherent in this
understanding of tying arrangements is that - (1) there should be in existence two products for
conditioning the sale of one upon the other. (2) consumer must be dependent upon the seller
for the desirable product and the seller must be in a position superior (dominance) to that of
the consumer by virtue of the latter’s need for the former’s product. (3) and that such
dependence or position of superiority is abused. Such abuse is condemned by antitrust laws for
varied reasons, primary being the exploitation of the consumers and the exclusion of
competitors in the tied market by the seller. It is facilitated by leveraging the dominance
possessed in the tying market to foreclose the market for the competitors in the tied market.

Therefore, for a seller to successfully tie, it must above all, possess dominance which may then
be leveraged. Another assumption which is apparent and has become the most important point
of contention is that tying is only used for such leveraging, and it is never used as a means of
achieving better standards of competition.1 This is contentious since this position stands altered
in the wake of the expanding scope of acknowledging efficiency defenses in particular and
shifting towards an ‘effects-based’ approach in general (Chicago School). Nevertheless,
considering that the objective of antitrust laws is the subsistence of fair competition upon merits
and proscription of activities having anti- competitive effects both actual (ex post) or potential
(ex-ante) what is implicit in this argument is the fact that once dominance is shown in a claim
for tying, the seller would invariably be held liable, for such tie-in would be anti-competitive
as it would lead to market foreclosure and the competition would not be on merit. It is for this
reason that many jurisdictions have proscribed tying as an instance of abuse of one’s
dominance.2

Some jurisdictions have also proscribed tying as an instance of vertical restraint facilitated
through an agreement without prescribing dominance as a prerequisite. What may be inferred
here is that a tie-in may still be illegal (as a vertical restraint), even if dominance as a

1
Victor H. Kramer, The Supreme Court and Tying Arrangments: Antitrust as History, 69 MINN. L. REV. 1013
(1985).
2
Federal Trade Commission, Tying the sale of Two Products, https://www.ftc.gov/tips-advice/competition-
guidance/guide-antitrust-laws/single-firm-conduct/tying-sale-two-products.

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prerequisite has not been established i.e., even if a seller may not be dominant in the tying
market, tying may still lead to anti-competitive effects. However, in such a scenario, market
foreclosure will have to be depicted by the plaintiff and such foreclosure will have to be
weighed against countervailing pro-competitive efficiencies if any exist similar to a rule of
reason approach under Section 1 of the Sherman Act, 1890 in the United States or as
agreements having as their effect the “prevention, restriction or distortion of competition” are
treated under Article 101 of the Treaty on the Functioning of the European Union in the
European Union.

A similar distinction exists in India as well, since tying has been proscribed as an abuse of
one’s dominance under section 4(2) of the Indian Competition Act, 2002 wherein it can only
be perpetrated by a dominant entity and as a vertical restraint u/s. 3(4)(a), wherein it can be
perpetrated by any entity irrespective of its standing in the market (dominance is not a
prerequisite). However, this statutory distinction has been blurred by the C.C.I. by introducing
the prerequisite of dominance in an enquiry u/s. 3(4)(a)7 setting a bad precedent for subsequent
tie-in related litigations in India.

THE ANTI-TRUST LAWS IN UNITED STATES

Antitrust laws are acts adopted by the U.S. Congress to restrict unfair or monopolistic trade
practices. The laws all share the same basic objective to ensure free trade and a competitive
economy by preventing price fixing and unlawful restraint of trade; and to encourage healthy
competition and improved market efficiency. The primary U.S. Antitrust Acts include:

The Sherman Antitrust Act of 1890: The first major legislation passed by Congress to address
the oppressive business practices of the late 1800s. The Sherman Antitrust Act and its
amendments form the foundation for most federal and state antitrust legislation. It provides that
no person shall monopolize, attempt to monopolize or conspire with another to monopolize
interstate or foreign trade commerce, regardless of the type of business entity.

The Clayton Act of 1914: An amendment to clarify and supplement The Sherman Act as well
as provide stronger enforcement capabilities. The Clayton Act was the first federal statute
expressly prohibiting certain forms of price discrimination.

The Federal Trade Commission Act of 1914: Created the Federal Trade Commission and
initially authorized it to issue “cease and desist” orders to large corporations in order to curb

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unfair trade practices. Today, all federal Antitrust Laws are enforced by the Federal Trade
Commission and the Antitrust Division of the Department of Justice.

The Robinson-Patman Act of 1936: Amended the statutes within the Clayton Act that related
to price discrimination. Specifically, it prohibits a seller of commodities from selling
comparable goods to different buyers at different prices (with certain exceptions).

The Celler-Kefauver Act of 1950: Called by some “The Antimerger Act”, it reformed and
strengthened the Clayton Antitrust Act by prohibiting buying up a competitor’s assets if the
result of that activity was reduced competition.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976: Required that companies

planning large mergers or acquisitions to notify the government of their plans in advance and
established the Premerger Notification Program.

16 CFR: Title 16 of the Code of Federal Regulations (CFR) encompasses the Federal Trade
Commission rules and regulations.

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 THE HISTORY & DEVELOPMENT OF SHERMAN AND CLAYTON ACTS

Development of Sherman Act:

The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to
prohibit trusts. It was named for Senator John Sherman of Ohio, who was a chairman of the
Senate finance committee and the Secretary of the Treasury under President Hayes. Several
states had passed similar laws, but they were limited to intrastate businesses. The Sherman
Antitrust Act was based on the constitutional power of Congress to regulate interstate
commerce. The Sherman Anti-Trust Act passed the Senate by a vote of 51–1 on April 8, 1890,
and the House by a unanimous vote of 242–0 on June 20, 1890. President Benjamin Harrison
signed the bill into law on July 2, 1890.

“The Sherman Act authorized the Federal Government to institute proceedings against trusts
in order to dissolve them. Any combination “in the form of trust or otherwise that was in
restraint of trade or commerce among the several states, or with foreign nations” was declared
illegal. Persons forming such combinations were subject to fines of $5,000 and a year in jail.
Individuals and companies suffering losses because of trusts were permitted to sue in Federal
court for triple damages. The Sherman Act was designed to restore competition but was loosely
worded and failed to define such critical terms as “trust,” “combination,” “conspiracy,” and
“monopoly.” Five years later, the Supreme Court dismantled the Sherman Act in United States
v. E. C. Knight Company (1895). The Court ruled that the American Sugar Refining Company,
one of the other defendants in the case, had not violated the law even though the company
controlled about 98 percent of all sugar refining in the United States. The Court opinion
reasoned that the company’s control of manufacture did not constitute a control of trade”3

Development of Clayton Act:

Clayton Antitrust Act, law enacted in 1914 by the United States Congress to clarify and
strengthen the Sherman Antitrust Act (1890). The vague language of the latter had provided
large corporations with numerous loopholes, enabling them to engage in certain restrictive
business arrangements that, though not illegal per se, resulted in concentrations that had an
adverse effect on competition. “Thus, despite the trust-busting activities of the administrations
of Presidents Theodore Roosevelt and William Howard Taft under the Sherman Act, it

3
Richard Henry Lee, Lee Resolution, June 7, 1776, https://www.ourdocuments.gov/doc.php?flash=false&doc=51

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appeared to a congressional committee in 1913 that big business had continued to grow bigger
and that the control of money and credit in the country was such that a few men had the power
to plunge the nation into a financial panic. When President Woodrow Wilson asked for a drastic
revision of existing antitrust legislation, Congress responded by passing the Clayton measure”.4

Tie-Ins in the US

As per the U.S. jurisprudence, claims against tying can be brought under any of the following
provisions of the relevant antitrust laws:

(1) section 1 of the Sherman Act, which prohibits contracts ‘in restraint of trade’, (2) section 2
of the Sherman Act, which makes it illegal to ‘monopolize’, (3) section 3 of the Clayton Act,
which prohibits exclusivity arrangements that may ‘substantially lessen competition’, and (4)
section 5 of the FTC Act, which prohibits ‘unfair methods of competition’.

However, since section 5 of the FTC Act is only limited for being invoked by the Federal Trade
Commission, primary consideration under this article is limited to the Sherman Act and the
Clayton Act. It was first considered, based upon the ruling of the United States Supreme Court
(“U.S.S.C.”), that there existed a difference in the standards set by these legislations, with
regard to tying agreements. However, position since then has been cleared to the extent that
these standards, ‘have become so similar that any differences remaining between them are of
interest to only antitrust theologians. Moreover, ‘whichever U.S. statute is invoked, the
underlying economics of the relevant agreements is the same, and each statute effectively
imposes the same requirement of proving the agreement is anticompetitive’. Tying in the U.S.
since its known inception as an alleged attempt of extending patent monopoly over unpatented
products has plummeted from almost absolute per se illegality to a rather modified approach,
with various prerequisites and noted exceptions in place. The Chicago school thinkers must be
credited for the same. The difference in opinion vests in the apprehension that the ‘leverage
theory’ as idealized by the Harvard school thinkers was not in sync with the economic reality
and a tad too much dependent upon the empirical analysis of the ‘industrial organization, the
field of economics that monopoly questions.

4
https://www.britannica.com/event/Clayton-Antitrust-Act.

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 JUDICIAL DEVELOPMENT OF LAW

1. MOTION PICTURE PATENTS CO. V. UNIVERSAL FILM MANUFACTURING CO.5

FACTS
When Motion Picture Patents Company (MPPC) (Plaintiff), the assignee of a patent, granted
the right and a license to manufacture and sell machines embodying the invention described in
the patent at suit, i.e., a mechanism for feeding film through a motion picture projector, MPPC
(Plaintiff) attached a notice to each machine limiting the use of the motion picture machines
by the purchaser or by the purchaser’s lessee to terms not stated in the notice but which were
to be fixed after sale, by MPPC (Plaintiff) at its discretion. The notice attempted to restrict the
use of film supplies and the sale price and was not a restriction on the use of the machine
itself. Universal Film Manufacturing Company (Defendant) claimed that the owner’s rights to
control the materials to be used in operating the machine could not be used in operating the
machine could not be derived from or protected by the patent law and the notice was invalid.
The lower court has dismissed the infringement claim of the plaintiff and held that the
restrictions are unreasonable.

ISSUES
Whether the restrictions provided by the plaintiff violates the provisions of Section 3 of Clayton
Act and thus considered as anti-competitive and of tying nature?

REASONING
The grant is of the exclusive right to use the mechanism to produce the result with any
appropriate material, and the materials with which the machine is operated are no part of the
patented machine or of the combination which produces the patented result. The difference is
clear and vital between the exclusive right to use the machine which the law gives to the
inventor and the right to use it exclusively with prescribed materials to which such a license
notice as we have here sought to restrict it. The restrictions of the law relate to the useful and
novel features of the machine which are described in the claims of the patent, they have nothing
to do with the materials used in the operation of the machine; while the notice restrictions have
nothing to do with the invention which is patented but relate wholly to the materials to be used
with it. Both in form and in substance the notice attempts a restriction upon the use of the

5
Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).

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supplies only and it cannot with any regard to propriety in the use of language be termed ‘a
restriction upon the use of the machine itself.
Whatever right the owner may have to control by restriction the materials to be used in
operating the machine must be derived through the general law from the ownership of the
property in the machine and it cannot be derived from or protected by the patent law, which
allows a’ grant only of the right to an exclusive use of the new and useful discovery which has
been made-this and nothing more.
Such a restriction is invalid because such a film is obviously not any part of the invention of
the patent in suit; because it is an attempt, without statutory warrant, to continue the patent
monopoly in this particular character of film after it has expired, and because to enforce it
would be to create a monopoly in the manufacture and use of moving picture films, wholly
outside of the patent in suit and of the patent law as we have interpret it. The notice further
provides that. the machine shall be used only upon other terms (than those stated in the notice)
to be fixed by the plaintiff, while it is in use and while the plaintiff “owns said patents.” And it
is stated at the bar that under this warrant a charge was imposed upon the purchaser graduated
by the size of the theater in which the machine was to be used. A restriction which would give
to the plaintiff such a potential power for evil over an industry which must be recognized as an
important element in the amusement life of the nation, under the conclusions we have stated in
this opinion, is plainly void, because wholly without the scope and purpose of our patent laws
and because, if sustained, it would be gravely injurious to that public interest, which we have
seen is more a favorite of the law than is the promotion of private fortunes.

CONCLUSION
The exclusive right granted in every patent must be limited to the invention described in the
claims of the patent and it is not competent for the owner to extend the scope of its patent
monopoly by restricting the use of it to materials necessary in its operation that are not part of
the patented invention. Also, the owner may not send its machines into channels of trade of
the country subject to conditions as to use or royalty to be paid to be imposed thereafter at the
discretion of the patent owner. The restriction contained in the notice affixed to the machine
sold by MPC (Plaintiff) is invalid because the film is obviously not a part of the invention of
the patent in suit and because to enforce it would be to treat a monopoly in the manufacture
and use of moving picture films, wholly outside of the patent in suit and out of the patent law
as we have interpreted it. In addition, the owner of a patent is not authorized to fix, by notice,
the price at which a patented article must be sold after the first sale of it. This enunciation of

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the doctrine of first sale coincided with antitrust legislation at the turn of the century. Resale
price maintenance was made illegal under antitrust law. Later amendments to the patent laws
clarified issues related to the typing of nonstable products to patented products.

2. UNITED STATES V. UNITED SHOE MACHINERY COMPANY OF NEW JERSEY6

FACTS
In 1911, twelve years after the formation of the United Shoe Machinery Company of New
Jersey, the government filed suit against USM-NJ alleging that the original merger, as well as
subsequent acquisitions, constituted a combination in restraint of trade in violation of Section
1 of the Sherman Act. 14 The government also charged USM-NJ with Section 2
monopolization violations. Aside from the original merger, the government’s chief competitive
concern focused on USMNJ’s leasing practices. The district court found in favor of USM-NJ,
and the government appealed. As for the merger itself, the district court did not find any
antitrust violation for two principal reasons. The government’s other chief complaint was that
certain lease provisions facilitated the acquisition of monopoly power by USM-NJ. The
government appeared to oppose leasing itself as it viewed USM-NJ’s leasing policy to be
unduly restrictive since the lessees were unable to change or cancel a lease once an agreement
was struck. In addition to opposing leasing generally, the government objected to the “tying”
clauses, which essentially required the lessees to lease clusters of USM-NJ machines. The
government alleged that such “tying” clauses, in addition to other lease provisions, foreclosed
USM-NJ’s competitors.

ISSUES
Whether the leases and merger of United Shoe Company constitute a combination in restraint
of trade and violation of section 1 of Sherman Act?

REASONING
The Supreme Court did not find the leases to be detrimental to competition for two main
reasons. First, the Court did not view USM-NJ’s intent to be anticompetitive. Because the
constituent companies had similarly leased their machines prior to the merger, the Court
inferred that the leases were not implemented as part of a new scheme to monopolize the shoe
machinery market. Second, the Court found that there were procompetitive aspects of the

6
United States v. United Shoe Machinery Company of New Jersey, 247 U.S. 32, 90 (1918).

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leasing system. For one thing, shoe manufacturers could enter the shoe industry and prosper
even if they started out with little or no capital, i.e., leasing eased entry into shoe production.

The Court observed that the leases were entered into by the lessees upon a calculation of their
value - the efficiency of the machines balanced against the restrictions upon and conditions of
their use. The lessees had the alternative of the choice of other machines for other machines
were sold side by side with those the leases covered.

CONCLUSION
The Supreme Court agreed and commented that although a patent by design gives the patentee
exclusive rights to his invention, a patent does not have the power of coercion. In other words,
the patented product will be employed only if its price, in terms of both money and any
restrictions placed on its use, is sufficiently attractive given the available alternatives. therefore,
the tying arrangements were lawful under the Sherman Act.

3. UNITED STATES V. UNITED SHOE MACHINERY COMPANY OF NEW JERSEY7

FACTS
In 1914, the Clayton Act was passed. Section 3 forbids provisions in sale or lease contracts that
tend to reduce competition or promote monopoly through an agreement not to deal in the
products of the seller’s or lessor’s competitors. Unlike the Sherman Act, the Clayton Act
explicitly states that it applies to patented as well as unpatented products. Under the Clayton
Act, the government initiated another antitrust suit against United Shoe Machinery in 1915,
which by this time had become the United Shoe Machinery Corporation (USM). The
government alleged that many of the lease provisions in USM’s contracts had the practical
effect of inducing shoe manufacturers to not trade in the products of USM’s competitors,
thereby violating section 3 of the Clayton Act.

ISSUES
Whether the challenged tying arrangement in the given case substantially lessened
competition?

REASONING
No matter how good the machines of the United Company may be, or how efficient its service,
it is not at liberty to lease its machines upon conditions prohibited by a valid law of the United

7
United States v. United Shoe Machinery Company of New Jersey, 258 U.S. 451 (1922).

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States. Therefore, many of the factors that led the Court in United Shoe I to find that the clauses
were lawful under the Sherman Act had no place in an analysis of their legality under the
Clayton Act. The Court concluded that it was “apparent” that United Shoe’s tying agreements
violated section 3 by necessarily lessening competition and tending to create a monopoly.

The court found that the provisions effectively created such a restriction: When it is considered
that the United Company occupies a dominating position in supplying shoe machinery of the
classes involved, these covenants signed by the lessee and binding upon him effectually prevent
him from acquiring the machinery of a competitor of the lessor except at the risk of forfeiting
the right to use the machines furnished by the United Company which may be absolutely
essential to the prosecution and success of his business.

The Court distinguished its holding of illegality under the Clayton Act from its earlier
determination in 1918 that the lease provisions did not constitute illegal monopolization under
the Sherman Act on the basis that in the prior case the leases “were sustained as valid and
binding agreements within the rights of holders of patents.”

CONCLUSION
The Supreme Court found that United Shoe’s tying arrangements were unlawful under section
3 of Clayton Act.

4. FEDERAL TRADE COMMISSION V. SINCLAIR REFINING COMPANY8

FACTS
A suit brought by the FTC as part of a series of proceedings against many gasoline refiners.
Sinclair leased unpatented gasoline storage tanks and pumps to service stations on the condition
that the stations would use the products only with Sinclair’s gasoline. July 18, 1919, the
Commission issued a complaint charging that respondent, Sinclair Refining Company, was
purchasing and selling refined oil and gasoline and leasing and loaning storage tanks and
pumps as part of interstate commerce in competition with numerous other concerns similarly
engaged; and that it was violating both the Federal Trade Commission Act, 38 Stat. 717, and
the Clayton Act, 38 Stat. 730.

ISSUES
Whether the restrictions put in by Sinclair Company are violative of FTC Act and Clayton Act?

8
Federal Trade Commission v. Sinclair Refining Company, 261 U.S. 463, 475 (1923).

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REASONING
The Court distinguished this tying arrangement from that in United Shoe II, emphasizing that
Sinclair’s provisions did not prevent the lessee service stations from purchasing gasoline from
any other refiner. There is no covenant which obligates the lessee not to sell the goods of
another, and its language cannot be so construed. Many competitors seek to sell excellent
brands of gasoline and no one of them is essential to the retail business. The lessee is free to
buy wherever he chooses; he may freely accept and use as many pumps as he wishes and may
discontinue any or all of them. He may carry on business as his judgment dictates and his means
permit, save only that he cannot use the lessor’s equipment for dispensing another’s brand. By
investing a comparatively small sum, he can buy an outfit and use it without hindrance. He can
have [Sinclair’s] gasoline, with the pump or without the pump, and many competitors seek to
supply his needs.

CONCLUSION

The Court also held that the tying clauses were not an “unfair practice” under section 5 of the
Federal Trade Commission Act, finding that the arrangement was a “practical method” for
Sinclair to prevent “passing off” and to ensure that its gasoline was being properly handled.
Finally, the Court, apparently convinced that Sinclair’s practices would foster the development
of roadside service stations, found no monopolistic or anticompetitive purpose underlying the
leases. The great purpose of the [Clayton Act and the Federal Trade Commission Act] was to
advance the public interest by securing fair opportunity for the play of the contending forces
ordinarily engendered by an honest desire for gain. And to this end it is essential that those who
adventure their time, skill and capital should have large freedom of action in the conduct of
their own affairs.

5. PICK MANUFACTURING CO. V. GENERAL MOTORS CORP.9

FACTS
By this suit petitioner challenged the validity under § 3 of the Clayton Act of a provision of the
contracts made with dealers by selling organizations of the General Motors Corporation. The
provision in the contract between the Chevrolet Motor Company and dealers is as follows:
“Dealer agrees that he will not sell, offer for sale, or use in the repair of Chevrolet motor

9
Pick Manufacturing Co. v. General Motors Corp., 299 U.S. 3, 4 (1936).

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vehicles and chassis second-hand or used parts or any part or parts not manufactured by or
authorized by the Chevrolet Motor Company. It is agreed that Dealer is not granted any
exclusive selling rights in genuine new Chevrolet parts or accessories.” There is a similar
provision in contracts made by the Buick company. The District Court dismissed the bill of
complaint for want of equity and its decree was affirmed by the Circuit Court of Appeals. F.
(2d) 641. Upon the evidence adduced at the trial the District Court found that the effect of the
clause had not been in any way substantially to lessen competition or to create a monopoly in
any line of commerce. This finding was sustained by the Circuit Court of Appeals.

ISSUES
Whether the restrictions put by the company reasonable and not anti-competitive?

REASONING
The court of appeals stressed that GM had a strong interest in ensuring that defective or
otherwise improper parts were not used in repairing GM cars. Finally, the court found that the
provisions had not actually reduced competition. Instead, the Supreme Court affirmed in a brief
per-curiam opinion, stating only that no clear error was shown in the findings.

CONCLUSION
The Seventh Circuit Court of Appeals, relying on United Shoe II and Sinclair, concluded that
the restrictions were reasonable because the dealers were still free to repair any other make of
car and, when doing so, were not obligated to use GM parts.

6. INTERNATIONAL BUSINESS MACHINES CORP. V. UNITED STATES10

FACTS
The government brought the suit against appellant and three other corporations, all
manufacturers of machines performing substantially the same functions as appellant’s, to
restrain the use by each of the defendants of a specified type of lease of their machines as a
violation of the Clayton Act, and to declare void under the Sherman Anti-Trust Act a contract
into which they had entered by which each agreed to use that type of lease and not to solicit
the lessees of machines of the others to purchase tabulating cards which it manufactures. The
case was tried upon the pleadings and a stipulation of facts in which the defendants consented
to a decree cancelling their agreement with each other. Two of the defendants have been
eliminated from the suit, one by dissolution and the other by merger with appellant. A third

10
International Business Machines Corp. v. United States, 298 U.S. 131 (1936).

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defendant, Remington Rand, Inc., has stipulated that the decree to be entered against it shall
conform to that entered against appellant upon this appeal.

ISSUE
Whether IBM’s tying agreements had an adverse effect on competition?

REASONING
The Court stressed that IBM controlled eighty-one per cent of the market for the tabulating
cards, it earned a “substantial” profit from the cards’ sales, and its annual gross receipts for the
machines and cards averaged almost thirteen million dollars. The Court consequently
condemned the agreements under section 3, holding that “these facts can leave no doubt that
the effect of the condition in IBM’s leases ‘may be to substantially lessen competition,’ and
that it tends to create monopoly.”

CONCLUSION
The prohibition is violated by a condition requiring a lessee to operate the leased machine only
with supplies from the lessor, since this, in effect, precludes the use of supplies of a competitor.
While the section does not purport to curtail the patent monopoly of the lessor, the prohibition
of tying clauses is not limited to unpatented supplies but includes also supplies which have
been patented to the lessor either separately or in combination with the patented machine.
Assuming that, by implied exception, a tying clause would not violate the provision, though it
tended to create a monopoly, if its purpose and effect were to protect the goodwill of the lessor
in the leased machines, there is no basis for the exception where the substantial benefit of the
clause to the lessor is in the elimination

Thus, within twenty years, the Court handed down four opinions on tying agreements under
section 3: United Shoe II and IBM condemning the tying agreements and Sinclair and Pick
upholding them. The results, if not the reasoning, can be reconciled through the cases’ factual
differences. One significant factor distinguishing United Shoe II and IBM from Sinclair and
Pick is the market share held by the respective defendants. Both United Shoe and IBM held an
overwhelming share of the market in the tied and the tying products. Neither Sinclair nor GM
held comparable market shares in their products. Moreover, the tying products in both IBM
and United Shoe II were patented; those in Sinclair and Pick apparently were not. At the time
of the IBM decision, therefore, the Court had yet to find a tying arrangement unlawful under
section 3 of the Clayton Act in which the defendant did not have either an overwhelming share

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of the market or a patent on the tying product. Furthermore, the Court had clearly held that
such clauses were not illegal under the Sherman Act.

7. INTERNATIONAL SALT COMPANY V. UNITED STATES11

FACTS
Defendant International Salt Company was the largest producer of industrial salt in the United
States and owned patents on two machines that used salt products. International Salt principally
distributed the machines under leases that required the lessee to purchase from International
Salt all salt consumed in the leased machines. The United States government filed a civil action
alleging that the leases on the patented machines violated § 1 of the Sherman Act, 15 U.S.C.S.
§ 1, and § 3 of the Clayton Act, 15 U.S.C.S. § 14. The district court granted the United States
government summary judgment, and International Salt sought appellate review by the United
States Supreme Court.

ISSUE
Did the lease agreements on the patented machinery violate the Sherman and Clayton Antitrust
Acts?

REASONING
The United States Supreme Court affirmed, holding that even though a lessor could impose
reasonable restrictions on a lessee if the restrictions were designed in good faith to minimize
maintenance burdens and to assure satisfactory operation, it was unreasonable, per se, to
foreclose competitors from any substantial market. The Court held that agreements that tended
to create a monopoly were forbidden.

CONCLUSION
Not only is price-fixing unreasonable, per se, but also it is unreasonable, per se, to foreclose
competitors from any substantial market.

8. UNITED STATES V. PARAMOUNT PICTURES, INC.12

FACTS
The United States sued to restrain violations of §§ 1 and 2 of the Sherman Act by (i) five
corporations that produce motion pictures and their respective subsidiaries or affiliates which

11
International Salt Company v. United States, 332 U.S. 392 (1947).
12
United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948).

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distribute and exhibit films and own or control theatres, (ii) two corporations that produce
motion pictures and their subsidiaries which distribute films, and (iii) one corporation engaged
only in the distribution of motion pictures. The complaint charged that the first group of
defendants conspired to and did restrain and monopolize interstate trade in the exhibition of
motion pictures in most of the larger cities of the country and that their combination of
producing, distributing and exhibiting motion pictures violated §§ 1 and 2 of the Act. It also
charged that all of the defendants, as distributors, conspired to and did restrain and monopolize
interstate trade in the distribution and exhibition of films. After a trial, the District Court
granted an injunction and other relief, holding that defendants had not acquired a monopoly,
but rather had only committed restraints of trade. In its order, the District Court held that the
only way the competition could be introduced into the existing system of fixed prices was to
require films to be licensed on a competitive bidding basis.

ISSUE
1) Did the defendants only commit restraints of trade?
2) In order to introduce competition into the existing system, should films be licensed on a
competition bidding basis?

REASONING
As to the first issue, the Supreme Court reversed the lower court’s decision concerning
divestiture and monopoly because the lower court’s conclusion that defendants had not
acquired a monopoly, but rather had only committed restraints of trade, was insufficient.
According to the Court, the lower court should have focused on what results the conspiracy
achieved and how they could be undone. As to the second issue, the Court held that licensing
films on a competitive bidding basis was not likely to bring about the desired result.
Furthermore, the Court held that it would require too much judicial supervision, thereby,
making the task unpalatable.

CONCLUSION
It is not necessary to find an express agreement in order to find a conspiracy. It is enough that
a concert of action is contemplated and that the defendants conformed to the arrangement.

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 9. JEFFERSON PAR. HOSP. DIST. NO. 2 V. HYDE13

FACTS
Jefferson Parish Hospital District No. 2 entered into an exclusive contract with Roux &
Associates, a firm of anesthesiologists, and required that every patient undergoing surgery at
the hospital use the services of Roux & Associates. Due to the exclusive contract by and
between the Hospital and the anesthesiology firm, respondent Edwin Hyde’s application for
admission to the hospital’s medical staff was denied. Thereafter, Hyde, an anesthesiologist,
commenced an action in Federal District Court, claiming that the exclusive contract violated §
1 of the Sherman Act, and sought declaratory and injunctive relief. The District Court denied
relief, finding that the anticompetitive consequences of the contract were minimal and
outweighed by benefits in the form of improved patient care. On appeal, the Court of Appeals
reversed, finding the contract illegal “per se.” The appellate court held that the case involved a
“tying arrangement” because the users of the hospital’s operating rooms (the tying product)
were compelled to purchase the hospital’s chosen anesthesiologic services (the tied product),
that the hospital possessed sufficient market power in the tying market to coerce purchasers of
the tied product, and that since the purchase of the tied product constituted a “not insubstantial
amount of interstate commerce,” the tying arrangement was therefore illegal “per se.” The
hospital thereafter appealed.

ISSUE
Did the exclusive contract by and between Jefferson Parish Hospital District No. 2 and Roux
& Associates violate § 1 of the Sherman Act?

REASONING
The Court held that the exclusive contract in question did not violate § 1 of the Sherman Act.
The court found that, while the hospital’s arrangement involved the required purchase of two
services that would otherwise be purchased separately, such finding did not necessarily make
the contract illegal. The Court concluded that the hospital did not have sufficient market power
to force patients to purchase the contracted anesthesiology services as opposed to using services
at a competing hospital. According to the Court, there was not sufficient evidence in the record
to provide a basis for finding that the contract, as it actually operated in the market, had

13
Jefferson Par. Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).

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unreasonably restrained competition. Accordingly, the judgment was reversed, and the case
was remanded for further proceedings.

CONCLUSION
The essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of
its control over the tying product to force the 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. When such “forcing” is present, competition on the merits in the market for the tied item
is restrained and the Sherman Act is violated.

10. UNITED STATES V. MICROSOFT CORP.14

“ In July 1994, officials at the Department of Justice (“DOJ”), on behalf of the United States,
filed suit against Microsoft Corp., charging the company with, among other things, unlawfully
maintaining a monopoly in the operating system market through anticompetitive terms in its
licensing and software developer agreements. The parties subsequently entered into a consent
decree, thus avoiding a trial on the merits. Three years later, the Justice Department filed a civil
contempt action against Microsoft for allegedly violating one of the consent decree’s
provisions. On appeal from a grant of a preliminary injunction, the Supreme Court held that
Microsoft’s technological bundling of IE 3.0 and 4.0 with Windows 95 did not violate the
relevant provision of the consent decree. On May 18, 1998, the United States and a group of
State plaintiffs yet again filed separate (and soon thereafter consolidated) complaints, asserting
antitrust violations by Microsoft and seeking preliminary and permanent injunctions against
the company’s allegedly unlawful conduct. The complaints also sought any other preliminary
and permanent relief as is necessary and appropriate to restore competitive conditions in the
markets affected by Microsoft’s unlawful conduct. The District Court ruled that Microsoft had
indeed violated § 1 and 2 of the Sherman Act and analogous state antitrust provisions, and
ordered various remedies, including divestiture. Microsoft thereafter appealed the legal
conclusions and the resulting remedial order . ”

ISSUE
Did Microsoft Corp. violate the Sherman Act?

REASONING

14
United States v. Microsoft Corp., 346 U.S. App. D.C. 330 (2001).

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While merely possessing monopoly power is not itself an antitrust violation, it is a necessary
element of a monopolization charge. Monopoly power is the power to control prices or exclude
competition. More precisely, a firm is a monopolist if it can profitably raise prices substantially
above the competitive level. Courts generally examine market structure in search of
circumstantial evidence of monopoly power. Under this structural approach, monopoly power
may be inferred from a firm’s possession of a dominant share of a relevant market that is
protected by entry barriers. Entry barriers are factors (such as certain regulatory requirements)
that prevent new rivals from timely responding to an increase in price above the competitive
level.

CONCLUSION
The Court held that exclusionary contracts with Internet access providers violated the Sherman
Act, but dealings with Internet content providers, software vendors, and a computer
manufacturer did not, since there was no proof that these deals substantially effected
competition. The Court determined that inter alia, the appellate court’s finding of monopoly
power was not error. Except for one license restriction prohibiting automatically launched
alternative interfaces, all the original equipment manufacturer license restrictions were market
power uses unredeemed by legitimate justification. Exclusion of the company’s Internet
browser from a program removal utility and commingling of browser and operating system
codes was exclusionary conduct.

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 CONCLUSION

The history of the law of tying arrangements has been one of changing tests reflecting changing
theories of legitimate application of the antitrust laws. The law has evolved through shifting
judicial attitudes, attitudes that sometimes emphasize the contribution of tying arrangements to
efficiency and other times insist that other values, such as preservation of competition, control.
It cannot be denied that the Supreme Court opinions developing antitrust law have been
principled; the difficulty is that two sets of principles, each at war with the other, exist at any
given moment. The law pronounced by the Court depends on which principle reaches the result
that, to the majority, seems most just, fair, reasonable, or workable.

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