Opinion ID: 547003
Heading Depth: 2
Heading Rank: 1

Heading: The Tying Arrangement

Text: 12 A so-called tying arrangement exists when a seller conditions the sale of one product or service, the tying product or service, on the buyer's purchase of another product or service, the tied product or service. See Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). 13 [T]he 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. 14 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12, 104 S.Ct. 1551, 1558, 80 L.Ed.2d 2 (1984). 15 A tying arrangement is per se unlawful under section 1 of the Sherman Act; that is, it is proscribed without examining the actual market conditions, when the seller has such power in the tying product or service market that the existence of forcing is probable, id. at 15, 104 S.Ct. at 1560, and there is a substantial potential for impact on competition. Id. at 16, 104 S.Ct. at 1560. A tying arrangement which is not per se unlawful may be invalidated under the rule of reason if the party challenging the tie demonstrates that it is an unreasonable restraint on competition in the relevant market. Id. at 18, 104 S.Ct. at 1561. 16 As previously noted, the alleged tying arrangement challenged in this case arises from the exclusive contract Parkview entered into with Bucholz for the provision of radiological services. Consequently, under the Jefferson Parish analysis, we must decide whether Parkview's contract with Bucholz is illegal as forcing surgical patients at Parkview to obtain radiological services from Bucholz which they might wish to obtain from another provider or as unreasonably restraining competition among radiologists in the Parkview area. We first examine, however, the precise reason for the district court's dismissal of Dr. Beard's section 1 claim. 17 In its decision granting Parkview's motion for summary judgment, the district court said: 18 In order for a tying arrangement to violate Sec. 1 of the Sherman Act, the seller must exploit its market power over the tying product to force the buyer into purchasing a tied product that the buyer either did not want at all, or might have preferred to purchase from someone else. An implicit requirement to a finding that a tying arrangement violates Sec. 1 is that the seller of the tying product must also profit from the sale of the tied product. 19 The district court went on to say that, [i]n all of the cases addressing this question which the Court is aware of, the courts require that the seller of the tying product must have benefited directly from the sale of the tied product. And, [i]n this case, it is clear from the evidence before the Court that none of the monies paid to Bucholz, Inc. reached Parkview's hands. Therefore, the Court finds defendants' motions for summary judgment as to plaintiff's Sec. 1 claim well taken. 20 The district court's reliance on the direct economic benefit rule was well-grounded in antitrust law. 21 Prior to Jefferson Parish, courts ordinarily tested a challenged tying arrangement for section 1 validity by determining whether the provider of the tying product or service derived any direct economic benefit from the arrangement. An absence of direct economic benefit was taken as a determinative indicator that the provider of the tying product or service had no anti-competitive impact upon the market for the tied product or service. See, e.g., Venzie Corp. v. United States Mineral Products Co., Inc., 521 F.2d 1309, 1317 (3d Cir.1975); Miller Motors, Inc. v. Ford Motor Co., 252 F.2d 441, 446-47 (4th Cir.1958); Keener v. Sizzler Family Steak Houses, 597 F.2d 453, 456 (5th Cir.1979); Crawford Transp. Co. v. Chrysler Corp., 338 F.2d 934, 939 (6th Cir.1964), cert. denied, 380 U.S. 954, 85 S.Ct. 1088, 13 L.Ed.2d 971 (1965); Roberts v. Elaine Powers Figure Salons, Inc., 708 F.2d 1476, 1478-81 (9th Cir.1983). These courts dismissed section 1 Sherman Act claims where the seller, accused of providing an alleged tying product or service, did not derive any direct economic benefit from the sale of the product said to be tied. 22 Notable among these decisions is Crawford Transp. Co. in which this court held that Chrysler Corporation was guilty of no tying arrangement in violation of Section 1 of the Sherman Act when it required its dealers to purchase new car delivery services from the company with which Chrysler had an exclusive contract along with new cars the dealers bought. 338 F.2d at 939. This court said: 23 Chrysler owned no transportation companies and had no financial interest in any of the transportation carriers to which it tendered traffic for its 1958 and subsequent models. It did not seek to invade and dominate the automobile transportation carriers' business. True, Chrysler benefited financially to the extent that it saved millions of dollars in the cost of transportation but it received no direct profits from the transportation carriers. 24 Id. The district court cited Crawford Transp. Co., for its reliance upon the direct economic benefit rule. 25 On appeal, Dr. Beard concedes that the district court correctly found that Parkview derives no direct economic benefit from the radiological services provided by Bucholz. He also concedes that if Crawford is a correct statement of the law, his section 1 claim fails. He contends, however, that in Jefferson Parish the Supreme Court overruled sub silentio those cases, including Crawford Transp. Co., holding that the supplier of a tying product or service who receives no direct economic benefit from the sale of the tied product or service is not guilty of an illegal tying arrangement under section 1 of the Sherman Act. 26 After a careful examination of Jefferson Parish, and a number of cases applying it, as well as the recent decision of Gonzalez v. St. Margaret's Housing Div. Fund, 880 F.2d 1514 (2d Cir.1989), which Dr. Beard cites in support of his argument, we are unpersuaded that the direct economic benefit requirement of Crawford Transp. Co. has been displaced or is otherwise inapplicable to this case. 27 In Jefferson Parish, the Supreme Court held that a contract between a hospital and a firm of anesthesiologists was not a per se violation of section 1 of the Sherman Act merely because the agreement required patients to buy all the anethesiological services they needed from the firm. 466 U.S. 28-29, 104 S.Ct. at 1566-67. The Court also held that the claimant in that case failed to make a showing of adverse competitive effect resulting from the agreement sufficient to demonstrate rule of reason invalidity. Id. at 30-31, 104 S.Ct. at 1567-68. 28 To be sure, the Court in Jefferson Parish did not state that the seller of a tying product or service must secure a direct economic benefit from sales of a tied product or service in order to violate section 1 of the Sherman Act. The Court's analysis turned on whether the seller of the alleged tying and tied services, namely Jefferson Parish Hospital District No. 2, used its market power to force patients to buy [anesthesiological] services they would not otherwise purchase, id. at 26, 104 S.Ct. at 1566, and whether the effect of the exclusive contract for anesthesiological services was to unreasonably restrain competition among anesthesiologists in the hospital's market. Id. at 29. 104 S.Ct. at 1567. But, the Court's silence in Jefferson Parish on the direct economic benefit issue ought not be interpreted as overruling the considerable body of pre-Jefferson Parish precedent relying on the direct economic benefit requirement as a means of determining whether a challenged contract or agreement is an illegal tying arrangement. 29 The Court in Jefferson Parish was not required to address the direct economic benefit issue because there was no dispute that the hospital in that case received a direct economic benefit from each sale of anesthesiological services. The Court noted that while [t]he fees for anesthesiological services are billed separately ... [t]hey are divided equally between [the anesthesiology firm] and the hospital. Id. at 6 n. 4, 104 S.Ct. at 1555 n. 4. 30 Moreover, the direct economic benefit requirement is consistent with the Court's explanation of what an illegal tying arrangement is in Jefferson Parish: 31 [T]he law draws a distinction between the exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other. When the seller's power is just used to maximize its return in the tying product market, where presumably its product enjoys some justifiable advantage over its competitors, the competitive ideal of the Sherman Act is not necessarily compromised. But if that power is used to impair competition on the merits in another market, a potentially inferior product may be insulated from competitive pressures. This impairment could either harm existing competitors or create barriers to entry of new competitors in the market for the tied product, and can increase the social costs of market power by facilitating price discrimination, thereby increasing monopoly profits over what they would be absent the tie. 32 Id. at 14-15, 104 S.Ct. at 1559 (citations and footnotes omitted). A seller who derives no direct economic benefit from sales of an alleged tied product or service is not attempting to invade the alleged tied product or service market in a manner proscribed by section 1 of the Sherman Act. 33 Furthermore, our conclusion that the pre-Jefferson Parish cases recognizing the direct economic benefit requirement in illegal tying cases were not overruled by Jefferson Parish is supported by numerous post-Jefferson Parish decisions holding that the absence of a direct economic benefit to the seller from sales of an alleged tied product or service precludes a determination that the alleged illegal tying arrangement violates the Sherman Act under either the per se or rule of reason analysis. See, e.g., White v. Rockingham Radiologists, Ltd., 820 F.2d 98, 104 (4th Cir.1987); Directory Sales Management v. Ohio Bell Tel. Co., 833 F.2d 606, 610 (6th Cir.1987); Sandburg Village Condominium Ass'n v. First Condominium Development Co., 758 F.2d 203, 209 and 210 (7th Cir.1985); Midwestern Waffles, Inc. v. Waffle House, Inc., 734 F.2d 705, 712 (11th Cir.1984). Notable among those cases is this court's decision in Directory Sales, in which we affirmed a district court's entry of summary judgment in a case alleging a illegal tying arrangement, stating, [i]f Ohio Bell does not receive a financial benefit from the tied product, case law indicates that a tying arrangement does not exist. 833 F.2d at 610 (citations omitted). 34 In support of his argument to the contrary, Dr. Beard cites the Second Circuit Gonzalez case. 880 F.2d 1514. 35 In Gonzalez, the court of appeals remanded the appeal of a number of tenants of a non-profit housing facility who sued the facility under section 1 of the Sherman Act. Id. at 1520. The tenants alleged that the facility was engaged in an illegal tying arrangement by its requiring that they purchase at least one meal, supplied by a third party, every day they stayed at the facility. Id. at 1515-16. The Second Circuit remanded the case so that the district court could determine whether the alleged tying arrangement impacted interstate commerce and, thus, whether the Sherman Act applied. Id. at 1519. But, because the district court had formerly dismissed the Gonzalez tenants' claim on the ground that the housing facility had no economic interest in the sale of the meals, id. at 1515, the court of appeals addressed the direct economic benefit issue. Id. at 1517. The court said, We do not feel justified, in this situation, to choose to add a sixth requirement of 'economic interest' to our [five-part] test for proving an illegal tying claim. Id. 1 The court reasoned: 36 The majority in Jefferson Parish focused primarily on the anticompetitive effect of tying arrangements and the resultant harm to consumer choice in the tied-product market. In protecting those interests, the majority in Jefferson Parish appeared to require a plaintiff to prove only that the tie impairs competition in the tied market and forecloses a substantial volume of commerce in that market. The majority in Jefferson Parish does not require any economic interest by the tying seller in the tied-product market. 37 Id. (citations omitted). The court then went on to suggest that, even if it were to adopt the economic interest test, it believed the housing facility received some economic benefit, albeit no profit, from the meal sales. Id. 38 While it is arguable that Gonzalez can be distinguished from this case as declining only in dicta to adopt the direct economic benefit requirement, we shall assume instead that Gonzalez is directly contrary to our holding in Crawford Transp. Co. and the line of cases previously cited that require a provider of the alleged tying product or service to derive a direct economic benefit from sales of the alleged tied product or service in order for an illegal tying arrangement to be found. We believe the rule of Crawford Transp. Co. to be the better reasoned rule; one consistent with the fundamental antitrust policy opposing the use of market power in one part of the economy to acquire power in another part and one to which we are bound as the rule of this circuit. 2 39 For the foregoing reasons, we hold, as a matter of law, that because Parkview received no direct economic benefit from the radiological services provided to its patients by Bucholz, it engaged in no unlawful tying arrangement, under either the per se or the rule of reason approaches, by entering into an exclusive contract for radiological services with Bucholz. The district court did not err in dismissing Dr. Beard's section 1 claim on this basis.