Tying vs Bundling Arrangements: An Attempt at Resolving the Lacuna in Indian Law

[Karan Trehan and Prakhar Bhatnagar are II year B.A. LL.B. (Hons.) students at the NALSAR University of Law, Hyderabad]

Various types of conditional arrangements exist in the commercial markets. They are conditional in that their conclusion is made subject to acceptance by other parties of additional obligations which, by their “nature or according to commercial usage”, may or may not have connection with the substance of these arrangements.

Although conditional arrangements are generally not problematic, “tying” and “bundling” are two such types that have always been under close scrutiny of antitrust agencies owing to their potential anti-competitive effects.

Tying and Bundling Arrangements

Definition: The term “tying” refers to a practice whereby the seller of a product or service (”Tying Product”) requires some or all purchasers of it to also purchase a separate product (“Tied Product”). “Bundling”, on the other hand is somewhat different from tying. Here, the two products are sold by the seller as a package at one price.

In a tying arrangement, the tied product is available independently of the tying product. The tying product, on the other hand, is not available independently i.e. the tied product has to be purchased along with it. Since the two products are sold as a package in a bundling arrangement, they are not available independently i.e. the customer is compelled to buy the entire package as a whole.

Motive: The primary motive behind tying and bundling lies in promotion of a slow selling unknown product by making use of the market power of a fast selling well known product. In these arrangements, a product which is less desirable and does not have a genuine competitive edge over similar products produced by other companies, is sold along with a dominant product, i.e. a product in which the entity holds a strong market position.

Presence of Distinct Products: It is important to note that the presence of two “distinct products” capable of being tied or bundled is a precondition for the existence of the above arrangements. This distinctiveness can either be inferred from the fact that entities in the market are offering the two products independently or the fact that the two products constitute separate markets. Further, the “consumer demand test” is applied for assessing the distinctive nature of products or the existence of separate markets. As per this test, a tying arrangement cannot exist unless there is a sufficient consumer demand for the purchase of the second product separately from the first one.

Element of Coercion: An important factor in tying and bundling arrangements is the presence of an element of “coercion”. In these arrangements, the customer is coerced to take or purchase a second product if she wishes to buy a particular product, thus resulting in consumer harm.

Moreover, for this element of coercion to exist, the entity undertaking tying or bundling should have “sufficient market power” in the market of dominant product. An analysis of market power is therefore essential in determining if the alleged arrangement is a product of the seller’s coercion or not, i.e. whether there exists a “tie” or a “bundle” in the antitrust sense at all or it is just a case of buyer choosing to buy the two products together.

Anti-Competitive Effects: Anti-competitive tying and bundling results in foreclosure in the tied market due to the reduction in the number of potential customers available for the competing firms in that market. Such arrangements also create barriers to entry in market for both the products, thereby making the entry of potential firms in latter market conditional upon the entry in the former and vice versa.

Issue

Interestingly, bundling and tying are dealt with as different practices in India, unlike some other foreign jurisdictions, viz. the European Union (EU), the United States (US) and the United Kingdom (UK) which treat the two practices similarly. This divergence in approach can be attributed to the presence of slight distinctions in terms of the nature and manner of practice between bundling and tying, despite the two arrangements being essentially the same.

EU Law

Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) prohibits horizontal and vertical agreements that adversely affect competition in the European Market. Further, Article 102 of the TFEU prevents dominant undertakings from abusing their position and thereby affecting the competition in the market.

Articles 101(1)(e) and 102(d) of the TFEU deals with tying and bundling arrangements. It is pertinent to note that these two clauses are worded in the same manner and prohibit:

making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage,         have no connection with the subject of such contracts.

[Emphasis Supplied]

Thus, Article 101 is attracted where a non-dominant entity indulges in tying or bundling by way of a vertical agreement. Article 102, instead, comes into the picture only where an entity dominant in the relevant market, i.e. market for the dominant product, abuses its position to force tying and bundling arrangements upon the buyers.

Indian Law

Section 3 and 4 of the Competition Act, 2002 (the “Act”) correspond to Articles 101 and 102 of TFEU and prohibit anti-competitive agreements and abuse of dominance respectively. 

Section 3(4)(d) of the Act deals with tie-in arrangements and defines it as follows:

tie-in arrangement” includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods

[Emphasis Supplied]

The language of the above provision makes it amply clear that its scope is limited to include only cases of tying and that the practice of bundling has been specifically excluded from its ambit. Furthermore, there is no other clause in section 3 which deals with the practice of bundling.

Section 4(2)(d), on the other hand, deals with bundling arrangements and is worded as follows:

making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage have no connection with the subject of such contracts.

[Emphasis Supplied]

It is pertinent to note that the wording of this section corresponds to both Articles 101(1)(e) and 102(d) of the TFEU. Thus, section 4(2)(d) of the Act should ideally incorporate both tying and bundling arrangements within its ambit.

However, a distinction in terms of the nature of the two practices and the applicability of sections 3(4)(d) and 4(2)(d) has been drawn under Indian Law. In the case of Sonam Sharma v. Apple, the Competition Commission of India (“CCI”) while analyzing the scope of these sections held:

There is a subtle difference between the two concepts of tying and bundling. The term “tying” is most often used when the proportion in which the customer purchases the two products is not fixed or specified at the time of purchase, as in a “requirements tie-in” sale. A bundled sale typically refers to a sale in which the products are sold only in fixed proportions. Bundling may also be referred to as a “package tie-in.

On the other hand, antitrust concerns are raised in the case of tie-in as held in section 3(4) (a). Therefore, the Commission has been at pains to distinguish between a tie-in arrangement and bundling in this specific case.

            [Emphasis Supplied]

An analysis of the above extracts makes it clear that the rationale behind distinguishing the two practices is to delineate the exact scope of section 3(4)(d), which is limited to only tying arrangements.

The question as to the scope of section 4(2)(d) has come up before the CCI in other cases as well. In Kapoor Glass Private Limited v Schott Glass India Private Limited, the CCI while analyzing an allegation with respect to a tying arrangement by a dominant entity held it to be violative of section 4(2)(d). Further, in the case of Shri Jeetendra Kumar v BMW India, the CCI analyzed a bundling arrangement under section 4(2)(d) of the Act and dismissed the allegation on account that the party imposing the bundling arrangement lacked dominant position in the market. These cases clearly elucidate the scope of section 4(2)(d), which is wide enough to encompass both tying and bundling arrangements.

Analysis

Though there is a subtle difference between tying and bundling, a closer analysis shows that the nature of these two practices is essentially the same.

Firstly, in both the practices, a second product is forced upon the consumer along with the dominant product by way of a mandatory separate purchase or a package. Moreover, various competition law authors do not distinguish bundling and tying in their works owing to the same legal assessment of these two practices. In other words, the distinction between tying and bundling is merely a technical one.[1] Even forms of bundling such as pure bundling are held to be synonymous with tying. This approach is further supported by the way in which the European courts have dealt with the two practices.

Secondly, the root of both the arrangements lies in the restricting the consumer choice in terms of the type and the number of products to be purchased. As a result, both the arrangements lead to consumer harm and produce similar anti-competitive effects such as foreclosure, creating barriers to entry, and the like.

In light of above observations, it is amply clear that the language incorporated under section 3(4)(a) of the Act and the interpretation given to the same in the Sonam Sharma case have created a lacuna in the law dealing with tying and bundling arrangements. Thus, cases of bundling will have to be necessarily brought under section 4(2)(d) which punishes the practice of tying and bundling by a dominant entity. As a result, innumerable cases of bundling (likewise the BMW case) will go unpunished due to the likelihood that the alleged entity might not have a position of dominance in the relevant market which very well frustrates the purpose of the legislation.                                                                       

Conclusion

Tying and bundling arrangements are very common in the commercial markets and lead to a great amount consumer harm on a regular basis. This makes it all the more important to closely scrutinize and regulate such arrangements. Hence, there is an urgent need to revisit the current law and amend section 3 accordingly so as to incorporate bundling arrangements within its ambit. It would ensure that the very purpose of competition law aimed at protecting the interests of the consumer and promoting fair competition is accomplished.    

Karan Trehan & Prakhar Bhatnagar

[1] E. Rousseva, Rethinking Exclusionary Abuse in EU Competition Law, 2010, p. 219. 

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