First Published in Antitrust News & Notes, January 2010
By Veronica Smith Lewis
| Read more articles from Antitrust News & Notes, January 2010 here. |
Masimo Corp. v. Tyco Health Care Group1 re-affirms that plaintiffs seeking to challenge “bundled discounting,” or the sale of a bundle of goods or services for a lower price than the seller charges for the goods or services purchased individually, as constituting predatory pricing faces a high hurdle in the Ninth Circuit.
In 2008, that court, only the second circuit court of appeals to recognize bundling as a possible predatory act, soundly rejected the reasoning the en banc Third Circuit had announced in LePage’s Inc. v. 3M.2 In Cascade Health Solutions v. PeaceHealth,3 the Ninth Circuit explained that while bundled discounts can “at least in theory” be used to exclude “a competitor who sells only a single product in the bundle (and who produces that single product at a lower cost than the defendant),” such discounts are “pervasive” and offer significant procompetitive benefits as well.4 The court concluded that, given these factors and the “measured concern” reflected in Supreme Court precedent “to leave unhampered pricing practices that might benefit consumers, absent the clearest showing that an injury to the competitive process will result,” illegal bundling claims must meet a rigorous test.5 The Ninth Circuit established a discount attribution test:
To prove that a bundled discount was exclusionary or predatory for the purposes of a monopolization or attempted monopolization claim under § 2 of the Sherman Act, the plaintiff must establish that, after allocating the discount given by the defendant on the entire bundle of products to the competitive product or products, the defendant sold the competitive product or products below its average variable cost of producing them.6
In Masimo, the Ninth Circuit applied this test and concluded that “the district court did not err in vacating the jury’s verdict regarding Tyco’s bundling agreements under § 2 of the Sherman Act,” explaining that because “Masimo did not allege anticompetitive tying or pricing, Tyco’s bundled discounts cannot, as a matter of law, violate § 2.”7 The court also rejected Masimo’s alternative argument “that Tyco’s bundling practices were actually illegal market-share discounts” under which “receipt of the discount was conditioned upon customers purchasing 90 95 percent of their requirements” for the bundled products, concluding that Masimo had failed to establish an exclusive dealing claim since “the evidence in the trial record concerning the pervasiveness and effects of Tyco’s varied bundling arrangements was insufficient to support a finding that the arrangements foreclosed competition in a substantial share of the relevant market.”8
The Ninth Circuit’s message on bundling claims is clear: all such claims will be subjected to the discount attribution test established in PeaceHealth. However, the scope of application for that test outside the bundling context remains an open question. In Masimo, the court noted that “PeaceHealth did leave open the possibility that application of the discount attribution test may be inappropriate “outside the bundling pricing context, for example, in tying or exclusive dealing cases.”9 However, it was careful not to decide that issue in PeaceHealth, since the parties had neither briefed it nor raised it with the district court.10 Thus, those challenging bundled discounts, in at least the Ninth Circuit, may now be more inclined to assert tying claims — that the bundled discounts leave purchasers with no rational economic choice other than purchasing the bundle — to avoid the discount attribution test. The proper cost-analysis to be used to assess this type of tying claim remains an open question.
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1 Nos. 07-55960, 07-56017, 2009 WL 3451725 (9th Cir. Oct. 28, 2009).
2 324 F.3d 141 (3d Cir. 2003).
3 515 F.3d 883 (9th Cir. 2008).
4 Id. at 894-97. The court noted that “[b]undled discounts generally benefit buyers because the discounts allow the buyer to get more for less” and “[b]undling can also result in savings to the seller because it usually costs a firm less to sell multiple products to one customer at the same time than it does to sell the products individually.” Id. at 895.
5 Id. at 902.
6 Id. at 910. In contrast, in LePage’s, the Third Circuit rejected the proposition that a plaintiff must demonstrate below cost pricing to establish that bundled discounts are predatory. 324 F.3d at 147, 151-52. The Third Circuit affirmed the bundling principles announced in LePage’s in United States v. Dentsply Int’l, Inc., 399 F.3d 181, 187 (3d Cir. 2005).
7 Masimo, 2009 WL 3451725, at *1.
8 Id. at *1-*2 (emphasis in original).
9 Id. at *1 (quoting PeaceHealth, 515 F.3d at 916 n.27) (emphasis added).
10 515 F.3d at 916 n.27.