Tying arrangements could put your business in a bind

Blog Post
The 6th U.S. Circuit Court recently revived a putative class action antitrust lawsuit by a group of homeowners against the developers of their communities (Developers) and the telecommunication service provider (Provider) that serviced them. In Cates v. Crystal Clear Techs., LLC1, the homeowners alleged that the Developers exerted their control over the property owners’ associations (POAs) to cause the POAs to execute long-term agreements with the Provider. Consequently, each homeowner had to pay fees for basic telecommunication services (i.e. internet, cable, phone) from the Provider regardless of whether the homeowners actually used the Provider’s services. Specifically, the agreements required each household to pay a one-time infrastructure fee and monthly assessment fees to the Provider. The Provider, which had no legitimate experience in the telecommunication industry and outsourced its services to another telecommunication company, was allegedly owned by two of the Developers, provided at least some of its profits to the third Developer, and shared an address with them. The homeowners alleged that this arrangement constituted an unlawful tie in violation of the Sherman Act.

What is a tying arrangement?

A tie exists where a seller sells one product or service (the “tying” product) only on the condition that the buyer purchases another product or service (the “tied” product), or at least agrees not to buy the tied product from a different source. Tying arrangements are unlawful where the seller has appreciable economic power in tying product market, and the arrangement affects a substantial volume of commerce in the tied market. In other words, the seller leverages its market power over the tying product to force a buyer to buy the tied product, which the buyer otherwise may not want or need, thereby reducing competition in the market for the tied product. 

Cates v. Crystal Clear Techs

In Cates, the tying product allegedly was the sale of homes in the specific communities, and the tied product was telecommunication services, which the homeowners could not economically buy from a different source because they were forced to pay for service from the Provider. The district court dismissed the tying claim after finding that the homeowners failed to adequately define the tying product market. And the court denied the homeowners leave to amend after finding that the proposed amended complaint, which sufficiently defined the market as “centrally planned communities within” a particular town, nevertheless failed to allege a substantial impact on the relevant tied market. On appeal, the 6th Circuit reversed the dismissal, concluding that the homeowners’ allegations regarding the fee arrangement in the agreements between the POAs and Provider were sufficient to show a substantial impact on the market for telecommunications services. As a result, the homeowners’ antitrust claim will proceed at the district court level.

Impact of Cates beyond the property development industry

Cates has important implications in the property development industry and beyond. Although tying more often occurs intracompany (i.e., within a company or at least a family of related companies) where a seller offers related products or services in multiple markets, it also can occur intercompany where a special arrangement arising out of a non-competitive market effectively reduces competition in a different, otherwise competitive market. Real estate developers, in particular, should carefully consider any agreements between the POAs they form and service providers to the communities they develop, especially where such agreements could render it impossible or uneconomical for property owners to purchase a competitor’s products or services. And given the harsh penalties for a antitrust violations, businesses considering such an agreement – either as a party to the agreement or a financial beneficiary of it – can expose themselves to sizeable judgments, fines, injunctions, and other forms of relief.
1. No. 16-6714, 2017 WL 4872977 (6th Cir. Oct. 30, 2017)

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