Fortner Enterprises, Inc. v. United States Steel Corp./Dissent White

by Byron White

United States Supreme Court

394 U.S. 495

Fortner Enterprises, Inc.  v.  United States Steel Corp.

 Argued: Jan. 23, 1969. --- Decided: April 7, 1969

Mr. Justice WHITE, with whom Mr. Justice HARLAN joins, dissenting.

The judicially developed proscription of certain kinds of tying arrangements has been commonly understood to be this: an antitrust defendant who ties the availability of one product to the purchase of another violates § 1 of the Sherman Act if he both has sufficient market power in the tying product and affects a substantial quantity of commerce in the tied product. This case further defines the degree of market power which is sufficient to invoke the tying rule. Prior cases provide some guidance but are not dispositive. Admittedly, monopoly power or dominance in the tying market, Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 608-611, 73 S.Ct. 872, 97 L.Ed. 1277 (1953), is not necessary; it is enough if there is 'sufficient economic power to impose an appreciable restraint on free competition in the tied product,' Northern Pacific R. Co. v. United States, 356 U.S. 1, 11, 78 S.Ct. 514, 521, 2 L.Ed.2d 545 (1958). The Court indicated in United States v. Loew's Inc., 371 U.S. 38, 45, 83 S.Ct. 97, 102, 9 L.Ed.2d 11 (1962), that this could be inferred from 'the tying product's desirability to consumers or from uniqueness in its attributes.'

The Court does not purport to abandon the general rule that some market power in the tying product is essential to a § 1 violation. But it applies the rule to permit proscription of a seller's extension of favorable credit terms conditioned on the purchase of an agreed quantity of the seller's product without any offer of proof that the seller has any market power in the credit market itself. Although the credit extended was for the purchase and development of land on which the purchased houses were to be built, the Court's logic dictates the same result if unusually attractive credit terms had been offered simply for the purchase of the houses themselves. Proscription of the sale of goods on easy credit terms as an illegal tie without proof of market power in credit not only departs from established doctrine but also in my view should not be outlawed as per se illegal under the Sherman Act. Provision of favorable credit terms may be nothing more or less than vigorous competition in the tied product, on a basis very nearly approaching the price competition which it has always been the policy of the Sherman Act to encourage. Moreover, it is far from clear that, absent power in the credit market, credit financing of purchases should be regarded as a tie of two distinct products any more than a commodity should be viewed as tied to its own price. Since provision of credit by sellers may facilitate competition, since it may provide essential risk or working capital to entrepreneurs or businessmen, and since the logic of the majority's opinion does away in practice with the requirement of showing market power in the tying product while retaining that requirement in form, the majority's per se rule is inappropriate. I dissent.

In this case there is no offer to prove monopoly or dominance in the tying product-money. And in no sense is the money provided to petitioner unique, even though the terms on which it was furnished and was to be repaid may have been advantageous, and indeed the money itself available from no other source on equally good terms. United States Steel was principally interested in the sale of houses, and petitioner in the economical development of its housing project. Before concluding that the financing arrangements on hich U.S. Steel sold its houses amounted to anything more than a price reduction on the houses, or that easy financing terms show that their provider has market power in the money market, the Court should have in mind the rationale on which the illegality of tying arrangements is based.

There is general agreement in the cases ^[1] and among commentators ^[2] that the fundamental restraint against which the tying proscription is meant to guard is the use of power over one product to attain power over another, or otherwise to distort freedom of trade and competition in the second product. This distortion injures the buyers of the second product, who because of their preference for the seller's brand of the first are artificially forced to make a less than optimal choice in the second. And even if the customer is indifferent among brands of the second product and therefore loses nothing by agreeing to use the seller's brand of the second in order to get his brand of the first, ^[3] such tying agreements may work significant restraints on competition in the tied product. The tying seller may be working toward a monopoly position in the tied product ^[4] and, even if he is not, the practice of tying forecloses other sellers of the tied product and makes it more difficult for new firms to enter that market. They must be prepared not only to match existing sellers of the tied product in price and quality, but to offset the attraction of the tying product itself. Even if this is possible through simultaneous entry into production of the tying product, entry into both markets is significantly more expensive than simple entry into the tied market, and shifting buying habits in the tied product is considerably more cumbersome and less responsive to variations in competitive offers. ^[5] In addition to these anticompetitive effects in the tied product, tying arrangements may be used to evade price control in the tying product through clandestine transfer of the profit to the tied product; ^[6] they may be used as a counting device to effect price discrimination; ^[7] and they may be used to force a full line of products on the customer ^[8] so as to extract more easily from him a monopoly return on one unique product in the line. ^[9]

All of these distortions depend upon the existence of some market power in the tying product quite apart from any relationship which it might bear to the tied product. In this case, what proof of any market power in the tying product has been alleged? Only that the tying product-money-was not available elsewhere on equally good terms, and perhaps not at all. Let us consider these possibilities in turn.

First, if enough money to proceed was available elsewhere and U.S. Steel was simply offering credit at a lower price, in terms of risk of loss, repayment terms, and interest rate, surely this does not establish that U.S. Steel had market power by any measure in the money market. There was nothing unique about U.S. Steel's money except its low cost to petitioner. A low price on a product is ordinarily no reflection of market power. It proves neither the existence of such power nor its absence, although absence of power may be the more reasonable inference. One who has such power benefits from it precisely because it allows him to raise prices, not lower them, and ordinarily he does so.

A low price in the tying product-money, the most fungible item of trade since it is by definition an economic counter-is especially poor proof of market power when untied credit is available elsewhere. In this case, the low price of credit is functionally equivalent to a reduction in the price of the houses sold. Since the buyer has untied credit available elsewhere, he can compare the houses-credit package of U.S. Steel as competitive with the price of the united credit plus the cost of houses from another source. By cutting the price of his houses, a competitor of U.S. Steel can compete with U.S. Steel houses on equal terms since U.S. Steel's money is no more desirable to the purchaser than money from another source except in point of price. The same money which U.S. Steel is willing to risk or forgo by providing better credit terms it could sacrifice by cutting the price of houses. There is no good reason why U.S. Steel should always be required to make the price cut in one form rather than another, which its purchaser prefers.

Provision of credit financing by the seller of a commodity to its buyer is a very common event in the American economy. Often the seller is not willing to supply credit generally for the business and personal needs of the public at large, but restricts his credit to the purchasers of the commodity which he is principally in the business of selling. In all such cases, the commodity may be viewed as tied to the credit. In all such cases, the money itself is no more desirable form one source than from another. But in all such cases, under the majority opinion, the mere fact that the credit is offered on uniquely advantageous terms makes the transaction a per se violation of § 1 of the Sherman Act. And so long as the buyer has chosen to accept the seller's credit terms over any other available to him, the buyer, like petitioner here, must have viewed them as uniquely advantageous to him. The logic of the majority opinion, then, casts great doubt on credit financing by sellers. I would not proscribe credit financing by sellers who had no independently demonstrable power in the credit market. Unlike the majority, I am unable to read petitioner's affidavits, the fruit of years of pretrial discovery, to offer any independent proof whatever of such market power. ^[10]

Second, adopting the other assumption, that sufficient credit to go forward with the enterprise was simply unavailable to petitioner from any other source at all, the result in this case is even worse. Were it not for the credit extended by U.S. Steel, petitioner would have been unable to carry out its development. U.S. Steel would not have foreclosed anyone from selling houses to petitioner since no one would have sold any houses to petitioner. A seller who is willing to take credit risks which no one else finds acceptable is simply engaging in the hard and risky competition which it is the policy of the Sherman Act to encourage. And if he may not do so, then those business and entrepreneurs who depend for their survival and growth or for the initiation of new enterprises on the availability of credit financing from sellers may well fail for lack of credit availability from other sources. Of course, if the credit was unavailable elsewhere because U.S. Steel was a monopolist of credit in a relevant market-which petitioner does not assert-the tie would be illegal. But here it was evidently unavailable elsewhere simply because others were not willing to match U.S. Steel's r latively low price for acceptance of high risk.

Neither petitioner nor the Court asserts that under prior antitrust doctrine U.S. Steel would have violated § 1 of the Sherman Act or § 3 of the Clayton Act ^[11] if it had simply contracted to supply all the houses Fortner required to develop the particular tract of land involved here-a requirements contract for the development-even if the price for the houses was particularly advantageous. What triggers the application of the antitrust laws is the asserted tying arrangement, the sale of one product conditioned on the purchase of another. And it is not all tying transactions in general but only those where leverage in one market has been used to distort another which so far have been held illegal restraints of trade. The basis for the rule is clear where the seller is dominant in the tying product market, where the product is patented, or where it is in short supply. In these cases the restraint on competitors in the tied product as well as on buyers of the tying product is reasonably apparent. But I question that buyers' acceptance of the tie-in-the simple fact that there are customers-will always suffice to prove market power in the tying product. Where the seller exercises no market power in the tying item but buyers prefer the tie-in because the seller offers the tying product on favorable terms-where the price is unusually low or where the seller gives the product away conditioned on buying other merchandise-the seller in effect is merely competing in the tied product market. Buyers are not burdened. They may buy both tied and tying products elsewhere on normal terms. Nor are the seller's competitors restrained. The economic advantage of the tie-in to buyers can be matched by other sellers of the tied product by offering lower prices on that product. Promotional tie-ins effected by underpricing the tying product do not themselves prove there is any market power to exercise in that product market, unless the economic resources to withstand lower profit margins and the willingness to compete in this manner are themselves suspect. If they are, however, they should as surely taint and muffle hard price competition in the tied market itself, a result which, short of a § 2 violation, it would be difficult to reach under the Sherman Act.

I cannot join such a complete evisceration of the requirement that market power in the tying product be shown before a tie-in becomes illegal under § 1. Certainly it is unnecessary to erect a § 1 per se ban on promotional tie-ins in order to protect the tied product market. If the resulting exclusion of competitors is of sufficient significance to threaten competition in that market, the transaction may be reached as a requirements contract under § 3 of the Clayton Act. ^[12] If the promotional tie is in effect price discrimination, that too can be examined under statutes designed for that purpose. ^[13] Moreover, the transaction could be dealt with as an unfair method of competition under § 5 of the Federal Trade Commission Act, 38 Stat. 719, as amended, 15 U.S.C. § 45. For example, in Hastings Mfg. Co. v. FTC, 153 F.2d 253 (C.A.6th Cir.), cert. denied, 328 U.S. 853, 66 S.Ct. 1344, 90 L.Ed. 1626 (1946), it was, inter alia, held an unfair method of competition for a seller of piston rings, ranking sixth or seventh in the industry, to attempt to obtain exclusive dealers or preferential dealers by guaranteeing profits to the dealers and making loans to them, tied to the purchase of the piston rings. Relying on the expertise of the FTC and the precedents of this Court, the Court of Appeals concluded that although it 'is not illegal for a manufacturer to finance his retail outlets,' 153 F.2d, at 257 (a proposition called into question by today's decision) tying this to exclusive or preferential dealing was an unfair method of competition.

The principal evil at which the proscription of tying aims is the use of power in one market to acquire power in, or otherwise distort, a second market. This evil simply does not exist if there is no power in the first market. The first market here is money, a completely fungible item. I would not apply a per se rule here without independent proof of market power. Cutting prices in the credit market is more likely to reflect a competitive attempt to offset the market power of others in the tied product than it is to reflect existing market power in the credit market. Those with real power do not offer uniquely advantageous deals to their customers; they raise prices.

This is not, of course, to say that if market power were proved in the tying product the per se rule would be inapplicable, or that it is necessarily impossible to prove market power in the credit market. There may be so few suppliers of credit in a certain relevant market, for example, that they have the power among them to manipulate the price and terms of credit, not necessarily by conspiracy, but by parallel behavior. Through proof that such a situation existed, or through proof of some other sort, an antitrust plaintiff might be able to show market power in the credit market, and if this were coupled with a tie I would consider the arrangement per se illegal under conventional antitrust doctrine. However, I do not consider petitioner's allegations that U.S. Steel lowered its price of credit sufficient to establish market power in credit and I can find no offer by petitioner of the necessary supplementary proof.

Notes

1. E.g., United States v. Loew's Inc., 371 U.S. 38, 44-45, 83 S.Ct. 97, 102, 9 L.Ed.2d 11 (1962); Northern Pacific R. Co. v. United States, 356 U.S. 1, 6-7, 78 S.Ct. 514, 519, 2 L.Ed.2d 545 (1958); Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611, 73 S.Ct. 872, 881, 97 L.Ed. 1277 (1953).
2. E.g., Report of the Attorney General's National Committee to Study the Antitrust Laws 145 (1955); Austin, The Tying Arrangement: A Critique and Some New Thoughts, 1967 Wis.L.Rev. 88; Bowman, Tying Arrangements and the Leverage Problem, 67 Yale L.J. 19 (1957); Day, Exclusive Dealing, Tying and Reciprocity-A Reappraisal, 29 Ohio St.L.J. 539, 540-541 (1968); Turner, The Validity of Tying Arrangements Under the Antitrust Laws, 72 Harv.L.Rev. 50, 60-61 (1958).
3. Theoretically, the tie may do the tier little good unless the buyer is in that position. Even if the seller has a complete monopoly in the tying product, this is the case. The monopolist can exact the maximum price which people are willing to pay for his product. By definition, if his price went up he would lose customers. If he then refuses to sell the tying product without the tied product, and raises the price of the tied product above market, he will also lose customers. The tying link works no magic. However, difficulty in extracting the full monopoly profit without the tie, Burstein, A Theory of Full-Line Forcing, 55 Nw.U.L.Rev. 62 (1960), or the marginal advantage of a guaranteed first refusal from otherwise indifferent customers of the tied product, or other advantages mentioned in the text, may make the tie beneficial to its originator.
4. If the monopolist uses his monopoly profits in the first market to underwrite sales below market price in the second, his monopoly business becomes less profitable. There remains an incentive to do so nonetheless when he thinks he can obtain a monopoly in the tied product as well, permitting him later to raise prices without fear of entry of recoup the monopoly profit he has foregone. But just as the firm whose deep pocket stems from monopoly profits in the tying product may make this takeover, so may anyone else with a deep pocket from whatever source.
5. Even when the terms of the tie allow a competitor to obtain the business in the tied product simply by offering a price lower than, rather than equal to, the tier's the Court has found sufficient restriction in the tied product, as in the Northern Pacific case.
6. Bowman, Tying Arrangements and the Leverage Problem, 67 Yale L.J. 19, 21-23 (1957).
7. Id., at 23-24.
8. Burstein, A Theory of Full-Line Forcing, 55 Nw.U.L.Rev. 62 (1960).
9. Tie-ins may also at times be beneficial to the economy. Apart from the justifications discussed in the text are the following. They may facilitate new entry into fields where established sellers have wedded their customers to them by ties of habit and custom. Brown Shoe Co. v. United States, 370 U.S. 294, 330, 82 S.Ct. 1502, 1526, 8 L.Ed.2d 510 (1962); Note, Newcomer Defenses: Reasonable Use of Tie-ins, Franchises, Territorials, and Exclusives, 18 Stan.L.Rev. 457 (1966). They may permit clandestine price cutting in products which otherwise would have no price competition at all because of fear of retaliation from the few other producers dealing in the market. They may protect the reputation of the tying product if failure to use the tied product in conjunction with it may cause it to misfunction. Compare International Business Machines Corp. v. United States, 298 U.S. 131, 138-140, 56 S.Ct. 701, 705, 80 L.Ed. 1085 (1936), and Standard Oil Co. v. United States, 337 U.S. 293, 306, 69 S.Ct. 1051, 1058, 93 L.Ed. 1371 (1949), with Pick Mfg. Co. v. General Motors Corp., 80 F.2d 641 (C.A.7th Cir. 1935), aff'd, 299 U.S. 3, 57 S.Ct. 1, 81 L.Ed. 4 (1936). And, if the tried and tying products are functionally related, they may reduce costs through economies of joint production and distribution. These benefits which may flow from tie-ins, though perhaps in some cases a potential basis for an affirmative defense, were not sufficient to avoid the imposition of a per se proscription, once market power has been demonstrated. But in determining whether even the market-power requirement should be eliminated, as the logic of the majority opinion would do, extending the per se rule to absolute dimensions, the fact that tie-ins are not entirely unmitigated evils should be borne in mind.
10. I agree with the majority that the affidavits are not inconsistent with a 'possibility of market power' and that such power might be shown by showing certain kinds of 'unique economic ability.' But I cannot see how petitioner offers to prove this, although by taking judicial notice of the possibility that U.S. Steel may have operated free of legal restraints on other lenders otherwise willing to provide 100% financing-a possibility not mentioned by petitioner-the majority suggests to petitioner an element of the sort of detailed description of one facet of the credit market which, with much more information about the whole of the market, would be relevant. But this was not the basis on which petitioner offered to go to trial and I would not remand for trial even under the applicable Poller standard.
11. 38 Stat. 731, 15 U.S.C. § 14.
12. The arrangements proscribed by § 3 relate only to 'goods, wares, merchandise, machinery, supplies, or other commodities * * *.' 38 Stat. 731, 15 U.S.C. § 14
13. Robinson-Patman Price Discrimination Act, 49 Stat. 1526, as amended, 15 U.S.C. § 13 et seq.