What Is a Tying Agreement?
Tying agreements are business arrangements in which the sale of one product is conditioned upon the purchase of another. Practically, a tying arrangement involves the sale of a second product or service to a customer only if the customer agrees to also purchase a product or service from the vendor. For example, if a developer allocates the right to purchase the first 50 lots in a new subdivision to a builder in exchange for the builder exclusively using the developer’s materials in the construction of all 50 homes, this would be a tying arrangement.
The basic legal definition of tying agreements can be found in Section 3 of the Clayton Antitrust Act, which states: "Sec. 14. It shall be unlawful for any person engaged in commerce, or in any activity affecting commerce, to tie the sale of a product or service to the purchase of a second product or service." Section 14 goes on to define what "tie in" means: "(T)he term "tie in" means to condition the sale or lease of a product or service purchased from, or a trick, concession or privilege granted by, such seller, licensor, lessor, etc. upon the purchase, sale, lease, or use of another product or service." A tying arrangement can be between competitive products, where the seller ties the sale of one product to the purchase of a second product. As defined by the Department of Justice, an example of a tying arrangement for competitive products is "a seller of hot dogs refuses to sell its hot dogs to a retailer unless the retailer sells only the seller’s brand of hot dog buns . " A tying arrangement can also be between a product and a service, such as "a shoe repair contractor’s refusal, in order to secure the bid for repairing shoes for a big department store, to service any other shoe repair business in the area." In the real estate context, tying arrangements are prohibited by federal law under the Clayton Antitrust Act, which conflicts with certain state laws that allow the use of tying agreements. Parties entering into tying agreements will generally argue that the agreement was pro-competitive; and that it will promote the development of limited or unique products that would otherwise not be produced. For example, selling only a single brand of a particular product may allow the developer greater leverage with respect to the single entity. These arguments are typically met with counter-arguments by plaintiffs that a tie-in affects more than one market and that, if there’s more than the buyer’s need for the product, the court should find that there is a market impact on others, and thus grant relief to the seller. The plaintiff is the only party that suffers by the arrangement because he is forced to buy from the developer, but because the developer has exclusive use of the product or service, he will become the sole high-quality grading contractor, and may become the only available grading contractor in the area. More to the point, all of the competitors of the plaintiff will have a substandard grading job, and the plaintiff will have to bid on his name alone.
Legal Implications and Antitrust Laws
At the federal level, the legality of tying agreements is governed by the Sherman Antitrust Act, which prohibits any agreement that creates market monopolies (loose interpretation). These agreements are condemned by Section 1 of the Sherman Act as those "’that unreasonably restrain trade or commerce.’" (Brown Shoe Co. v. United States, 370 U.S. 294, 305 (1962)). Tying agreements that are considered per se illegal under the Sherman Act have been found to "pose an unreasonable restraint on the market for the tied product." (Canadian Am. Comm’n Co., Inc. v. Pomerantz Agency, Ltd., 2006 U.S. Dist. LEXIS 47915 (S.D.N.Y. 2006); see also In re Humco Holding Corp., 2006 WL 284049 * 2 (2006)). If a tying arrangement is deemed to be per se unlawful, no further evidence is needed to determine whether it violates the law. Since a finding of per se illegality is usually made only in the most extreme instances, most tie-in agreements will be reviewed under a rule of reason analysis. Under this heightened standard, the pros and cons of the tying arrangement are laid out and assessed, and the competition-friendly nature of such contracts is considered. The Virginia Commercial Tying Agreements Act ("Act") also addresses tying contracts and voids any tying agreement in "restraint of trade or commerce" in violation of Va. Code ยง 59.1-9.4. In Virginia, parties bound by a tying agreement will not be held liable from damages resulting from that agreement, except antitrust-related damages and attorney fees, since antitrust lawsuits are the only action permitted by the Act, although other possibilities exist. Courts will use the same rules of reason analysis as under the federal Sherman Act although the Act is interpreted to exert "broad power." (Locus Point v. Rogers, 75 Va. Cir. 435, 439 (Fairfax County 2008)). For parties to a tying agreement that operates as an actual restraint on trade under the Act and the corresponding federal antitrust laws, allowing the contract to stand may cause the offending party to be held liable for treble damages and attorney fees. In order to avoid the enforcement of a potentially illegal tying agreement, any party subject to the Act may seek injunctive relief in the form of terminating the tying agreement.
Examples of Tying Agreements in Real Estate
Examples of Tying Agreements in Real Estate Transactions
Common scenarios in real estate where tying agreements may be required include conditions from a builder for the purchase of property, such as a home, townhome, or condo, with the requirement that a purchaser use a specific lender to qualify for a mortgage. Settlements have also been observed with property developers that require the sale of a proportion of lots to a particular utility company before the developer will proceed with the purchase and installation of utilities. Other examples may arise from an agreement with a real estate agent and a financier to only use their services together in order for the parties to benefit from a mortgage discount.
In circumstances where the parties are not acting at arm’s-length (i.e. where they have some kind of pre-existing business relationship), complaints can arise. Likewise, pressing concerns have arisen when the trust and confidence of the relationship has been abused by the more powerful party or where the other party has been pressured into a potentially vulnerable consumer situation.
Risks and Challenges of Tying Agreements
Potential problems that could arise from tying agreements are largely anti-competitive, i.e. bribery, kickbacks, creating monopolies, poverty, creating dependency on the seller, price fixing, restricting or limiting trade or sale of goods, fraud, debt, etc. The Antitrust Division of the U.S. Department of Justice (the "Division") and the antitrust division at each state’s department of justice, as well as the Federal Trade Commission, oversee the implementation of federal and state tying agreements in real estate transactions. If the tying agreement violates provisions of Section 2 and/or Section 3 of the Sherman Antitrust Act, there are severe penalities such as jail time, civil fine of up to $350,000 and treble damages, which means paying three times the amount of the damages to the buyer and seller. The exceptions to this are farmers, ranchers and any other entity whose business is considered agricultural, which has exempt status from the antitrust laws. Civil enforcement of antitrust laws is done by the Division, which is divided into a number of sections. The section that handles tying agreements is the Chief of the Litigation and National Criminal Enforcement Section, who enforces violations of Section 1 of the Sherman Act. Tying agreements violations are prosecuted by both the Department of Justice and the Federal Trade Commission.
Handling Tying Agreements in Real Estate Transactions
To ensure fairness and legality when dealing with tying agreements in real estate transactions, parties should consider taking steps that promote transparency and compliance with applicable laws. Negotiating clear terms and providing full disclosure are essential to avoiding potential antitrust issues and fostering a favorable environment for all parties involved.
When negotiating the terms of a tying agreement, it is paramount that landlords clearly define their expectations and requirements. This involves setting specific standards for base leases and upcharges, as well as establishing guidelines for third-party providers, such as cable companies. By clarifying the terms of the tying arrangement, landlords can avoid confusion and establish a fair and consistent basis for conducting business with their tenants.
Providing full disclosure to all parties involved is crucial. This means that landlords should keep all tenants informed of upcharges and processes regarding service and retail store providers. By maintaining open lines of communication, landlords can foster transparency and industry-leading practices, which can lead to better tenant relationships and reduce the risk of disputes .
Seeking counsel when dealing with tying agreements is also recommended. Experienced attorneys can provide valuable legal advice, evaluate the implications of existing tying arrangements, and guide the landlords through complex negotiations. For example, counsel can advise whether a landlord should negotiate with individual tenants or work through an association of tenants. By working closely with legal counsel, landlords can better understand their options and select the most appropriate course of action.
Landlords must also analyze the synergy between the businesses they operate and the location of the property. They should consider how the two can help each other thrive before proceeding with tying agreements. By carefully considering the relationship between the business and the property, landlords can create a more efficient and mutually beneficial arrangement.
Overall, to promote fairness and legality in real estate deals, parties must approach tying agreements with transparency, clarity, and informed legal counsel. By doing so, they can avoid antitrust issues and enjoy a more straightforward process for all parties involved.
Recent Cases and Trends
Courts have issued a number of important rulings on tying agreements in recent years. For example, in United States v. Badalov, the United States District Court for the District of Massachusetts denied a motion to dismiss a criminal indictment charging that two defendants had engaged in a tying arrangement. 2015 U.S. Dist. LEXIS 198894 (Nov. 13, 2015). There, the government had charged the defendants with criminal violations of the Sherman Act, claiming that they had offered "to tie the sale of conversion systems . . . to the sale of cloud servers," because "many of their customers needed . . . both products."
More recently, the Supreme Judicial Court of Massachusetts held that a developer violated Massachusetts General Laws chapter 93A by forcing a buyer to enter into such an agreement before it would modify the buyer’s mortgage. Leardi v. Brown, 470 Mass. 362, 363 (2015). The developer argued that chapter 93A was intended to prohibit only tying arrangements that would force a consumer to purchase unwanted or unnecessary products or services, which never occurred in this case. The court rejected the developer’s argument, reasoning that "the legislative policy behind [chapter 93A] is to regulate ‘the conduct of business, not the character or ethical behavior of the individual.’" Id. at 366 (quoting Maillet v. ATF, 413 Mass. 437, 441 (1992)). The court further noted that chapter 93A "has been construed to apply to conduct that saddles a buyer with a condition that has no other reason to be imposed other than the sale itself." Id. at 367 (internal quotation omitted).
The Federal Trade Commission (FTC) has also brought a number of tying agreement cases that have become influential. In Idaho Dental Servs., P.A., the FTC ordered that a group of dentists cease enforcing their contractual agreements that required member dentists to refer enrollees to a specific set of dentists in order for themselves or their employees to provide services: "This create[d] two problems: First, by denying the members freedom of choice as to the selection of a dentist, the agreement restrain[ed] competition among dentists. Second, the requirement that members maintain the contract with [the organization] creates[] a barrier to entry for other plans that are priced out of the market." Idaho Dental Servs., P.A., No. 9304 (F.T.C. June 17, 2014).
Conclusion: Navigating Tying Agreements
In closing, this article has reviewed the concept of tying agreements as they relate to real estate within the broader context of U.S. and Canadian law. Tying agreements are often perfectly legal and, in fact, are quite common in many business-to-business contexts (where one party is not a consumer). However, once a tying agreement must include a "tie-in" or "tie-out" involving a consumer or consumers, concern over compliance and trade regulation matters will arise. Any time a property owner or agent is required to package products or services together in a single real estate transaction, tying agreements may come into play. For example, requiring a real estate buyer to purchase title insurance in order to complete their transaction might constitute a tying agreement such that the agent may be found to have violated the law if they did not first protect themselves with provisions in their listing or purchase agreements . Tying agreements that arise in a real estate context require an awareness of the relationship between the agreement’s parties. In other words, what parties are involved in the real estate transaction (i.e., a consumer and an agent)? Who owns the parties in the transaction (i.e., a parent company on top of the entity that is directly involved)? Finally, as this article has discussed, there are legitimate reasons for creating a tying agreement, such as where the parties mutually benefit from the arrangement. Real estate professionals should carefully examine the circumstances surrounding a potential tying agreement to ensure compliance and better anticipate antitrust challenges (if any).