Antitrust Tying and Computer Hardware Manufacturers

by Walt Pennington

At the outset, consumers should realize that manufacturers are forbidden by law to compel their customers to purchase an unwanted operating system as a prerequisite to buying a computer. This is because antitrust law makes illegal a practice known as "tying." defines tying as "an arrangement or agreement in which a seller will sell a product to a buyer only if the buyer will also buy another product." further discusses tying:

Sellers with more than one product may seek to tie the sale of one (which the customer presumably desires) with that of another (which it presumably does not want). Such tie-ins are governed not only by the general language of the Sherman Act, but the more particular provisions of Section 3 of the Clayton Act, which prohibits such arrangements if the likely result is substantially to lessen competition. Tie-ins are per se unlawful if the seller possesses sufficient market power in the tying product, and coerces the buyer to take the tied product as a condition to obtaining the desired product.

The antitrust problem with tie-ins is that the leverage generated by economic power in one market is used to accomplish sales in another. Once it is established that a tie-in is present; that the seller has sufficient economic power in the desired product to force the tie-in; and that a "not insubstantial" amount of sales is involved (amounts as small as $60,800 have been found to meet this standard), they are generally deemed unlawful.

In our situation, the tying product is the computer; the tied product is the unwanted Microsoft Windows operating system. Under the applicable antitrust statutes, it is unlawful for Dell or Compaq, for instance, to compel consumers who wish to purchase a computer to pay also for an unwanted, pre-installed operating system that is a completely separate product --Windows.

The United States Supreme Court has held in an analogous situation that such tying is illegal. In Eastman Kodak v. Image Technical Services, 112 S. Ct. 2072 (1992), Kodak provided service and parts for Kodak copiers, and sought to prevent independent servicers from servicing its copiers. To achieve that goal, Kodak would not allow replacement Kodak parts to be sold to any independent service provider. Thus, Kodak copy machine owners always "chose" to use Kodak to service their machines because no other servicer had access to the necessary parts. The Supreme Court held that this was not in fact a real choice for Kodak customers. The Court held that Kodak illegally tied the sale of its copier servicing (the tied product) to the sale of its copy machines (the tying product).

As Kodak forced its copier customers to become customers of its servicing product as well, so, too, several computer hardware manufacturers are similarly demanding that their hardware customers become customers of a separate unwanted software system. Apparently, these computer hardware manufacturers believe that unlike, Kodak, they are not compelled to offer their consumers a real choice of operating system. These manufacturers think the law permits them to tie a purchase of Windows to the purchase of a computer. But this notion flies in the face of the Supreme Court's ruling in Kodak.

Offer a choice

One simple solution for manufacturers seeking to abide by the law would be for computer hardware manufacturers to offer the same hardware with a variety of operating systems, and link the price of the unit to the cost of the operating system selected. If the hardware cost $700, for example, and the available operating systems cost $300, $200, or $100, the cost of the computer would range from $1,000 to $800, depending on the software selected by the customer. Or, the unit could be sold without an operating system for $700.

Provide a refund

Another easy out for manufacturers would be to preinstall just one brand of operating system, and offer a refund to the relatively few consumers who choose a different brand. This would prevent consumers from having to purchase two operating systems--the preinstalled system, and then the preferred system. Ostensibly, this is the way in which the manufacturers have chosen to "comply" with applicable antitrust statutes.

For example, the contract provided by Compaq with the Presario computer I purchased provided in relevant part:

If you do not agree to the terms of this EULA, then you will not be licensed for this SOFTWARE PRODUCT(s). In such event, you may not use or copy the SOFTWARE PRODUCT, and you should promptly contact Manufacturer for instructions on return of the product(s) for a refund.

Remember, this apparent refund offer is not of made of magnanimity. Rather, it springs from the manufacturer's desire to escape liability under applicable antitrust laws. But when I attempted to return the software for the refund "offered, " Compaq argued that the contract didn't say there IS a refund, just that you can contact the manufacturer to SEE if there is a refund. Oh, and by the way, there is no refund. Thus, I was compelled to purchase an operating system I did not want or use (the tied product) in order to purchase my Compaq computer (the tying product). As you may have recognized, from the contract (license) above, that no negotiation is allowed. Take-it-or-leave-it contracts are called "contracts of adhesion." Adhesion contracts are legal, but where ambiguities exist, courts generally hold that the contract should be construed against the drafter of the contract.

To avoid this obvious antitrust violation in the future, Compaq and other hardware manufacturers must be made to do more than offer a refund: they must provide it. It is nothing more than corporate greed motivating these companies; they certainly can afford to live up to the language contained in their own contracts. As responsible citizens, they should fulfill their agreements. My lawsuit against HP Windows Refund Day II

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