Wednesday, December 16, 2009

FTC Sues Intel for Monopolization

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Federal Trade Commission (FTC) announced today that it has issued an administrative complaint against Intel Corporation for engaging in monopolization. An administrative trial could begin next September.

Intel is charged with monopolizing the markets for Central Processing Units (CPUs) and creating a monopoly in the markets for graphics processing units (GPUs).

“Intel has engaged in a deliberate campaign to hamstring competitive threats to its monopoly,” said FTC Bureau of Competition Director Richard A. Feinstein. “It’s been running roughshod over the principles of fair play and the laws protecting competition on the merits. The Commission’s action today seeks to remedy the damage that Intel has done to competition, innovation, and, ultimately, the American consumer.”

Relevant Markets, Monopoly Power

A CPU is a type of microprocessor used in a computer and is often described as the “brains” of a computer. Intel’s unit share in the CPU markets at issue has exceeded 75 percent in each of the years since 1999, and its share of revenue in these markets has consistently exceeded 80 percent during that time, the FTC alleged.

The FTC identified a second set of relevant product markets for GPUs, in which Intel is likely to obtain monopoly power. GPUs originated as specialized integrated circuits for the processing of computer graphics but have evolved to take on greater functionality, the agency explained.

Unfair Methods of Competition, Unfair Acts and Practices

The agency contended that the computer chip maker maintained its monopoly in the CPU markets and strengthened its monopoly position in the GPU markets through unfair methods of competition and unfair acts or practices that date back to 1999 and continue to today.

According to the FTC, Intel used threats and rewards aimed at the world’s largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival computer CPU chips. In addition, allegedly, Intel secretly redesigned key software, known as a compiler, in a way that deliberately stunted the performance of competitors’ CPU chips.

The agency also contends that, once Intel found itself falling behind the competition in the critical market for GPUs, the chip maker embarked on a similar anticompetitive strategy to smother potential competition from GPU chips.

Relief Sought

To remedy the anticompetitive damage alleged in the complaint, the FTC is seeking an order which includes provisions that would prevent Intel from using threats, bundled prices, or other offers to encourage exclusive deals, hamper competition, or unfairly manipulate the prices of its CPU or GPU chips. The FTC said that it also might seek an order prohibiting Intel from unreasonably excluding or inhibiting the sale of competitive CPUs or GPUs, and prohibiting Intel from making or distributing products that impair the performance of non-Intel CPUs or GPUs.

Commissioner Rosch’s Partial Dissent

The Commission vote approving the administrative complaint was 3-0, with Commissioner William E. Kovacic recused, and Commissioner J. Thomas Rosch issuing a separate statement in which he concurred in part and dissented in part.

Commissioner Rosch, in his separate statement, said that he concurred in the issuance of a complaint based on pure FTC Act Section 5 claims, but dissented on public policy grounds to the extent the complaint contained Sherman Act, Section 2 “tag-along” claims.

“The collateral consequences of including any Section 2 claims are very unfavorable for both Intel and the Commission,” Rosch said. Because Intel was facing a suit filed by the New York Attorney General under Section 2 in addition to a number of Section 2 treble damage class actions, Rosch argued that perhaps “as a matter of policy the Commission should not spend public resources on a duplicate claim.”

Rosch also pointed to the risk that private plaintiffs might free ride off of the Commission’s work or that the Commission could be placed in a position where an unfavorable outcome in those cases could be cited against it.

FTC Case “Misguided”

Intel posted the following response on its website:

"Intel has competed fairly and lawfully. Its actions have benefitted consumers. The highly competitive microprocessor industry, of which Intel is a key part, has kept innovation robust and prices declining at a faster rate than any other industry. The FTC's case is misguided. It is based largely on claims that the FTC added at the last minute and has not investigated. In addition, it is explicitly not based on existing law but is instead intended to make new rules for regulating business conduct. These new rules would harm consumers by reducing innovation and raising prices."

According to Intel senior vice president and general counsel Doug Melamed, "This case could have, and should have, been settled. Settlement talks had progressed very far but stalled when the FTC insisted on unprecedented remedies—including the restrictions on lawful price competition and enforcement of intellectual property rights set forth in the complaint—that would make it impossible for Intel to conduct business."

"The FTC's rush to file this case will cost taxpayers tens of millions of dollars to litigate issues that the FTC has not fully investigated,” said Melamed, who served in the Department of Justice Antitrust Division during the Clinton Administration. “It is the normal practice of antitrust enforcement agencies to investigate the facts before filing suit. The Commission did not do that in this case.”

Other Actions Against Intel

In November, New York State filed an action charging Intel with monopolization in violation of the Donnelly Act and Section 2 of the Sherman Act. (See Trade Regulation Talk, November 4, 2009 posting).

In addition, Intel has agreed to pay $1.25 billion to Advanced Micro Devices (AMD) and to abide by a set of business practice provisions to resolve antitrust litigation and patent cross-license disputes, the companies announced on November 12, 2009. AMD agreed to drop all pending litigation against the computer chip maker, including a case in the federal district court in Delaware and two
cases in Japan.

Earlier this year, Intel was fined €1.06 billion by the European Commission based on similar allegations. (See Trade Regulation Talk, May 15, 2009 posting.)

The administrative complaint is In the Matter of Intel Corporation, FTC Docket No. 9341, December 16, 2009. Text of the complaint, statements by the Commissioners, and a news release appear here on the FTC website. Further details will appear in CCH Trade Regulation Reporter.

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