Intel/FTC case is about law, not facts
March 4, 1999
by James Niccolai
(IDG) -- At what point does a company become so powerful that antitrust laws must be applied to regulate its behavior? That question lies at the heart of the U.S. Federal Trade Commission's antitrust case against Intel Corp., which is due to come to trial next week.
Legal experts say the conduct Intel is charged with -- that it coerced firms into sharing technology patents by denying them access to future microprocessors -- wouldn't be illegal when practiced by a smaller, less powerful firm. But the FTC will argue that Intel is a monopoly and that it exploited its power to snuff out competition and cement its chokehold over the microprocessor market.
The case has a tighter focus than the antitrust suit leveled against Microsoft Corp. by the U.S. Department of Justice and 19 states. The FTC hasn't alleged, as some analysts speculated it might, that Intel tried to bully its way into related markets. Also, Intel doesn't contest most of the facts in the case but argues that the market in which it competes is so competitive that its actions were justified and legal under intellectual property law.
Also unlike Microsoft, the firm is willing to put its most senior executives on the stand to help argue its case, including Chairman Andy Grove and President and CEO Craig Barrett. "That tells me that they feel strongly that they were in the right and that they believe this is an issue that's worth fighting for," said Sam Miller, an antitrust expert at the law firm Folger, Levin, Kahn in San Francisco.
The trial could help clear up an important question for the high-tech industry about whether antitrust laws should take precedence over the right of powerful firms to exercise their intellectual property rights as a weapon. And it could affect the way other industry leaders -- such as Microsoft and Cisco Systems Inc. -- go about their business in the future, Miller said.
In its complaint filed last summer, the FTC said Intel harmed competition by coercing three firms -- Compaq Computer Corp., Digital Equipment Corp. (now owned by Compaq) and Intergraph Corp. -- into licensing microprocessor patents on terms favorable to Intel.
In each case, the firms had asserted patent infringement claims either directly or indirectly against the chip maker. And in each case, Intel tried to force the firms into favorable settlements by denying them access to samples and information relating to future Intel processors, which the firms depended on to carry out their core business, the FTC said.
Digital eventually settled a claim that Intel infringed on nine patents in Digital's Alpha processor. Compaq settled a more complex claim involving motherboard and chipset technologies that it hoped would allow it to differentiate its PCs based on a non-Intel technology. And Intergraph is pursuing its claim in a federal district court that Intel infringed on patents used in its Clipper microprocessor. The judge overseeing that case ruled that Intergraph is likely to win and has ordered Intel to reinstate Intergraph's access to Intel's products pending the outcome of the trial.
The effect of Intel's behavior, the FTC said, was to chill competition in the PC market by reducing the incentive of firms, which feared reprisals, to develop new microprocessors or try to distinguish their PCs based on non-Intel technologies. The behavior also helped Intel cement its dominance by reducing the chance that competitors would emerge, the FTC charged.
Although Intel doesn't deny that it cut off its supply of future products to the three firms, it asserts that its hardball tactics were justified in a highly competitive market. In addition, because the three firms had filed or shown an intent to file patent claims against Intel, withdrawing its intellectual property was a natural and defensive reaction, the company said.
"If someone is suing you over [intellectual property] and you continue to provide that party with information about products you have under development, then you essentially increase your risk," said Intel spokesman Chuck Mulloy.
The company will deny that it holds a monopoly, despite holding a more than 70% share of the PC chip market. That argument may be bolstered by the fact that rival Advanced Micro Devices Inc. has managed to steal significant market share from Intel in the past year -- although only in the low end of the market where profits are thin and only at considerable financial cost to AMD, the FTC notes.
Intel will also cite senior staff at major chip makers, including IBM, Motorola Inc., Hewlett-Packard Corp. and Sun Microsystems Inc., who have said Intel's conduct didn't cause them to scale back their research and development efforts. In a brief filed last week, Intel claimed that even the FTC's own expert economist was unable to find direct evidence that Intel's behavior had harmed innovation or price competition.
Most industry analysts interviewed for this story said it is unclear whether Intel holds a monopoly over the market for general-purpose microprocessors. At the same time, most said they believe the FTC is right to pursue a case against Intel.
"Once you have a monopoly, you have a responsibility to act in a fair way. ... It doesn't seem fair that Intel should have this godlike power to destroy a company when it comes down to an arbitrary disagreement over intellectual property," said Linley Gwennap, vice president at MicroDesign Resources in Sebastopol, Calif.
In part because of its narrower focus, the case is unlikely to unearth the type of inflammatory evidence on display in the Microsoft case -- the incriminating E-mail that implied threats to customers, industry analysts and antitrust experts said. Intel has a reputation for being a well-counseled company that watches its conduct when it comes to antitrust law.
One observer characterized the different styles of operation between the two firms as "the brash street kids" style of Microsoft vs. the "older pros" at Intel. "Microsoft left a lot of bodies lying around -- that's the difference between street gangs and professionals," said Carey Heckman, a law professor at Stanford Law School and co-director of the Stanford Law and Technology Policy Center.
If the FTC wins its case, the implications for consumers are less apparent than in the Microsoft trial, where the Justice Department may seek a remedy that affects the way Microsoft packages and sells its products or the freedom PC makers have to choose the software they bundle with their PCs, analysts said.
The FTC has asked the court to prevent Intel from using access to its products as a way to force other companies to license their technology on Intel's terms -- unless it can show good cause for doing so, such as if a company had abused its patents in the past. If it is found guilty of antitrust violations, it will likely also face a fine, Heckman said.
If the FTC's assertions are correct, and Intel's behavior has inhibited competition, then the remedy could encourage firms to develop new microprocessor technologies in the future, Heckman said. But given the enormous challenge and expense of establishing even a new x86-type processor in the market, a victory for the FTC is unlikely to have much impact on Intel's position in the near term.
Analysts said the FTC is certain to have explored the possibility of filing broader charges against Intel, such as whether it strong-armed PC manufacturers into using only Intel chips or whether it used its dominance in the microprocessor market to gain control of related products such as chipsets -- the collections of chips that surround the processor.
"There are many other things they are probably looking at and would look at more should the decision be made that Intel has a monopoly," said Michael Slater, founder and principal analyst at MicroDesign Resources.
Intel claims FTC found no evidence of harm
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