Intel Violates Antitrust Laws, FTC Suit Alleges
WASHINGTON — In a move that could significantly affect competition in the computer industry, the Federal Trade Commission on Monday filed an antitrust lawsuit against Intel Corp., alleging that the chip giant used its monopoly power to cement its dominance over the microprocessor market.
The FTC charged that Intel selectively withheld information from three PC makers--information needed to develop computers based on Intel microprocessors, the central brains of the computer. Intel also “took other steps to punish them for refusing to license key patents on Intel’s terms,” the agency said.
“A monopolist can legally compete by producing better and cheaper products,” said William J. Baer, director of the FTC’s Bureau of Enforcement, “but it cannot wield its monopoly power to lock others out. In three separate cases against three separate customers, it used its power to unlawfully protect its monopoly.”
The long-awaited action follows last month’s Department of Justice suit against Microsoft Corp., which said the software maker used its monopoly in Windows operating systems to gain control of the Internet browser market. The two legal moves represent a double-barreled government challenge to the business practices of the world’s most powerful hardware and software companies--called the “Wintel” duopoly by many in the industry.
While the FTC suit focuses narrowly on an intellectual property dispute, sources say the agency may broaden its action in future months.
Still, Intel strongly disputed the FTC claims. “For more than 10 years, Intel has taken unprecedented steps to ensure that all of our activities and policies are in full compliance with existing law,” said F. Thomas Dunlap, Intel vice president and general counsel. “The commission’s decision today signals that they want to change the very laws upon which we’ve based our policies.”
Lawsuit Echoes FTC Concerns
The FTC’s concerns were strongly supported, however, in a lawsuit involving Intergraph Corp., a Huntsville, Ala.-based maker of advanced computer workstations. During an intellectual property dispute, Intel withheld key documents that Intergraph needed to produce a new generation of computers based on Intel’s Pentium II processor--an alleged violation of antitrust laws.
A federal judge in the U.S. District Court for the Northern District of Alabama upheld Intergraph’s claims. In April, the judge enjoined Intel from engaging in such practices while the Intergraph claim is adjudicated.
The FTC cites the Intergraph case and similar disputes involving Houston-based Compaq Computer Corp., the world’s largest PC maker, and Digital Equipment Corp., a diversified technology company in Maynard, Mass. Digital’s chip-making operations were recently acquired by Intel; the rest of Digital was purchased by Compaq.
“Intel believes it has obeyed the law,” said company spokesman Chuck Mulloy. “We withdrew that information [from Digital, Intergraph and Compaq] in cases where we were either a defendant or about to be made a defendant in an intellectual property dispute. We believe that our actions are well within our rights under existing intellectual property and antitrust laws.”
The FTC action follows a broadly based, nine-month investigation into allegations that the Santa Clara-based company has used its near-monopoly in PC microprocessors to dominate other important markets and to squelch competition--possible violations of the Sherman Antitrust Act.
According to market research firm Dataquest in San Jose, as well as the FTC, Intel chips power the vast majority of PCs, and the company took in about 80% of industrywide revenues for microprocessors in 1997.
For Now, Little Impact Expected
Intel’s central-processor dominance--and its extension into other PC components, such as chip sets, which control subsidiary computer functions, and motherboards, the principle circuit board of a PC--strongly resembles Microsoft’s situation in the software market.
But the FTC suit follows a more narrow path than that filed by the Department of Justice against Microsoft. The FTC challenges only the question of illegally withholding key intellectual property.
“It’s easier to go and attack the symptoms of Intel’s overpowering market position than the cause,” said Michael Feibus, a chip industry analyst with Mercury Research in Scottsdale, Ariz. “But this is a signal that the FTC and maybe the government at large is watching.”
In the short term, the FTC’s action is not likely to have much impact on consumers or the microprocessor industry, experts say.
Unlike the software industry, where companies such as Netscape Communications Corp. can turn the bright idea of a few resourceful college students into formidable competition to software giant Microsoft, it can take $2 billion or more to get into state-of-the-art computer chip manufacturing.
“There are probably only a dozen or so companies in the world now” that have the financial and technical wherewithal to produce a microchip, said Linley Gwennap of the analyst group Microdesign Resources in Sunnyvale, Calf. “There’s a very high bar just to play in this game and [today’s] action won’t change that.”
But FTC sources say that Monday’s complaint is regarded by officials in the Bureau of Competition as a first step against Intel while a broader investigation continues. This ongoing inquiry may allow the FTC to expand its charges at a later date, sources say.
“In general, the legal environment and political environment for bringing huge cases is much more hostile now than it was in the late 1960s when the Justice Department brought its antitrust case against IBM,” said Simon Lazarus III, a Washington antitrust lawyer who helped America Online get its software included in Microsoft’s Windows 95 operating system.
“This drip-drip strategy is something that frankly raised a lot of consciousness about Microsoft . . . and made it easier for the government to build its case,” Lazarus added.
Tom McCoy, senior vice president and general counsel of a key Intel competitor, Advanced Micro Devices Inc., called Intel’s actions in the Intergraph case and others “intellectual property extortion.” McCoy predicted that his company, the entire PC industry and consumers would all benefit if the FTC prevails.
“The industry was built on broad-based innovation from many corners of the world. Over time, Intel has drained this away,” McCoy said.
But Intel skirted a previous FTC antitrust investigation, which ended in 1993 with no action taken. And antitrust experts said an FTC victory in this suit is far from certain.
“Under current law, the FTC does not seem to have a good case,” said Charles Rule, an antitrust attorney with Covington & Burling in Washington, D.C. Rule was head of the DOJ antitrust division in the 1980s and is now a legal consultant to Microsoft.
Rule said the FTC may have difficulty proving that Intel has a true monopoly, given its recent stumbles in the market for processors that power low-cost PCs. Competitors have grabbed a sizable and growing part of that market in the last year.
FTC Is Pursuing ‘Elusive Concept’
Rule added that the FTC case appears to expand antitrust limits improperly to intellectual properly issues.
“The most time-honored way of protecting intellectual property is simply to keep it a secret, and that’s all Intel has done here,” said William Baxter, professor emeritus at Stanford Law School. “The claim is that they’ve done it in a discriminatory and exclusionary way, but that’s a very elusive concept.”
Whether the government’s more aggressive regulatory posture--as evidenced in Microsoft and Intel suits--will help increase competition and reduce those companies’ dominance remains to be seen.
“If [the DOJ and the FTC] both fall on their faces, we’ll be back in the other pattern with a vengeance,” Baxter said.
Intel shares lost 50 cents to close at $69.31 on Nasdaq.
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Times staff writer Jube Shiver contributed to this story.
* INFORMATION AGE ISSUES
Intel case raises difficult issues of intellectual property. D1
* CHANGED LANDSCAPE
The path turns perilous for new Intel CEO Craig Barrett. D2
