FTC and Intel Settle Antitrust Claims

August 4, 2010. The Federal Trade Commission (FTC) and Intel announced that they have settled the FTC's administrative claims that Intel violated Section 5 of the FTC Act. See, Agreement Containing Consent Order [3 pages in PDF] and Decision and Order [22 pages in PDF].

This proceeding is in the nature of a Sherman Act antitrust case. However, the FTC proceeded under Section 5 of the FTC Act, which has only rarely been invoked in the antitrust context, to avoid the large body of antitrust case law, and reach conduct that is not prohibited by the antitrust statutes.

The Decision and Order, among other things, regulates Intel's pricing and other marketing practices, changes Intel's obligations under intellectual property contracts with AMD, Nvidia, and Via, requires Intel to extend Via's x86 licensing agreement through 2018, and compels Intel to maintain the PCI Express Bus for at least six years.

The order consists of definitions and mandates. It does not explain the FTC's understanding of the antitrust obligations that arise under Section 5 of the FTC Act.

The order is not final. The FTC seeks public comments before making the order final. Comments are due by September 7, 2010.

Summary of the Order. The Decision and Order provides that it "does not constitute an admission by Respondent that the law has been violated as alleged in such complaint, or that the facts as alleged in such complaint, other than jurisdictional facts, are true". (Intel is the Respondent.)

This settlement does not resolve the legal questions of whether the FTC has authority to bring antitrust actions under Section 5 of the FTC Act, and if so, what is the extent of that authority, and what anticompetitive conduct constitutes a violation of Section 5.

The FTC stated in a release that Intel is prohibited by the order from "conditioning benefits to computer makers in exchange for their promise to buy chips from Intel exclusively or to refuse to buy chips from others; and retaliating against computer makers if they do business with non-Intel suppliers by withholding benefits from them".

The FTC stated in this release that Intel must also "modify its intellectual property agreements with AMD, Nvidia, and Via so that those companies have more freedom to consider mergers or joint ventures with other companies, without the threat of being sued by Intel for patent infringement".

The FTC stated in an analysis [16 pages in PDF] of the order that it "is designed to protect the ability of customers and existing and future Intel competitors to engage in mutually beneficial trade, while prohibiting Intel from using certain practices to deter or thwart such trade. The Proposed Consent Order therefore prohibits Intel from engaging in: 1) certain pricing practices that could allow Intel to exclude competitors while maintaining high prices to consumers ...; 2) predatory design that disadvantages competing products without providing a performance benefit to the Intel product ...; and 3) deception related to its product road maps, its compilers, and product benchmarking ..."

This FTC analysis also states that the order "seeks to undo the effects of Intel’s past restraints on competition by enhancing the ability of AMD, NVIDIA, Via, and others to compete effectively with Intel. To that end, the Proposed Consent Order seeks: 1) to make it easier for AMD, NVIDIA, and Via to use third-party foundries to manufacture products (to enable them to better match Intel's manufacturing advantages) ...; 2) to give AMD, NVIDIA, and Via flexibility to secure modifications of change of control provisions in their Licensing Agreements with Intel ...; 3) to extend Via’s intellectual property license ...; and 4) to provide assurances to manufacturers of complementary and peripheral products that they will be able to connect their devices to Intel’s CPUs ..."

The FTC analysis cites as authority for the proposition that it can use Section 5 as an antitrust tool only two ancient cases. The main authority is the Supreme Court's 1953 opinion in FTC v. Motion Picture Adv. Serv. Co., 344 U.S. 392. The Court wrote then that "the Federal Trade Commission Act was designed to supplement and bolster the Sherman Act and the Clayton Act". Then, in 1966, the Supreme Court quoted this opinion in its opinion in FTC. v. Brown Shoe Co., 384 U.S. 316. Antitrust law has been transformed significantly since then.

Procedural History. On December 16, 2009, the FTC filed a five count administrative complaint [24 pages in PDF] against Intel alleging violation of Section 5 of the FTC Act, which is codified at 15 U.S.C. § 45. However, the allegations are in the nature of violations of federal antitrust law. See, story titled "FTC Files Antitrust Charges Against Intel by Administrative Complaint Under FTC Act" in TLJ Daily E-Mail Alert No. 2,024, December 17, 2009.

The FTC complaint alleged that from 1999 forward Intel's conduct "was and is designed to maintain Intel's monopoly in the markets for Central Processing Units" or CPUs, and "to create a monopoly for Intel in the markets for graphics processing units" or GPUs.

The complaint alleged that the relevant markets are first, "CPUs for use in desktop, notebook, netbook (or nettop) computers, servers, and narrower relevant markets contained therein", and second, "GPUs (including all graphics processors, or chipsets with graphics processors regardless of industry nomenclature) for use in desktop, notebook, netbook (or nettop) computers, servers, and narrower relevant markets contained therein". (Parentheses in original.)

The complaint alleged, among other things, that Intel acted "to block or slow the adoption of competitive products and maintain its monopoly to the detriment of consumers. Among those practices were those that punished Intel’s own customers – computer manufacturers -- for using AMD or Via products. Intel also used its market presence and reputation to limit acceptance of AMD or Via products, and used deceptive practices to leave the impression that AMD or Via products did not perform as well as they actually did."

It further alleged that Intel entered into "anticompetitive arrangements with the largest computer manufacturers that were designed to limit or foreclose the OEMs’ use of competitors' relevant products", "offered market share or volume discounts selectively to OEMs to foreclose competition in the relevant CPU markets", "used its position in complementary markets to help ward off competitive threats in the relevant CPU markets", and "paid or otherwise induced suppliers of complementary software and hardware products to eliminate or limit their support of non-Intel CPU products".

On December 31, 2009, Intel submitted its Answer [22 pages in PDF]. It denied most of the factual allegations in the complaint. It denied that it violated Section 5 of the FTC Act. It asserted that "The Complaint fails to state a claim upon which relief can be granted under Section 5". It also argued that the relief sought in by the complaint would "harm competition, injure consumers, interfere with valid contracts, and abrogate valid intellectual property rights".

Intel's answer also argued that Intel did not receive "fair notice" of the FTC's "new, ad hoc interpretations" of Section 5 of the FTC Act. Moreover, "Those interpretations are vague, novel, and in important respects inconsistent with existing antitrust standards. Intel did not have reasonable or adequate notice of the standards by which the Commission now proposes to judge its conduct when it engaged in that conduct. Further, the Commissioners' new, proposed interpretations of Section 5 do not provide reasonable persons, including Intel, with fair notice of the standards to which they must conform their conduct in the future. The Commission’s proposed interpretations of Section 5 are thus unconstitutionally vague on their face and/or as applied to Intel’s prior and contemplated conduct. Therefore, application of the Commissioners’ proposed interpretations of Section 5 to Intel would not be in the public interest and would violate Intel's rights to due process under the Fifth Amendment to the Constitution of the United States."

Intel also argued in its answer that the microprocessor market is competitive. It wrote that "The Complaint paints a picture of competition for microprocessors and graphics products that bears little resemblance to reality. Competition in these sectors has been robust during the period covered by the Complaint, producing greater consumer benefits than any other sector of the economy."

Intel continued that "According to the Complaint, Intel's alleged conduct raised the prices of microprocessors (also known as ``CPUs´´) and the products containing them. In reality, during the period covered by the Complaint, according to U.S. Bureau of Labor Statistics data, microprocessor prices, adjusted for quality, declined at an annual rate of 42%. This rate of decline was greater than that of any of the 1,200 other products that the Bureau tracks, including any other high-technology product. During the same period, the quality-adjusted price of personal computers declined at an annual rate of 23%. Contrary to the Complaint's allegation that Intel’s conduct reduced output, sales of x86 microprocessors grew from 136.5 million in 1999, the first year covered by the Complaint, to 324.7 million in 2008." (Emphasis in original. Parentheses in original.)

The FTC sought to admit into evidence the European Commission's decision in its antitrust proceeding against Intel. See, EC Decision [518 pages in PDF].

See also, story titled "European Commission Initiates Proceeding Against Intel Alleging Anticompetitive Behavior" in TLJ Daily E-Mail Alert No. 1,617, July 26, 2007, story titled "EC Fines Intel One Billion Euros" in TLJ Daily E-Mail Alert No. 1,937, May 12, 2009, and story titled "EC Releases Intel Decision" in TLJ Daily E-Mail Alert No. 1,986, September 22, 2009.

On May 6, 2010, the FTC's administrative law judge (ALJ) ruled the EC decision inadmissible in this U.S. administrative proceeding. See, Order Denying Complaint Counsel's Motion to Admit European Commission Decision [PDF].