Intel Charges May Have Limited Impact

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June 12, 1998 (3:47 PM EDT)

By Mark Hachman and Chandra Steele,

Government allegations that Intel misused its monopoly control over the microprocessor marketplace are likely to have little effect unless prosecutors widen the scope of their investigation, according to industry observers.

The trustbusters strike again -- this time the Federal Trade Commission is in pursuit of Intel. Stay tuned to TechWeb for coverage of the latest government antitrust action.

The case, which was filed last week by the Federal Trade Commission, charges Intel (company profile) withheld crucial documents from customers who refused to relinquish key patent rights. Those patents would have enabled Intel to tighten its monopoly grip on the processor industry, according to the FTC.

Underlying the forthcoming trial is the fact that the original equipment manufacturers named as defendants in the FTC suit -- Compaq, Digital Equipment, and Intergraph -- represent a unique combination of OEM box-builders that compete against Intel with their own proprietary technology.

These customer/competitor relationships have prompted the government to word its suit narrowly and address only the small fraction of Intel's OEM customers that compete directly against it in its core businesses, litigants in the case said.

"There's a reason that other OEMs, or box-builders as you call them, wouldn't be included in the FTC's investigation," said David V. Lucas, chief counsel for Intergraph, a Huntsville, Ala.-based workstation and processor maker. "That's because they don't have enough intellectual property to represent a threat to Intel."

Nevertheless, Lucas expects other companies to join in the investigation, and over time, help bolster the government's legal arsenal.

FTC regulators said they will seek a court order barring Intel from using its confidential technical documents and product road maps as a club to intimidate other OEMs into sharing patent technology.

Intel said its decision to withhold confidential documents was part of a valid legal defense exercised only after its customers filed patent infringement suits against it. The chip maker plans to mount a vigorous defense.

"The issue is intellectual property," said an Intel spokesman. "We have a chance to make a case, and we're going to do that."

The case will be heard by an FTC administrative law judge, who will have a year to deliver a ruling. A trial is expected to begin in the fall.

In the year since the company fell under government scrutiny, Intel's relationships with its customers have grown considerably more cordial, analysts said. "That's not to say that they did anything wrong before, but Intel has been generally more accommodating of late," said Dean McCarron, principal at Mercury Research, Scottsdale, Ariz.

Intel's legal team said its actions have not harmed competition within the semiconductor industry, which is the basis of the FTC's antitrust suit.

"In all three cases, Intel was named as a defendant in an intellectual-property dispute," the spokesman said. "In such a case, the best defense ... is to not ship [Intel's opponents] further intellectual property."

Legal and business experts generally agreed with Intel. "[Intel's] type of conduct is strong, but within the realm of competitive behavior," said Hillard Sterling, an antitrust attorney at Gordon & Glickson, a Chicago-based law firm that handles information technology suits.

Luke M. Froeb, assistant professor of management at Vanderbilt University's Owen Graduate School of Management, questioned the FTC's contention that Intel is a monopoly, given the existence of several processor competitors in the market.

"You have to get away from market-share presumptions in antitrust," said Froeb, a former economist for the Justice Department's Antitrust Division. "You have to ask, 'Are there close [microprocessor] substitutes?' I would say yes."

The FTC said it is trying to protect the right of companies to develop, own, and defend their patents without fear of reprisal. By its actions, Intel has exhibited predatory behavior that could stifle competition if unchecked, said Willard K. Tom, deputy director of the FTC.

"The harm to competition is that inventors [can no longer] rely on a patent system that's protected them for hundreds of years," Tom said in a phone interview. By its actions, Intel is attempting to seize those patents "with impunity."

Still, the government may proceed slowly, building to a separate, broader action that explores Intel's entry into new markets, a strategy that legal analysts said could give the FTC more ground for legal maneuvering.

As it stands now, the government's case rests on evidence provided by the three defendants.

The Intergraph dispute stems from technology included in the Clipper microprocessor, an Intergraph-developed chip that Intel first asked Intergraph to abandon in favor of the Pentium, and then license to Intel. When Intergraph refused, Intel terminated its nondisclosure agreement (NDA) with the company, a move a U.S. District Court judge found to be anticompetitive.

The FTC also cited the 1996 dispute between Digital Equipment, Hudson, Mass., and Intel concerning patents allegedly used in both Intel's forthcoming 64-bit Merced microprocessor and Digital's 64-bit chip, the Alpha. When Digital sued Intel to protect its patents, Intel threatened to cut off its supply of Pentium chips in retaliation.

After Intel later purchased the assets of Digital's semiconductor subsidiary, the FTC ruled Digital must retain rights to the Alpha, keeping the and Samsung Electronics.

Last week, Digital executives issued a statement saying all outstanding issues with Intel have been settled.

In November 1994, Houston-based Compaq filed suit against fellow OEM Packard Bell Electronics, saying Packard Bell's motherboards used Compaq's technology.

Intel indemnified Packard Bell, and later terminated its NDA relationship with Compaq, resuming relations only after a cross-licensing agreement was struck between Compaq and Intel, said the FTC.

Of course, Intel also employs other, less controversial tactics to acquire desirable technology. In addition to various cross-licensing agreements in the microprocessor industry, Intel has signed deals with graphics pioneers Real3D and Silicon Graphics, and has invested $750 million in more than 125 companies to date, said Intel.

"For years, Intel has shared its intellectual property and early samples of its products with a number of key customers," said F. Thomas Dunlap, Intel's vice president and general counsel, in a statement. "We believe the ultimate beneficiaries of this approach have been consumers."

Despite Intel's intention to pursue the case to the end, a number of analysts believe the chip maker will eventually agree to a compromise.

"I fully expect the parties to come to some kind of agreement involving some degree of relief regarding Intel's practices," said Gordon & Glickson attorney Sterling. "It won't really have an impact on [Intel's] competitive behavior. Their actions may just be modified a bit."