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INTEL IN TROUBLE

JULY 2009

On 13 May 2009, the European Commission imposed its highest ever single anti-trust fine of €1.06 billion on Intel.

Intel has been found guilty of abusing its dominant position for a period of 5 years on the worldwide market for x86 central processing units (“CPUs”), by taking steps to keep Advanced Micro Devices (“AMD”), its nearest competitor, out of the market. Intel was ordered to stop the conduct identified immediately.

Why did the Commission decide to investigate Intel?

AMD is Intel’s only significant competitor in the market for the supply of x86 microprocessors, the key hardware component in computers, which represent some 20-30% of the input costs of a computer. In 2000 and 2003, AMD had complained to the Commission about Intel’s conduct. AMD also complained to the German regulator, the Bundeskartellamt, in 2006. The German complaint was later transferred to the Commission, because the similarities between the complaints suggested that the suspected actions belonged to a single set of practices used by Intel to limit the market share of AMD.

During July 2005, Commission officials (assisted by representatives from the relevant national competition authorities) made unannounced ‘dawn raid’ inspections at several Intel offices across the EU and also visited a number of computer manufacturers.

What is Intel accused of doing?

The Commission issued its first Statement of Objections setting out the case against Intel in July 2007 and a supplementary Statement of Objections in July 2008, which outlined three further elements of abusive conduct.
The recent decision confirmed the Commission’s preliminary conclusion that Intel has a dominant position in the worldwide x86 CPU market (with at least a 70% market share) and that it abused its market power by engaging in two specific types of conduct:
(i) loyalty rebates / payments
Intel gave wholly or partially hidden rebates to key computer manufacturers (Acer, Dell, Hewlett Packard, Lenovo and NEC) on the condition that they bought all, or almost all, their x86 CPUs from Intel. Intel also paid a major retailer, Media Saturn Holdings, in return for it selling only Intel-based PCs.

(ii) payments to prevent sales of specific rival products
The Commission found that Intel also made direct payments to computer manufacturers to halt or delay the launch of specific AMD-based products and to limit the sales channels available to these products (e.g. no use of distributors).

Intel’s contracts did not make these conditions explicit and evidence suggested that Intel actively concealed its actions. However, the Commission obtained other documents, such as emails, from on-site inspections, responses to information requests, and in formal statements from third parties.

Why is this contrary to law?

Having a position of dominance is not, in itself, something to worry about. Article 82 of the EC Treaty only regulates the way in which companies with a strong market position use their market power, to ensure that they do not conduct themselves in a manner that is exploitative of / unfair towards customers, or excludes competitors.

Conduct that has been found to infringe Article 82 includes pricing practices such as predatory pricing, discriminatory pricing and loyalty discounting. However, in general terms, any conduct by a dominant firm which seeks to maintain or exploit its dominant position, hinder market development including new entry, or eliminate competitors, may be held to be abusive.

The Commission did not object to the rebates in themselves but to the conditions attached to them by Intel, which impaired rival manufacturers’ ability to compete and innovate, leading to reduced choice for consumers. Discounting can be beneficial (e.g. by expanding demand). However, when practised by a dominant firm, some discounting practices can be exclusionary and foreclose the market to other competitors. Where this happens, such behaviour will be considered an abuse.

Evidence suggested that AMD, Intel’s only real competitor in the market, was perceived by Intel and by computer manufacturers to have improved its product range and to be a growing competitive threat. However, computer manufacturers relied on Intel for a majority of their x86 CPU supplies. They would therefore forego a significant rebate on any of their very high volumes of Intel purchases if they opted to buy AMD CPUs for the small part of their needs that was open to competition. AMD would have had to offer a price lower than its costs of production to compete with Intel’s rebates.

Similarly, Intel’s payments to computer manufacturers to halt or postpone the launch of desktops and laptops using AMD’s chips, and to limit their distribution once available, had the potential to prevent products for which there was consumer demand from coming to the market.

Intel does not escape the application of the European competition rules by virtue of it being a US company. Intel sells its products within the EU and must therefore respect EU law by not engaging in any abusive practices that have an effect within the EEA. In fact, the conduct identified by the Commission is recognised in many jurisdictions around the world as being anti-competitive and unlawful. Intel has already come under scrutiny in South Korea, where it was fined $25.4 million for abusing its dominant position in the local chip market. Investigations have also been opened in Japan (2008) and in the US (ongoing).

How did the Commission decide on the level of fine to be imposed on Intel?

The sanction for infringing Article 82 is a fine of up to 10% of worldwide turnover for the preceding financial year. Some of the highest fines for breaches of EU law have involved infringements of Article 82.

In calculating the fine, the Commission is required to consider a number of factors, including: the gravity and duration of any infringement; its geographic scope; whether or not the infringement has been implemented; if it is a repeat offence; and the need to make sure that fines have a sufficient deterrent effect. Exceptionally, the Commission may also take account of a party’s real ability to pay.

The fine imposed on Intel represented 4.1% of Intel’s total sales of US$37.6 billion last year.

What will happen next?

The decision is yet to be published in the Official Journal – the Commission is currently engaged in the confidentiality exercise with Intel and others.

Intel has denied the charges and states that it will appeal the Commission’s decision to the Court of First Instance (“CFI”). Its track record suggests that it may well see this through. In October last year, Intel appealed the Commission’s procedure during the investigation, by seeking access to confidential AMD documents and asking for a time extension to assess and respond to the documents. However, in January 2009, the CFI rejected Intel's arguments and also dismissed its application for interim measures. Intel must now lodge any further appeal within 2 months of being notified of the decision or of it being published in the Official Journal, whichever is earlier.

Notwithstanding any appeal, Intel still has to pay the €1.06 billion fine within 3 months of the date of the decision, although it can be paid into a blocked bank account pending the final outcome of the appeals process.

The Commission has made clear that it will monitor Intel’s compliance closely. It has the power to impose periodic penalty payments of up to 5% of the average daily turnover in the preceding business year for failing to comply with a requirement to end an infringement. This has been used rarely but was used twice against Microsoft (€280.5 million in 2006 and €899 million in 2008) for failing to provide interoperability information as required by the Commission in its 2004 infringement decision under Article 82.

A further concern for Intel must now be the risk of third parties bringing damages claims against Intel in their national courts, which will be bound by the Commission’s infringement decision.

In the UK, so-called ‘follow on’ damages claims may be commenced in the Competition Appeal Tribunal, either by individual claimants (s46A of the Competition Act), or by specified consumer groups acting on behalf of two or more individual consumers under s47B. A successful claimant may be awarded damages for loss suffered as a result of an infringement of UK or European competition law. For example, a target of predatory pricing in the UK recently claimed damages following the decision of a sectoral regulator, on the basis that it had been unlawfully placed at a competitive disadvantage and had lost market share as a result of the abusive conduct.

AMD, other competitors, and customers (e.g. computer manufacturers and end consumers) may well now be considering whether to bring similar cases against Intel.

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