Intel Corporation; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[Docket No. 9288]

Intel Corporation; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the complaint that

the Commission issued in June 1998 and the terms of the consent order--

embodied in the consent agreement--that would settle these allegations.

DATES: Comments must be received on or before May 24, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Avenue, NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: John Horsley or Richard Parker, FTC/H-

3105, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 326-

2648 or (202) 326-2574.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 3.25(f) of

the Commission's Rules of Practice (16 CFR 3.25f), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for March 17, 1999), on the World Wide Web, at ``http://www.ftc.gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, NW., Washington,

DC 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Avenue, NW.,

Washington, DC 20580. Two paper copies of each comment should be filed,

and should be accompanied, if possible, by a 3\1/2\-inch diskette

containing an electronic copy of the comment. Such comments or views

will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

section 4.9(b)(b)(ii) of the Commission's Rules of Practice (16 CFR

4.9(b)(6)(ii).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted for public comment an

Agreement Containing Consent Order with Intel Corporation (``Intel'')

to resolve the matters charged in an administrative Complaint issued by

the Commission on June 8, 1998. The Agreement has been placed on the

public record for sixty (60) days for receipt of comments from

interested members of the public. The Agreement is for settlement

purposes only and does not constitute an admission by Intel that the

law has been violated as alleged in the Complaint or that the facts

alleged in the Complaint, other than jurisdictional facts, are true.

I. The Complaint

The Complaint alleges that Intel has monopoly power in the

worldwide market for general purpose microprocessors. According to the

Complaint, Intel's market dominance is reflected in a market share

approximating 80 percent of dollar sales, together with high entry

barriers including large sunk costs of design and manufacture,

substantial economies of scale, customers' investments in existing

software, the need to attract support from software developers, and

reputational barriers.

The Complaint alleges that Intel sought to maintain its dominance

by, among other things, denying advance technical information and

product samples of microprocessors to Intel customers (``original

equipment manufacturers'' or ``OEMs'') and threatening to withhold

product from those OEMs as a means of coercing those customers into

licensing their patented innovations to Intel.

A microprocessor is an integrated circuit that serves as the

central processing unit (or CPU) of computer systems. Microprocessors

are sometimes described as the ``brains'' of computers because they

perform the major data processing functions essential to computer

systems. Advance technical information about new microprocessor

products is essential to Intel's OEM customers, who design, develop,

manufacture, and sell computer system products such as servers,

workstations, and desktop and mobile personal computers. Computer

design and development require the effective integration of multiple

complex microelectronics components (including microprocessors, memory

components, core logic chips, graphics controllers, and various input

and output devices) into a coherent system. To achieve such system

integration, a computer OEM requires product specifications and other

technical information about each component, such as the electrical,

mechanical, and thermal characteristics of the microprocessor. OEMs

also need advance product samples, errata, and related technical

assistance in order to perform system testing and debugging, thereby

assuring the high performance and reliability of new computer products.

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Intel promotes and markets its microprocessors by providing

customers with technical information about new Intel products in

advance of their commercial release, subject to formal nondisclosure

agreements. Such information sharing has substantial commercial

benefits for Intel and its OEM customers. Customers benefit because the

information enables them to develop and introduce new computer system

products incorporating the latest microprocessors as early and

efficiently as possible. Intel benefits because a larger group of OEMs

can sell new computer systems incorporating Intel's newest

microprocessors as soon as the new microprocessors are introduced to

the market.

The Complaint charges that Intel suspended its traditional

commercial relationships with three established customers--Digital

Equipment Corporation, Intergraph Corporation, and Compaq Computer

Corporation--by refusing to provide advance technical information

about, and product samples of, Intel microprocessors. Intel did so,

according to the Complaint, to force those customers to end disputes

with Intel concerning the customers' asserted intellectual property

rights and to grant Intel licenses to patented technology developed and

owned by those customers. In at least one of the cases, the Complaint

alleges that Intel also acted to create uncertainty in the marketplace

about the customer's future source of supply of Intel microprocessors.

The computer industry is characterized by short, dynamic product

cycles, which are generally measured in months. Time to market is

crucial. Indeed, the denial of advance product information is virtually

tantamount to a denial of actual parts, because an OEM customer lacking

such information simply cannot design new computer systems on a

competitive schedule with other OEMs. An OEM who suffers denial of such

information over a period of months will lose much of the profits it

might otherwise have earned even from a successful new computer model.

Continued denial of advance technical information to an OEM by a

dominant supplier can make a customer's very existence as an OEM

untenable.

As a result of the commercial pressure exerted by Intel's conduct,

Compaq and Digital quickly entered in to cross-license arrangements

with Intel. Intergraph was able to resist that pressure because it

succeeded in obtaining a preliminary injunction from a federal district

court requiring Intel to resume and continue supplying Intergraph with

advance product information, part samples, and other technical support

pending a judicial resolution on the merits of the claims in the

lawsuit.

The alleged conduct tends to reinforce Intel's domination of the

general purpose microprocessor market in at least three ways. First,

the alleged conduct tends to give Intel preferential access to a wide

range of technologies being developed by many other firms in the

industry. To the extent that firms desiring to compete with Intel are

unable to obtain comparable access to such a wide range of technology,

they can be seriously disadvantaged, thus making it more difficult for

them to challenge Intel's dominance. Second, because patent rights are

an important means of promoting innovation, coercion that forces

customers to license away rights to microprocessor-related technologies

on unfavorable terms to diminish the customers' incentives to develop

such technologies, and thus harms competition by reducing innovation.

Finally, Intel's conduct tends to make it more difficult for an OEM to

serve as a platform for microprocessors that compete with Intel's.

Intel's actions ensure that Intel can act as a conduit for technology

flows from one OEM to another. That is, an OEM that seeks to enforce

its intellectual property rights against other Intel customers may face

retaliation from Intel, as the Complaint alleges Compaq did when it

sued Packard-Bell for patent infringement. The result is that OEMs find

it more difficult to differentiate their computer systems from their

competitors through patented technology. As a result, an OEM seeking to

use non-Intel microprocessors is less able to offset the lack of an

Intel microprocessor by the strength of its own reputation for offering

superior technology in other areas. For all of these reasons,

continuation of this pattern of conduct would likely have injured

competition by entrenching Intel's dominant position.

The Complaint also alleges that Intel's exclusionary conduct was

not reasonably necessary to serve any legitimate, procompetitive

purpose.

Exclusionary conduct by a monopolist that is reasonably capable of

significantly contributing to the maintenance of a firm's dominance

through unjustified means has long been understood to give rise to

serious competitive concerns. See, e.g., Lorain Journal Co. v. United

States, 342 U.S. 143, 154 n.7 (1951); Eastman Kodak Co. v. Image

Technical Services, 504 U.S. 451, 483 & n.32 (1992); Aspen Skiing Co.

v. Aspen Highlands Skiing Co., 472 U.S. 585, 596 .19 (1985); United

States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966); Barry Wright

Corp. v. ITT Grinnell Corp., 724 F.2d 227, 230 (1st Cir. 1983) (Breyer,

J.) (citing 3 P. Areeda & D. Turner, Antitrust Law, para. 626 at 83

(1978)).

Such conduct harms consumers, not only because competition brings

lower prices, but also because competition is a powerful spur to the

development of new, better, and more diverse products and processes.

Unjustified conduct by a monopolist that removes the incentive to such

competition by depriving innovators of their reward or otherwise

tilting the playing field against new entrants or fringe competitors

thus has a direct and substantial impact upon future consumers.

In the absence of a legitimate business justification that

outweighs these concerns, such conduct constitutes a violation of

Section 2 of the Sherman Act, 15 U.S.C. 2, and therefore Section 5 of

the Federal Trade Commission Act, 15 U.S.C. 45. In issuing Complaint,

the Commission found reason to believe that such a violation had

occurred.

II. Terms of the Proposed Consent Order

The Proposed Order would remedy all of the concerns embodied in the

Complaint. The substantive prohibition, Section II.A., prohibits Intel

from withholding or threatening to withhold certain advance technical

information from a customer or taking other specified actions with

respect to such information for reasons relating to an intellectual

property dispute with that customer. It also prohibits Intel from

refusing or threatening to refuse to sell microprocessors to a customer

for reasons related to an intellectual property dispute with that

customer. This provision is designed to prevent Intel from restricting

access to microprocessor products, or advance technical information

relating to such products, as leverage in an intellectual property

dispute against a customer that is receiving advance technical

information from Intel at the time the dispute arises. The Proposed

Order does not impose any kind of broad ``compulsory licensing'' regime

upon Intel. So long as it is otherwise lawful, Intel is free to decide

in the first instance whether it chooses to provide or not provide

information to customers, and whether to provide more information or

earlier information to specific customers in furtherance of a joint

venture or other legitimate activity. Moreover, the Order is limited to

the types of information that Intel routinely gives to customers to

enable them to use Intel microprocessors, not information that would be

used to design or

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manufacture microprocessors in competition with Intel.

In short, Paragraph II.A. secures to Intel customers the right to

seek full and fair value for their intellectual property, free from the

risk of curtailment of needed advance technical information or product.

With one exception, Intel will be required to continue providing

information and product while the customer seeks any of a range of

legal and equitable remedies available to it, such as damages (trebled

or otherwise increased in appropriate cases), reasonable royalties, and

attorneys fees and costs. These remedies will generally be sufficient

to protect the customer in its exercise of its intellectual property

rights.

The exception involves situations where a customer maintains the

right to seek an injunction against Intel's manufacture, use, sale,

offer to sell or importation of its microprocessors. The Order

contemplates that Intel may request a customer to waive that remedy and

give the customer a reasonable opportunity to make a simple written

statement to that effect. If the customer refuses, Intel will not be

required by this Order to continue providing information or product

with respect to the microprocessors that the customer is seeking to

enjoin.

This part of the Order strikes an appropriate balance, on a

prospective basis, between the interests of Intel and its customers. If

a customer chooses to seek an injunction against Intel's

microprocessors, it cannot, under the provisions of this Order, be

assured of continuing to receive advance technical information about

the very same microprocessors that it is attempting to enjoin. If an

Intel customer nevertheless wishes to seek injunctive relief against

Intel's manufacture, use, sale, offer to sell or importation, it

remains free to do so, but without the protections in this Order. In

all other circumstances, Intel is required to continue supplying

technical information and product under the Proposed Order.

The Proposed Order contains a number of other definitions and

provisos to ensure that it will achieve its purposes while not sweeping

more broadly than needed to remedy the competitive concerns alleged in

the Complaint:

``Advance Technical Information'' (or ``AT Information'')

is defined in Paragraph I.C. to encompass all information necessary to

enable a customer to design and develop, in a timely way, computer

systems incorporating Intel microprocessors. The Proposed Order

establishes a rebuttable presumption that the provision of AT

information six months before the commercial release date of a

microprocessor is sufficient to enable the customer to design and

develop new systems based on that microprocessor in a competitive and

timely way. AT Information does not include detailed microprocessor

design information or other information not generally provided to

Intel's customers.

``Intellectual Property Dispute'' is defined in Paragraph

I.D. to include not only situations in which a customer directly or

indirectly asserts or threatens to assert patent, copyright or trade

secret rights against Intel, but also to situations in which a customer

asserts such rights against another Intel customer, or where a customer

has refused a request by Intel to license or otherwise convey its

intellectual property rights.

Paragraph II.B.1. states that the Proposed Order does not

prohibit Intel from seeking legal or equitable remedies based upon its

own intellectual property, provided that it continues to supply AT

Information to the customer.

Paragraph B.2. and B.3. make clear that the Proposed Order

does not prohibit Intel from withholding AT Information or making

decisions about product supply based on otherwise lawful business

considerations unrelated to the existence of the intellectual property

dispute. For example, Intel retains the right to withhold information

from a customer that has breached an agreement regarding the disclosure

or use of the information.

Paragraph B.4. provides that the Proposed Order does not

require Intel to provide AT Information or microprocessors to

facilitate the design or development of a type of system that the

customer has not designed or developed or demonstrated plans to design

or develop within the preceding year.

Paragraph B.5. makes clear that the Proposed Order does

not prohibit Intel from restricting the use of AT Information to the

customer's design and development of computer systems that incorporate

the microprocessor to which the AT Information pertains. For example,

if a recipient of AT Information is in the business of designing

competing microprocessors, the Proposed Order would not prevent Intel

from using reasonable firewall provisions to prevent that recipient

from using the information in that competing business.

Paragraph B.6. provides that the Proposed Order does not

require Intel to disclose information or supply microprocessors that

are not otherwise available for disclosure or supply to Intel's

customers. If the information or product is not being provided to other

customers, then the refusal to provide it to a customer with which

Intel has an intellectual property dispute does not provide the kind of

leverage that the challenged conduct provides.

Paragraph B.7. makes clear that, apart from the specific

requirements and prohibitions, the Proposed Order does not otherwise

limit Intel's intellectual property rights.

In light of the rapidly changing nature of the industry, Intel's

obligations under the Proposed Order would terminate in ten years. The

Commission appreciates that this same industry dynamic makes it

important for it to address disputes over Intel's compliance with the

Order expeditiously, should any such disputes arise.

Parts III, IV, and V of the Proposed Order set out various

procedural requirement, such as notice to affected persons and annual

compliance reporting. Paragraph III.A. permits Intel to provide notice

of the Order to recipients of AT Information through a conspicuous

notice placed, for thirty days after final entry of the Order, as the

first item on the ``In the News'' portion of the ``developers'' page of

Intel's World-Wide Web site. Because recipients of AT Information must

frequently visit that area of Intel's Website in order to receive

information needed in their business, a notice displayed at that

location will ensure notice to all affected persons. After the initial

thirty-day period, Intel will maintain a link from the ``developers''

page to the Order, so that new customers will also have access to the

Order. The other provisions of these paragraphs are standard provisions

of the type typically included in Commission orders of this kind.

III. Opportunity for Public Comment

The Proposed Order has been placed on the public record for 60 days

in order to receive comments from interested persons. Comments received

during this period will become part of the public record. After 60

days, the Commission will again review the Agreement and comments

received, and will decide whether it should withdraw from the Agreement

or make final the Order contained in the Agreement.

By accepting the Proposed Order subject to final approval, the

Commission anticipates that the competitive issues described in the

complaint will be resolved. The purpose of this analysis is to invite

and facilitate public comment concerning the Proposed Order. It is not

intended to constitute an official interpretation of

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the Agreement and Proposed Order or in any way to modify their terms.

By direction of the Commission.

Donald S. Clark,

Secretary.

Statement of Commission Mozelle W. Thompson in the Matter of Intel

Corporation

The Commission has accepted for public comment an Agreement

Containing Consent Order (the ``Agreement'') that settles the charges

made by the Commission against Intel in an administrative complaint

(the ``Complaint''). The Complaint alleged that Intel unlawfully used

its monopoly power in the market for general microprocessors, to coerce

computer and other peripheral manufacturers to license intellectual

property rights to Intel. The Complaint further alleged that Intel

engaged in this conduct in order to maintain its monopoly position.

On June 8, 1998, I voted to issue a Complaint in the above-

captioned action because I was concerned that these allegations, if

true, threatened to harm competition and opportunity for innovation in

the general microprocessor market. This threatened harm would thereby

deprive consumers of the price and innovation benefits of a truly

competitive marketplace. Today, I vote to accept the Agreement for

public comment because I believe the Agreement can address these

concerns by preserving competition and providing opportunities for

innovation by preventing Intel from using intellectual property

disputes to limit access to advance technical information or

microprocessor products that it routinely provides customers.

I particularly wish to commend the Commission staff and Intel for

working together to craft an agreement that effectively serves the

public interest in the context of the important characteristics of the

high technology computer industry. By eliminating the possibility of

anti-competitive withholding of product and information, the Agreement

preserves the benefits of competition while creating a climate for new

ideas. This creative solution will benefit consumers and industry

alike.

Statement of Commissioner Orson Swindle in the Matter of Intel

Corporation

As is already widely known, one of the Federal Trade Commission's

most significant antitrust adjudications in years was resolved on the

eve of trial with the signing of a consent agreement by complaint

counsel and respondent Intel Corporation. A hospitalization for major

surgery since March 5 has precluded me for the present from considering

the settlement of this important case on its merits. I would have

strongly preferred to have been able to evaluate it and to participate

in the Commission's vote.

Nevertheless, I fully expect to have an opportunity to formulate

and communicate my views on the consent agreement, and I anticipate

issuing those views--as an aid to public comment on the settlement--as

soon as possible during the 60-day comment period. When my statement is

ready for issuance, I will ask the Commission's Office of Public

Affairs to release it and will also post it on the Commission's website

(www.ftc.gov).

[FR Doc. 99-7211 Filed 3-23-99; 8:45 am]

BILLING CODE 6750-01-M