The FTC Sues Intel for “Running Roughshod Over the Principles of Fair Play” [UPDATE: Intel Responds]

The FTC has just announced that it’s suing the chip-making giant Intel for monopolistic market abuses. “Intel has engaged in a deliberate campaign to hamstring competitive
threats to its monopoly,” said Richard A. Feinstein, Director of the
FTC’s Bureau of Competition in a statement (copied below). “It’s been running roughshod over the
principles of fair play and the laws protecting competition on the
merits.”

Intel has responded:

“Intel has competed fairly and lawfully. Its actions have benefitted consumers. The highly competitive microprocessor industry, of which Intel is a key part, has kept innovation robust and prices declining at a faster rate than any other industry. The FTC’s case is misguided. It is based largely on claims that the FTC added at the last minute and has not investigated. In addition, it is explicitly not based on existing law but is instead intended to make new rules for regulating business conduct. These new rules would harm consumers by reducing innovation and raising prices.

“Intel senior vice president and general counsel Doug Melamed added, “This case could have, and should have, been settled. Settlement talks had progressed very far but stalled when the FTC insisted on unprecedented remedies – including the restrictions on lawful price competition and enforcement of intellectual property rights set forth in the complaint — that would make it impossible for Intel to conduct business.

“The FTC’s rush to file this case will cost taxpayers tens of millions of dollars to litigate issues that the FTC has not fully investigated. It is the normal practice of antitrust enforcement agencies to investigate the facts before filing suit. The Commission did not do that in this case,” said Melamed.

The E.U. slapped a $1.45 billion fine on the company earlier this year, which does not bode well for Intel in the U.S. That said, over 75% of Intel’s business is overseas, which might help limit damages here.

What’s this all about? Intel is allegedly using dirty tricks to shut out competitors in the CPU market, and that means AMD mainly. Just last month Intel agreed to pay AMD a $1.25 billion settlement as reparations for financial damages caused by its anti-competitive maneuvers, which sounds a little like an admission of guilt…and it may help drag AMD out of the business quagmire it’s found itself in recently.

So just how roughshod were Intel’s maneuvers? The E.U.’s charges included paying computer makers to use Intel chips instead of AMD ones, and even threatening some companies if they went ahead and used AMD CPUs. The FTC notes that the public has been denied access to “potentially superior” chips as a result of the same bad practices. And it highlights what seems to be a particularly nasty one: Intel apparently designed compiler code so that it “deliberately stunted” the performance of the code when run on non-Intel CPUs, and then told the public the code simply worked better on Intel-made chips. Vicious stuff.

A hearing is “tentatively” scheduled for September 8, 2010…so this will be in and out of the news for months. You can bet the atmosphere in Intel’s boardroom can’t be described as “relaxed” right now.

Update: Intel’s just had a press call on this matter. It’s basically restating the same points it made in its official published response: Intel didn’t break the law, and the FTC’s recommendations are too far-reaching and will harm the American consumer. In fact at one point Intel said “it’s obvious from the complaint that the FTC does not understand important aspects of the computer industry.” Fending off direct questions about the FTC-identified issue of future CPU/GPU chips, Intel sees FTC intervention in this tech as particularly dangerous and restrictive in an emergent field–which is, again, potentially bad for the consumer. The FTC’s “theories are unprecedented” and Intel is guilt-free: That’s basically the long and the short of it.

Full body of the FTC press release is below, or you can read it directly at the FTC’s Web site.

For Release: 12/16/2009

FTC Challenges Intel’s Dominance of Worldwide Microprocessor Markets

FTC Charges Anticompetitive Tactics Have Stifled Innovation and Harmed Consumers

The Federal Trade Commission today sued Intel Corp., the world’s leading computer chip maker, charging that the company has illegally used its dominant market position for a decade to stifle competition and strengthen its monopoly.

In its complaint, the FTC alleges that Intel has waged a systematic campaign to shut out rivals’ competing microchips by cutting off their access to the marketplace. In the process, Intel deprived consumers of choice and innovation in the microchips that comprise the computers’ central processing unit, or CPU. These chips are critical components that often are referred to as the “brains” of a computer.

According to the FTC complaint, Intel’s anticompetitive tactics were designed to put the brakes on superior competitive products that threatened its monopoly in the CPU microchip market. Over the last decade, this strategy has succeeded in maintaining the Intel monopoly at the expense of consumers, who have been denied access to potentially superior, non-Intel CPU chips and lower prices, the complaint states.

“Intel has engaged in a deliberate campaign to hamstring competitive threats to its monopoly,” said Richard A. Feinstein, Director of the FTC’s Bureau of Competition. “It’s been running roughshod over the principles of fair play and the laws protecting competition on the merits. The Commission’s action today seeks to remedy the damage that Intel has done to competition, innovation, and, ultimately, the American consumer.”

The FTC’s administrative complaint charges that Intel carried out its anticompetitive campaign using threats and rewards aimed at the world’s largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival computer CPU chips. Intel also used this practice, known as exclusive or restrictive dealing, to prevent computer makers from marketing any machines with non-Intel computer chips.

In addition, allegedly, Intel secretly redesigned key software, known as a compiler, in a way that deliberately stunted the performance of competitors’ CPU chips. Intel told its customers and the public that software performed better on Intel CPUs than on competitors’ CPUs, but the company deceived them by failing to disclose that these differences were due largely or entirely to Intel’s compiler design.

Having succeeded in slowing adoption of competing CPU chips over the past decade until it could catch up to competitors like Advanced Micro Devices, Intel allegedly once again finds itself falling behind the competition–this time in the critical market for graphics processing units, commonly known as GPUs, as well as some other related markets. These products have lessened the need for CPUs, and therefore pose a threat to Intel’s monopoly power.

Intel has responded to this competitive challenge by embarking on a similar anticompetitive strategy, which aims to preserve its CPU monopoly by smothering potential competition from GPU chips such as those made by Nvidia, the FTC complaint charges. As part of this latest campaign, Intel misled and deceived potential competitors in order to protect its monopoly. The complaint alleges that there also is a dangerous probability that Intel’s unfair methods of competition could allow it to extend its monopoly into the GPU chip markets.

According to the FTC’s complaint, Intel’s anticompetitive tactics violate Section 5 of the FTC Act, which is broader than the antitrust laws and prohibits unfair methods of competition, and deceptive acts and practices in commerce. Critically, unlike an antitrust violation, a violation of Section 5 cannot be used to establish liability for plaintiffs to seek triple damages in private litigation against the same defendant. The complaint also alleges that Intel engaged in illegal monopolization, attempted monopolization and monopoly maintenance, also in violation of Section 5 of the FTC Act.

To remedy the anticompetitive damage alleged in the complaint, the FTC is seeking an order which includes provisions that would prevent Intel from using threats, bundled prices, or other offers to encourage exclusive deals, hamper competition, or unfairly manipulate the prices of its CPU or GPU chips. The FTC also may seek an order prohibiting Intel from unreasonably excluding or inhibiting the sale of competitive CPUs or GPUs, and prohibiting Intel from making or distributing products that impair the performance–or apparent performance–of non-Intel CPUs or GPUs.

The Commission vote approving the administrative complaint was 3-0, with Commissioner William E. Kovacic recused, and Commissioner J. Thomas Rosch issuing a separate statement in which he concurs in part and dissents in part from the Commission vote.

Chairman Leibowitz and Commissioner Rosch issued a statement outlining the rationale for bringing the case under Section 5 of the FTC Act, which can be found on the FTC’s Web site and as a link to this press release. In his concurring and dissenting statement, Commissioner Rosch described the legal principles that limit an FTC Act Section 5 claim in this case, and the problems that could result from adding follow-on Sherman Act Section 2 claims. A copy of the Commissioner’s statement also can be found on the FTC’s Web site and as a link to this press release.

Under the recently implemented rule expediting the Part 3 administrative hearing process, this matter is tentatively scheduled to be heard before an Administrative Law Judge on September 8, 2010, at 10:00 a.m.

NOTE: The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The issuance of a complaint is not a finding or ruling that the respondent has violated the law. The complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing.

The Fast Company 50 – 2009: Intel