The issues Intel sidesteps with its FTC deal
There's quite a lot of muck we won't be reading -- this time around, anyway...
The legal background to the anticipated Intel-FTC Consent Agreement gives some insight into Intel's strategy, while the minutiae provide just a few glimpses of what we all missed as a result of Intel's capitulation. Intel was formally told that it was being investigated by the FTC in September 1997. This was not the first time that the FTC had turned its attention to the chip giant: in a 1993 investigation, the FTC concluded after two years that no action was warranted at that time. The FTC issued its Complaint against Intel on 8 June 1998, less than a month after the Department of Justice began its present case against Microsoft. There really is no connection, and it would be wrong to construe the actions as an anti-Wintel move. Unlike the first Microsoft case, where the FTC commissioners could not agree about how to proceed (resulting in the DoJ taking over the case), this time the commissioners under Chairman Robert Pitofsky voted 3-1 in favour of legal action, with Commissioner Orson Swindle dissenting because he thought more information should have been gathered before the FTC made a "reason-to-believe" determination. The Complaint states that in the FTC's view, Intel has monopoly power, and "wilfully maintained its monopoly power in the general-purpose microprocessor market" through exclusionary conduct. The legal basis of the Complaint was that Intel had violated Section 5 of the Federal Trade Commission Act by "unlawful monopolization, unlawful attempts to monopolize, and unfair methods of competition". Specifically, the Complaint refers to Intel's refusal to do business with Digital, Intergraph, and Compaq. Intel would have to prove that its actions resulted from "legitimate business considerations" (such as bad credit or misusing the technology -- not because Intel preferred no competitors) to win the case, which was presided over by Chief Administrative Law Judge James Timony. The hearing was scheduled for 12 January 1999, then later delayed to 23 February because of the complexity of the case, and then finally to 9 March because Intel had failed to produce documents to the FTC on time. In 1996, Intel wanted to obtain a royalty-free licence to Intergraph's Clipper processors, which Intergraph refused, so Intel withdrew essential technical information and prototypes from Intergraph. Intergraph won a preliminary injunction against Intel in April 1998 in the District Court in Birmingham, Alabama, but that trial is not scheduled until 14 February 2000, when the judge has set aside five weeks for it. Digital sued Intel in May 1997 for patent infringement, alleging that the Pentium infringed ten Digital patents. Intel cut off the supply of technical information to Digital, and threatened to stop supplying processors. Only when the lawsuit was settled did Intel recommence the flow of information. Compaq sued Packard Bell for using Compaq-patented technology in its motherboards, and since these were manufactured by Intel, Compaq did not receive technical information from Intel until Compaq agreed to cross-license its patents with Intel. Intel denied it had monopolised any market, claimed that the disputes arose from intellectual property issues, and managed to obtain a substantial protective order to keep its information confidential. Intel's counsel initially failed to obtain the court's permission to see confidential information from the other parties, and was denied permission to appeal. Later, the judge agreed that Joseph Kattan, who advised Intel on business matters as well as the present case, could see "a reasonable number" of Digital and Compaq supersensitive documents. Transmeta Corporation [employer of Linus Torvalds] entered the frame when it unsuccessfully tried to quash a subpoena to produce documents. The suspicion grew that Intel was using the case as a fishing expedition to find out as much as possible about rivals and potential rivals. Dell managed to keep in camera some information demanded by Intel. Texas Instruments and STMicroelectronics initially refused to provide subpoenaed documents until threatened with enforced compulsion. There were many objections to the public status of documents, and the appropriateness of witnesses. In January and early February this year, 13 Motions and Oppositions were filed under seal concerning witnesses and document production. Intel tried to get Richard Parker, the FTC's Counsel, removed from the case because when he was in private practice, he had represented AMD in litigation against Intel. Since Intel had known of his participation for four months, this was seen as an eve-of-trial tactic. Parker's participation had been cleared by the FTC's ethics officer and the Office of Government Ethics. Curiously, Intel claimed that an American Bar Association model rule forbade his participation, but the DC bar, of which Parker is a member, had not adopted the rule (which is concerned with lawyers moving from private to government practice). Intel proved itself to be tough when it subjected Wade Patterson to three days of deposition, and still wanted more information from him, which the judge would not allow. In an expert report, FTC witness Frederic Scherer said that the effect of Intel producing around three quarters of new-generation chip sets was to render a computer assembler a "stylist" and "undifferentiated box assembler". As the trial date approached, Intel tried hard to have evidence excluded. A week before the trial date, Intel moved to strike the designation of Dean Klein, Donald Lewine, Lee Hoevel, Gordon Campbell, Vinod Dham and David Hixson as witnesses for the FTC. Intel also had a go at precluding any hearsay testimony by FTC witnesses Atiq Raza and Robert Herb. In the end, the FTC succeeded in getting a witness list that would have helped it to prove that Intel's "broad pattern of behaviour" was illegal. It seems that Intel approached Michael Sohn of the DC law firm Arnold & Porter (where Pitovsky and Baer had both previously worked) and he brokered the proposed settlement agreement with the FTC. The FTC was keen to find a solution that would achieve its objectives but not curtail Intel's ability to compete. There is no room for negotiation, because Barrett signed for Intel Sunday evening, in Washington, following telephone negotiations. On Monday 8 March, there was a joint Motion to withdraw the matter from adjudication "for the purpose of considering an executed proposed consent agreement". The FTC secretary announced that the request was granted. The consent agreement will now be considered by the FTC commissioners, and it is extremely unlikely that they will dissent. Generally the FTC likes consent agreements - and the commissioners are unlikely to want to get their hands dirty with a very technical and contentious case. The coincidence that the Intel cave-in followed so closely after Microsoft had concluded giving evidence in its trial is just that. The legal procedures are entirely separate and unrelated. Nor is there the same groundswell of feeling against Intel as has happened with Microsoft. However, Intel would have noted how the once mighty Microsoft had been pilloried in court, and would not have wished to bare its soul before the FTC. As The Register exclusively reported on 22 February, a settlement was in the wind, although the final capitulation decision was not made until the last moment as the FTC was still taking witness testimony on Friday, and Intel's legal team at Gibson, Dunn & Crutcher was polishing the defence case. Although the text of the proposed agreement was not disclosed on Monday, it would be surprising if the terms differed substantially from the FTC Notice of Contemplated Relief. Some cosmetic changes from the FTC's Notice may have been allowed to help Intel to save face, but the result should not be seen as anything but a win for the FTC. The main terms are therefore likely to be a "cease and desist" agreement that Intel will not in future discriminate in its processor sales, its NDAs, the supply of relevant information, the supply of prototypes, and technical assistance in areas where Intel is dominant. Intel's CEO will probably be required to send all Intel's customers and employees a copy of the Complaint and the Consent Agreement, stating that Intel will abide by the terms of the Agreement. The Intel response was rather predictable: CEO Craig Barrett claimed a "win-win" and that it "gives us value for our intellectual property rights" which is a very woolly remark. Intel spokesman Chuck Malloy's line was that Intel was pleased because it had avoided "a long and expensive trial". He too was woolly on the subject of the outcome, saying that Intel was pleased that the "issues associated with our intellectual property have been addressed" which seems to be a pretty clear admission of defeat, in spokesman's lingo. Victoria Streitfield, the FTC spokeswoman, said the FTC "got the relief it wanted". William Baer, Director of the FTC Bureau of Competition, said that there were "remaining issues under investigation by the Commission. The Commission's staff is committed to working expeditiously to resolve those concerns." The Complaint did extend beyond issues concerned with the three third parties, but details were not fleshed out. This is the first time that the FTC has publicly acknowledged it was pursuing other issues against Intel: they probably include the consequences of Intel expanding its processor and so displacing other chips [a rerun of the incorporation of utilities into the operating system, this]; concern about the Intel Inside campaign, with its up-to six per cent rebates for OEMs that played the game; motherboards; and chipsets. Reading between the lines, it seems that what Intel has succeeded in doing is splitting the case into two: giving in to the part that in effect it had admitted but claimed was not unlawful - its actions towards Digital, Intergraph and Compaq. There remains the more serious accusation of monopolisation -- using its market position to achieve dominance in other areas -- which could deter acceptance of the agreement by the commissioners when they consider it during the next few weeks. Settlements do not create precedents, since they cannot be cited. Insiders have suggested that the settlement avoids dealing with the controversial issues, such as the proof of Intel's monopoly, and Intel's culpability. It may well turn out that Intel will try to conduct business as usual, but give in more easily if challenged lest it finds itself back in court. Intel is full of engineers, so a cost-benefit analysis in the light of present realities could well have decided the issue. There is also the issue as to what extent an extended case would defocus Intel as it faces strengthening competition, and create adverse PR. Furthermore, Intel is spending $300 million on its current ad campaign for the Pentium III, so any distraction could be costly. The outcome for Intel is certainty rather than uncertainty, and perhaps a two-year breathing space before it might be in court again on additional charges. The case the FTC had to prove was not a certain one, since it was clear that Intel's monopoly was weakening. What remains unresolved is the interaction between antitrust law and intellectual property law. ®
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