On August 4, 2010, the Federal Trade Commission announced a proposed settlement (approved by a 4-0 vote, with Commissioner Kovacic recused, and subject to public comment) with Intel Corp. of charges of anticompetitive conduct in violation of Section 5 of the FTC Act. The FTC has exclusive jurisdiction over Section 5, which is broader than the antitrust laws and prohibits “unfair” methods of competition (as well as deceptive acts and practices).
The Intel action, filed in December 2009, has been the most visible competition matter brought thus far by the FTC under the Obama Administration. Chairman Jon Leibowitz asserted that the case “demonstrates that the FTC is willing to challenge anticompetitive conduct by even the most powerful companies in the fastest-moving industries.” In the settlement, Intel -- which did not admit the facts alleged by the FTC or any violation of law -- agreed to limitations on its ability to use bundled prices, exclusivity arrangements with original computer equipment manufacturer customers (“OEMs”), and agreements that customers purchase certain percentages of their requirements from Intel as conditions for benefits such as price discounts.
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Briefly, the FTC asserted in its Administrative Complaint that Intel engaged in a ten-year course of conduct to stall the widespread adoption of non-Intel computer hardware and software products, allowing Intel to maintain a monopoly in the relevant central processing unit (“CPU”) markets, as well as creating a dangerous probability of monopolization of relevant graphics processing markets. According to the FTC, Intel made misrepresentations concerning the performance of other manufacturers’ computer chips, and in the settlement, Intel agreed to disclose to software developers that Intel computer compilers discriminate between Intel chips and non-Intel chips, and may not register all features of non-Intel chips.
More interestingly, the FTC also alleged that Intel’s course of conduct included de facto exclusive dealing arrangements with certain OEMs, quantity discount practices, and retaliatory actions (withholding rebates, technical support, and supply, for example) that together had the effect of raising the price of dealing with Intel’s rivals. Under the proposed consent order, which is effective for 10 years (as opposed to the common 20 years), Intel would be prohibited from conditioning certain benefits to customers on exclusive purchasing arrangements, and from withholding benefits based on dealings with Intel’s competitors.
Exceptions are carved out for commercial practices that otherwise would be prohibited by the settlement, however, in order to allow Intel to offer competitive pricing and enter into pro-competitive deals. For example, Intel would not be prohibited under the proposed settlement from entering into a limited number of exclusive arrangements when it provides “extraordinary assistance” to an OEM customer (to develop new and innovative products or sponsor the OEM’s entry into a new market segment), nor would Intel be prohibited from offering volume discounts in competitive bidding situations pursuant to a single bid and not conditioned on future purchases, or from meeting (but not beating) terms or benefits that it “reasonably believes” are being offered by a rival supplier. It remains to be seen whether these exceptions and the standards applied to them will result in substantial continuing regulatory oversight of Intel by the FTC, which is not the ordinary role assumed by the Commission in competition cases, but could be a shrewd result for Intel to the extent that Intel obtains increased certainty concerning its conduct -- at least with respect to the conduct addressed in this action pursuant to Section 5.
Intel also would be required to modify certain intellectual property agreements with competing CPU manufacturers in order to facilitate their ability to consider mergers or joint ventures. Additionally, Intel would be required to offer to extend a licensing agreement with Via, another competing manufacturer, for five years, and to maintain an interface in a manner for at least six years that will not inhibit the performance of graphics processing chips. The FTC asserts that such provisions “will provide incentives to manufacturers of complementary, and potentially competitive, products to Intel’s CPUs to continue to innovate.”
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The Intel settlement is noteworthy in several respects that may not be immediately apparent from its substance.
First, the action itself is a significant indicator that the FTC is continuing to explore the full potential of its Section 5 authority, particularly with respect to competitors with perceived market dominance. Commissioner J. Thomas Rosch has asserted that one of the biggest “unintended gaps” that currently exists in the antitrust laws is that various single-firm practices (such as loyalty discounts and bundling, as to which the law is not fully settled), analyzed individually, may be lawful under Section 2 of the Sherman Act and not considered illegal under the antitrust laws if they are part of a “course of conduct.” He contends that the FTC may be able to address such practices under Section 5 as unfair methods of competition. Additionally, Section 5 of the FTC Act may be used as a vehicle (by the FTC exclusively) to challenge anticompetitive practices as “unfair” methods of competition even when such practices are in their incipiency.
Second, the action gives some possible insights into antitrust enforcement in the high technology sector, an industry of substantial current interest to antitrust regulators. Here, the FTC asserted that Intel used its intellectual property in a manner that was anticompetitive, but did not allege that Intel’s acquisition of that intellectual property was unlawful. Rather, Intel was alleged to have used agreements that locked competitors into Intel’s strategy (as a dominant company) and unduly restricted competitors’ abilities to enter into joint ventures with other companies. Like other recent collisions at the intersection of intellectual property and antitrust law -- including, for example, regulators’ efforts to restrict “reverse payment” settlements of patent disputes by branded drug manufacturers, and the Antitrust Division’s investigation concerning the appropriateness of certain patent licensing practices for genetically modified seeds -- the Intel action underscores the potential for limitations on lawfully acquired intellectual property rights, particularly when held by market leaders, in the name of “antitrust” or, by the FTC, “unfair methods of competition.”
Third, consistent with the flexible nature of Section 5, the FTC was careful in the Intel settlement not to commit itself unnecessarily to a legal standard where the law may be unsettled or to create any inference of a “safe harbor” for the commercial practices at issue. Specifically, the settlement’s provision prohibiting certain bundling practices is based on the “discount attribution” standard articulated in the Ninth Circuit’s PeaceHealth decision, in which bundling is only subject to Sherman Act scrutiny when the price of the competitive product would be below average variable cost if all of the discounts in the bundle were attributed to that product. However, in its Analysis to Aid Public Comment, the FTC staff expressly notes that the Commission reserves the right to challenge such practices under a different standard, such as the malleable test set forth by the Third Circuit en banc in the LePage’s case: that bundled discounts may be anticompetitive if they are offered by a monopolist and substantially foreclose portions of the market to a competitor who does not provide an equally diverse group of services and who therefore cannot make a comparable offer. And the Intel settlement does not apply the average variable cost benchmark used in PeaceHealth, but instead scrutinizes Intel’s pricing to the extent that allocation of bundled discounts to the dominant product would cause its price to fall below the “Product Cost of Sales” as that term is used by Intel in its ordinary course of business -- a level somewhere above average variable cost. Thus, the FTC’s application of the discount attribution test under Section 5 of the FTC Act has the potential to subject more bundled discounting to challenge than the PeaceHealth application under Section 2 of the Sherman Act.
In short, despite a short life on the docket and a narrow statutory focus in Section 5 of the FTC Act, the Intel case may be an indicator of more expansive enforcement activities to come.