On May 13, 2009, the European Commission (“EC”) announced in a press release that it had imposed a fine of €1.06 billion (approx. $1.45 billion) on US-based chipmaker Intel Corporation for violating EU antitrust rules. This is the highest individual fine ever imposed by the EC. The EC has not yet published its decision.
Intel is the world’s largest producer of x86 central processing units (“CPUs”), the main hardware component of a computer. According to the EC, Intel abused its dominant position by offering loyalty rebates and direct payments to computer manufacturers and to a major retailer in order to exclude Intel’s main rival, Advanced Micro Devices (“AMD”), from the market. Intel has announced it would appeal the decision.
The Intel investigation and the resulting record fine is the latest example of the EC’s focus on enforcement of Article 82 of the EC Treaty, which prohibits abuses of dominance. That trend was also signaled by the release of the EC’s Guidance on the application of Article 82 to exclusionary conduct. New inquiries into Microsoft’s practices and other high-profile abuse of dominance investigations currently underway further demonstrate an increased level of enforcement vigor by the EC. Rebate practices, such as the ones involved in Intel, are but one of many types of commercial behavior that could potentially raise concerns. Given this environment, it is essential for leading market players to consider carefully the manner in which they deal with their suppliers, distributors, customers, and competitors.
The fine is the result of a nine-year long investigation
Beginning in 2000, AMD submitted several complaints to the EC regarding Intel’s business strategies. The EC investigated these complaints and conducted unannounced inspections (“dawn raids”) at Intel’s Munich offices and at the offices of several retailers. In 2007 and 2008, the EC issued statements of objections to Intel.
In November 2008, Intel applied to the EU Court of First Instance (“CFI”) for interim measures to suspend the investigation. Intel complained that it was not given sufficient time to respond to the EC’s statement of objections and was not provided with access to certain key evidence. However, the CFI’s President dismissed Intel’s request.
The EC found that Intel had abused its dominant position
The EC decided that Intel had violated Article 82 of the EC Treaty, which prohibits abuses of dominant position. Intel accounts for around 70% of the global market for x86 CPUs and the EC found that Intel held a dominant position in that market. According to the EC, Intel had abused its dominance by engaging in the following illegal practices:
- Loyalty rebates: Intel offered rebates to five computer manufacturers (Acer, Dell, Hewlett-Packard, Lenovo, and NEC) on condition that they purchased all, or almost all, of their requirements for x86 CPUs from Intel;
- Direct payments to a retailer: Intel made direct payments to Media Saturn Holding, owner of the MediaMarkt chain, on condition that MediaMarkt stores stock only computers with Intel x86 CPUs;
- “Pay for delay”: Intel made direct payments to computer manufacturers to delay the launch of certain products incorporating AMD’s CPUs and to limit the sales channels available to these products.
Intel’s illegal conduct took place between 2002 and 2007. The rebates and direct payments were generally secret and were not disclosed in Intel’s supply agreements. The EC concluded that Intel used its existing entrenched position in the market for x86 CPUs in order to exclude AMD from that market.
The EC distinguished between valid discounts and illegal loyalty rebates
In its press release, the EC emphasized that it did not object to the rebates themselves but to the conditions Intel attached to its rebates. The EC considers rebates to be abusive if offered by a dominant company and made conditional on buying less (or none) of a rival’s products, unless the dominant company can put forward specific reasons to justify such rebates.
The EC stated that computer manufacturers depended on Intel for a majority of their x86 CPU supplies. Only a limited part of each manufacturer’s x86 CPU requirements was open to competition. However, a manufacturer that satisfied its residual requirements by buying AMD’s products could no longer qualify for a significant rebate on its very high volumes of Intel purchases. Therefore, Intel’s rebates eliminated competition in the residual market for x86 CPUs.
This is the highest individual fine ever imposed by the EC
The EC fined Intel €1.06 billion (approx. $1.45 billion). This record-breaking fine exceeds each of the three fines imposed by the EC on Microsoft in 2004-2008 for abuses of dominance and for failure to comply with the EC’s orders (although the total of the fines imposed on Microsoft amounts to €1.68 billion). It also exceeds the record cartel fine of €896 million imposed by the EC in 2008 on the French group Saint-Gobain.
In order to calculate the fine, the EC has considered the value of Intel’s x86 CPU sales in the European Economic Area and the duration of the infringement (five years and three months). The fine represents 4.15% of Intel’s 2008 worldwide revenues. The EC can impose fines of up to 10% of the company’s worldwide annual revenues.
The EC has also ordered Intel to cease illegal practices immediately to the extent that they are still ongoing. The EC has announced that it would monitor Intel’s compliance with the decision.
Intel’s business practices have also been challenged outside of the EU
In the past, Intel’s rebates have been subject to antitrust scrutiny outside of the EU. In 2005, Japan’s Fair Trade Commission issued an injunction against Intel after finding that Intel’s rebates illegally prevented five major Japanese computer manufacturers from purchasing competing CPUs. In 2008, the Korean Fair Trade Commission fined Intel $25 million for offering rebates to computer manufacturers in return for boycotting AMD’s products (Intel has appealed this fine).
In June 2008, the US Federal Trade Commission opened a formal investigation into Intel’s sales strategies and issued a subpoena to Intel. The New York Attorney General’s Office has also issued a subpoena to Intel in connection with an investigation into Intel’s pricing practices and possible attempts to exclude competitors through its market dominance. Moreover, AMD has filed private litigation against Intel in the US District Court for the District of Delaware and trial is scheduled for Spring 2010.
The crackdown on abuses of dominance is likely to continue
We anticipate that following the Intel decision the EC will continue to aggressively prosecute abuses of dominance and that the level of fines will remain extremely high:
- The EC has been emboldened by several recent court victories, including the CFI’s ruling confirming the EC’s Microsoft decision. EU courts strongly support the EC’s approach to abuses of dominance.
- The EC has recently issued detailed guidelines on exclusionary abuses. It considers that the guidelines set forth clear rules that should be followed by dominant firms in order to comply with EU law.
- The EC is currently conducting other high-profile investigations into alleged abuses of dominance (including new inquiries into Microsoft’s practices). It is expected that Competition Commissioner Neelie Kroes will endeavor to close some of these cases before her term ends this year.
- The Intel fine is more than double the €495 million fine imposed on Microsoft in 2004 and is the first EU penalty to cross the €1 billion threshold. While each fine is calculated based on the specific circumstances of the case, we believe that the EC will continue to impose substantial fines in abuse of dominance cases.
In the US, the Obama administration also intends to pursue a more aggressive enforcement approach with respect to monopolization cases. In a speech delivered two days before the EC fined Intel, Assistant Attorney General Christine Varney announced the US Department of Justice’s departure from certain policies adopted by the prior administration which it believed raised “many hurdles to Government antitrust enforcement.” Ms. Varney made clear that the Department of Justice would actively investigate and pursue enforcement in this area.