FTC probe: Intel caught with hand in cookie jar
12/7/2009 by: John Oram
The latest installment of Intel's legal sagas consists of rumors that the FTC is going to prosecute them very soon. We asked Intel for a comment about the possibility of them being investigated by the FTC.
Chuck Mulloy, Intel spokesperson said: "There’s not really a lot to say. The [San Jose] Mercury News, along with the Wall Street Journal and Bloomberg news all filed FOIA [Freedom of Information Act] requests with the Federal Court to have the records in the Roomy Kahn case unsealed. They have written their stories based on what was in those files so I guess you can assume their reporting is correct. Our position on this whole matter is that our policy is to always cooperate with authorities for investigations of this nature."
Roomy Khan is a prosecution witness in the SEC insider trading case against Galleon Management and sixteen people. Galleon Group was a $7 billion hedge fund located in New York. The SEC complaint [PDF download]
indicted Galleon's founder, Raj Rajaratnam and co-conspirators. Some of the co-conspirators have been identified, but others have not been named at this point.
So what does the unsealing of the court papers about insider trading have to do with the FTC prosecuting Intel for anti-competitive behavior? The San Jose Mercury News has a summary article about Galleon's problems.
Why did Mulloy’s answer about a possible FTC probe point us toward the Galleon insider trading case? We can only speculate that inside of Intel the facts of the two cases are stumbling over each other. We will explore some of the possible reasons for Mulloy answering our question the way he did.
Intel is clearly worried about antitrust litigation, because last month they hired an antitrust expert as their general counsel. Douglas Melamed will serve as their general counsel and senior vice president. Melamed will be responsible for overseeing all Intel legal matters, as well as corporate and government affairs.
Previously, Bruce Sewell was their general counsel and senior vice president. Mr. Sewell was Intel's general counsel when the EU Commission fined them $1.45 billion in May for anti-competitive practices. Sewell left Intel in mid-September to join Apple, leaving outstanding legal disputes on both sides of the Atlantic behind him.
Melamed was hired just after Intel settled AMD's lawsuit out of court with a $1.25 billion dollar payment. As part of the AMD settlement, Intel also agreed to refrain from awarding "any benefit" to OEMs and ODMs that are conditioned on limiting or restricting their "freedom to satisfy" any or all of its demands for microprocessors via: a) Exclusive use of Intel microprocessors. b) Limiting, depositioning or delaying it purchase or use of AMD products on a geographic, platform, market segment, distribution channel, volume, share of purchase, or any other basis.
Intel has remained on the FTC investigative branch's agenda because of the EU Commission's fine, Intel’s lost lawsuits, and fines by the Japanese and South Korean FTCs for anti-competitive/anti-trust behavior. We previously explained the New York State Attorney General's suit against Intel for an illegal campaign to deprive AMD of distribution channels.
The current rumors in Silicon Valley are that the FTC, which announced its investigation in 2008, is now focusing on a pair of lawsuits between Intel and nVidia. Intel sued nVidia in February after negotiations broke down over terms of a 2004 agreement that gave nVidia access to some of Intel's technology. Besides graphics chips, nVidia also makes chipsets, The cross-licensing agreement let nVidia make chipsets that were compatible with Intel microprocessors and more importantly for Intel, that agreement allowed Intel access to complete nVidia's patent portfolio, a move that was criticized by nVidia insiders. The result of that cross-licensing agreement is now known: on Intel's side, motherboards with integrated graphics [51.2% of world-wide PC market], on nVidia's side - nForce series for Intel Core 2 Duo and Quad processors and nVidia ION platform for Atom processors.
When Intel released its Nehalem processors in 2008, they and nVidia disagreed on the scope of the 2004 licensing agreement. Intel said the terms didn't give nVidia the right to make Nehalem-compatible chipsets. nVidia argued the opposite. Intel sued them in the Delaware Court of Chancery. Then, nVidia countersued in the same court in March, alleging a breach of contract, accusing Intel of unfair dealing, and asking a judge to terminate Intel's rights to nVidia patents covered in the agreement. Both cases are still pending. Some analysts say the cross-licensing disagreement could be one of the reason that Intel canceled their Larrabee GPU but the problems may not be limited to Larrabee - if the court would indeed
Normally, an FTC probe is focused on monopolistic behavior. Clearly, with over 85 percent of CPU global sales, Intel qualifies as a monopoly. However, it isn't illegal to be a monopoly and charge whatever the market will bare. According to Scott Hemphill, a law professor at Columbia University, "What's not O.K. is conduct that's aimed at unreasonably prolonging and maintaining that monopoly." He went on to say that New York AG Mario Cuomo's case against Intel is essentially about Intel maintaining a monopoly to the detriment of AMD. David Balto, a former policy director with the FTC who led the agency's case against Intel in the late 1990s, said that if a firm coerces its customers into deals they might not prefer, this is direct evidence of market power which is abusive.
We started asking some experts whether they thought Intel was unfairly influencing their customers and denying consumers competitive products. A member of an overseas computer design team said, "Yes, Intel effectively paid kickbacks to have their chips installed". He said that the EU released evidence showing that from November 2002 through May 2005 Intel conditioned rebates to HP to ensure that at least 95 percent of all of its CPU needs for business desktops came from Intel.
An importer of laptops told us, "VIA secured netbook wins with tier one vendors HP, Samsung, and Lenovo. With the possible exception of Samsung, these deals were never extended beyond one product, promoting suspicion that Intel was snuffing out further contracts. For example, within a few days after Lenovo launched its VIA Nano powered S12 IdeaPad netbook, the product could no longer be navigated to through Lenovo's shopping website."
Next we asked a retired attorney from a California technology company for his thoughts on an organization that has been prosecuted as many times as Intel has for anti-competitive/antitrust behavior. He reviewed both the New York State 83-page detailed complaint [PDF download] and the EU Commission’s decision to fine Intel. He was familiar with the November 12th articles about the out-of-court settlement between Intel and AMD. He also pointed to an Australian business journal article from October that said three of the four FTC commissioners are in favor of filing a complaint against Intel. It was his opinion that there was sufficient hearsay information and proven facts for the FTC to start an investigation.
The attorney raised another concern. He said that corporate officers have a fiduciary responsibility to protect shareholders’ wealth from losses and that aggressive marketing tactics can be seen as a positive choice. However, when some of the corporate officers expose the company to legal actions by their decisions, the shareholders should question the workplace environment. He said that Intel could have been more involved in monitoring the behavior of the Intel staff who are indicted in the SEC v Galleon Management complaint on pages 26 to 36.
Will Intel be investigated by the FTC and found guilty of anti-competitive practices as three other foreign equivalents of the FTC have ruled? In the 1990s and again in 2000, Intel was not prosecuted by the FTC after being investigated. However, this time there is a large amount of cumulative evidence of Intel abusing their monopolistic advantage over their competitors. We think the FTC will go after them. And give them a hefty fine, however that is like taking candy from a candy factory - there’s a lot more where that came from.
Intel, AMD, nVidia, Apple, VIA, HP, Samsung, Lenovo, SEC, FTC, San Jose Mercury News, Wall Street Journal, Bloomberg, FOIA, fiduciary, Freedom of Information Act, Galleon, insider trading, antitrust, monopolistic, Court of Chancery, monopoly, EU, OEM, ODM, Nehalem, Larrabee, GPU, cross licensing, CPU, microprocessors, S12 IdeaPad, Nano, Columbia University, New York, California, Delaware, Australian, Japan, South Korea, Atlantic, Chuck Mulloy, Roomy Khan, Raj Rajaratnam, Douglas Melamed, Bruce Sewell, Scott Hemphill, David Balto, Mario Cuomo
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