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N.Y. files antitrust lawsuit against Intel
Chipmaker used bribes, coercion to get PC makers to shun its rivals, Cuomo says

By Tomoeh Murakami Tse and Cecilia Kang
Washington Post Staff Writer
Thursday, November 5, 2009

NEW YORK -- New York Attorney General Andrew M. Cuomo filed an antitrust suit against Intel on Wednesday, accusing the world's largest chipmaker of illegally threatening computer makers and paying them billions of dollars in kickbacks to stop using chips made by rivals.

The lawsuit comes amid increased scrutiny of the company's business practices and adds to a growing chorus of complaints by overseas regulators who have accused the chipmaker of anti-competitive behavior.

Intel has repeatedly denied wrongdoing, and a company spokesman did so again Wednesday. "We disagree with the New York attorney general," Chuck Mulloy said. "Neither consumers who have consistently benefited from lower prices and increased innovation nor justice are being served by the decision to file a case now. Intel will defend itself."

Cuomo's suit, filed in the U.S. District Court of Delaware, claims that Intel violated state and federal antitrust laws by "engaging in a worldwide, systematic campaign of illegal conduct" that involved threatening and bribing executives at firms with such household names as Hewlett-Packard, Dell and IBM.

According to the lawsuit, Intel persuaded computer makers to use its chips in exchange for billions of dollars of payments masked as "rebates." The company also threatened to retaliate against manufacturers that worked with Intel's competitors, in a particular Advanced Micro Devices.

For example, Cuomo said, Intel paid nearly $2 billion in 2006 to Dell, which agreed to refrain from marketing AMD products. Intel also paid IBM $130 million not to launch a product using AMD chips and threatened to derail a joint development project with Hewlett-Packard if the computer maker promoted AMD products, Cuomo said.

A history of scrutiny

"Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market," Cuomo said in a statement. "Intel's actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices."

As part of the lawsuit, Cuomo presented internal e-mails between Intel executives as well as between Intel executives and those at computer makers.

According to Cuomo, for example, Intel chief executive Paul S. Otellini wrote a 2005 e-mail to Dell chief executive Michael S. Dell, who had complained that his company's business performance was suffering. Otellini reminded him that Intel had paid more than $1 billion to Dell. " This was judged by your team to be more than sufficient to compensate for the competitive issues," Otellini allegedly wrote.

Hewlett Packard, Dell and IBM either declined to comment or did not return phone calls and e-mail.

While numerous foreign regulators have filed lawsuits against Intel, which is based in Santa Clara, Calif., Cuomo's is the first formal antitrust action against Intel by U.S. regulators in more than a decade. In 1998, the Federal Trade Commission filed an administrative complaint, which was later settled.

In May, the European Commission fined the company $1.45 billion for alleged antitrust violations. Intel is appealing. Regulators in Japan found four years ago that the chipmaker had violated the country's antitrust laws, as did South Korean regulators last year. AMD is also suing Intel in a four-year-old case set to go to trial in Delaware in March.

In the United States, the FTC has been investigating Intel since mid-2008 but has yet to take action. Observers said Wednesday that that could change.

"The FTC is likely to file a suit in a couple of weeks," said Joshua Wright, a law professor at George Mason University who was an antitrust attorney in the FTC's bureau of competition until last year. "The New York suit puts pressure on the FTC not to get pegged as a regulator asleep behind the wheel."

An FTC spokesman said the investigation is continuing but declined to comment further.

'A notoriously gray area'

The Obama administration has promised to be tougher than its predecessor on anti-competitive practices in the tech industry. It has launched reviews of Apple, Google and IBM on separate matters.

Christine A. Varney, President Obama's pick to run the antitrust division of the Justice Department, has been an attorney in the high-tech industry and in recent speeches has urged that it be scrutinized more closely as that industry rapidly changes, affecting the overall economy.

Antitrust experts say the case may not be easy for Cuomo to win.

"This is a notoriously gray area in U.S. antitrust law," said Scott Hemphill, professor of antitrust law at Columbia University. While the allegations made by the European Commission and Cuomo's office are similar, the laws on each side of the Atlantic are not, with the U.S. requiring a "more rigorous showing of consumer harm," Wright said.

"The essence of the allegations in the E.U. case and the New York case is that Intel's lower prices might benefit consumers today but will eventually lead to the exclusion of AMD from the marketplace and ultimately result in higher prices for consumers," he said.

The lawsuit was cheered by some consumer advocates, who say they hope that public sentiment and the new administration will bring about tougher scrutiny of monopolistic behavior.

"It does seem to me to be indicative of a new attitude in antitrust enforcement that is a welcome development," said John M. Simpson, a consumer advocate at Consumer Watchdog. "It's clearly the case that technology companies for too long have not had enough close scrutiny."

Kang and staff writer Zachary A. Goldfarb contributed to this report from Washington.

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