The government's narrow suit may be fundamentally flawed

Federal trustbusters learned a hard lesson a generation ago after decade-long litigation against IBM (IBM) and AT&T (T): Think small. That's why the Justice Dept. has filed a narrow suit aimed at Windows 98 while it continues to investigate a broader case against Microsoft Corp. (MSFT). And that's why the Federal Trade Commission's June 8 complaint against Intel Corp. is limited to charges that the chipmaker stifled competition by punishing three customers in patent disputes.

The FTC'S legal strategy is clear: Seek a swift victory in a case where key facts aren't in dispute, then build on that triumph to pursue a wider probe. The commission's larger concern is whether Intel leverages its dominance in microprocessors to enter new markets, such as graphics chips. The FTC is also looking at whether Intel is shutting out rivals by using proprietary standards. The agency is still gathering evidence on those questions and hopes a tough stance now could encourage rivals to give evidence to build the bigger case and induce Intel to back off its hardball tactics. Says FTC Bureau of Competition chief William J. Baer: ''When we have evidence of anticompetitive behavior, we are ready to act.''

Sounds like a smart approach. But the FTC'S current case, say legal analysts, is no legal cinch. The FTC will have a hard time proving that the customers Intel acted against are competitors or potential ones. Even more difficult: The FTC will have to prove that the tactics Intel employed against these three would actually dampen competition in microprocessor technology. If Intel can force customers and others to turn over patent rights, Baer says, ''other firms will have little incentive to invent new features to challenge Intel's dominance.''

At the heart of the case are charges that Intel retaliated against Intergraph Corp. (INGR) and Digital Equipment Corp. (DEC) when they sued to stop Intel from infringing on their patents. The FTC also says Intel punished Compaq Computer Corp. (CPQ) after the pc maker sued a rival that had been using Compaq patents in motherboards made by Intel. After the suits were filed, Intel stopped giving these three customers information they needed to develop systems based on Intel chips. Intel says that's true, but spokesman Chuck Mulloy says ''we were within our rights under existing intellectual-property and antitrust law.''

The FTC'S argument rests on the 30-year-old theory of ''potential competition.'' It posits that a company's actions can be deemed anticompetitive even if it's not clear a rival has been harmed yet--and even if the prosecutors can't say who a competitor's rivals in the future could be. In practice, such arguments have generated only mixed results. And, says Washington antitrust attorney Joe Sims, the chances of succeeding on potential competition aren't any better now. ''Since the three [customers] are not direct competitors, it will make it harder for the commission to prove that Intel is trying to get a bigger monopoly,'' he says.

But the FTC argues that the three companies targeted by Intel are already competitors or potential ones. Digital's Alpha chip competes directly against Intel's Pentium line. Intergraph and Intel compete in computer graphics. Moreover, the two companies are locked in a nasty battle over processor patents held by Intergraph that may have been violated in Intel's Pentiums--making them rivals in processor technology. (In April, Intergraph won an injunction against Intel, forcing the chipmaker to turn over information it had withheld after Intergraph sued Intel for alleged patent violations. On June 8, Intel sued to have that ruling overturned.) As for Compaq, the FTC claims it competes with Intel in motherboards--although Compaq builds them only for its own computers.

Legal experts say the FTC will have a tough time showing that Intel's relations with those three have chilled innovation in chip technology among other developers. Says Chicago antitrust attorney Hillard M. Sterling: ''The effect has to be more than hypothetical and speculative.''

Baer insists he has lots of evidence. If so, his think-small strategy could bring a big win. If not, the FTC may have to pack up its stacks of Intel files.

By Susan B. Garland in Washington, with Andy Reinhardt in San Mateo, Calif.


Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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