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By Spencer Ante, with Cliff Edwards, Ian Rowley, and Andy Reinhardt Opening a new round of hostilities in one of Silicon Valley's longest-running legal feuds, Advanced Micro Devices (AMD
) on June 27 filed suit against chip giant Intel (INTC
) for a series of alleged antitrust violations AMD says are aimed at crippling the smaller chipmaker.
In a sharply worded 48-page complaint, AMD claims that Intel has engaged in an aggressive, global campaign to shut out or severely limit AMD's participation in the microprocessor market. The methods Intel has used, according to the complaint, include hundreds of millions of dollars in rebates, discounts, and marketing funds to drive computer makers, distributors, and retailers into exclusive or near-exclusive deals with Intel.
In one case, AMD says Toshiba (TOSBF
) stopped using AMD chips in 2001 because doing business with the chipmaker would "jeopardize Intel market development funds estimated to be worth $25 million to $30 million per quarter." In 2002, Hewlett-Packard (HPQ
) said it would be willing to use AMD chips only if AMD paid the computer maker $25 million each quarter to compensate for the expected retaliation from Intel, the suit contends.
CROWD PLEASER? Intel also applied intense personal pressure on executives who contemplated breaking ranks, AMD alleges. The complaint says Craig Barrett, Intel's former chief executive and now chairman, flew to Taiwan in September, 2003, when he heard that Acer was planning to publicly support the launch of a new AMD chip for laptop and desktop computers. He allegedly told Acer's chairman and CEO that the company would suffer "severe consequences" if it participated in AMD's launch. Ultimately, Acer withdrew from the publicity events.
AMD is seeking unspecified damages in the suit, filed in U.S. District Court in Delaware. But the Sunnyvale (Calif.) chipmaker says financial payments are much less important than forcing Intel to stop its monopolistic practices. AMD contends that Intel's behavior has resulted in higher PC prices, fewer choices, and a decline in innovation.
"It has become clear that the industry needs us to do this," says Hector Ruiz, AMD chief executive. "Around the world people will be happy we're putting this on the table. They may not come out and say it. But there's no doubt in my mind."
UPPING THE ANTE. Intel denies any wrongdoing. "We haven't seen the lawsuit and therefore can't provide specific comment. However, we believe our sales practices are both fair and consistent with federal antitrust laws," says Intel spokesman Tom Beermann. Intel makes no secret of the fact that it pays money to computer makers for marketing, and it contends that nothing is wrong with the practice. Moreover, in a May interview, Barrett said Intel's payments are a benefit to customers, because the result is cheaper PCs.
The Delaware lawsuit is the latest in a long series of legal battles between the rival chipmakers. The two companies have been involved in at least five different suits since the 1980s, involving everything from breach of contract to trademark infringement. In 1991, AMD sued Intel for antitrust violations. Then in 1995, AMD and Intel signed an agreement to settle all outstanding litigation, including the antitrust suit. In 2001, AMD filed a complaint against Intel with the European Commission, alleging anticompetitive practices. The EC's investigation is still going on.
Executives and lawyers for AMD say it's filing its own private antitrust lawsuit for a simple reason: AMD's products are more competitive than ever before, and Intel is stepping up its efforts to keep the new AMD chips from gaining any ground. AMD boosted its share of the PC processor market to 9.1% at the end of 2004, from 7.9% in 2003, according to market researcher IDC. Yet that's less of a gain than many analysts expected, given AMD's perceived technological edge.
FREE-MARKET ARENA. "We've created a family of products that are pretty awesome," says Ruiz. "It has become clear we cannot earn our way in the marketplace because of Intel's illegal monopoly. I made the decision that there was no other choice."
Proving that Intel's actions amount to anticompetitive behavior will be very difficult. The dominant chipmaker has been investigated by regulatory authorities numerous times in the past, and it has never incurred much more than a slap on the wrist. Courts, regulators, and juries, particularly in the U.S., tend to favor unfettered competition. In addition, it's unclear whether any top execs from the PC industry will testify against Intel, given their dependence on the chip behemoth. One former chief executive contacted for this article was familiar with the AMD lawsuit but declined any comment on the record.
Another complicating factor is that AMD's suit is focused on an emerging area of antitrust law involving what's called exclusionary pricing. A dominant company may use these pricing tactics to keep out competitors. One example: The market leader could offer lower prices to a customer if that customer buys 95% or 100% of its supplies from the leader. The problem, says Eleanor Fox, an antitrust expert at the New York University School of Law, is that the use of exclusive contracts and rebates is not always illegal. "Competition is about playing hardball," says Fox. "The plaintiff has a very high burden."
TOUGHER OVERSEAS. Still, AMD chose its court carefully. The District Court in Delaware is part of the Third Circuit Court of Appeals, which handed down a key opinion on exclusionary pricing. In the case, transparent-tape manufacturer LePage's sued giant 3M (MMM
) for allegedly offering customers cash payments for buying exclusively from 3M and higher rebates for buying other 3M products. The Circuit Court ultimately ruled in favor of LePage's, which won a $68 million judgment.
Regulators in other countries have been more aggressive in their investigations of Intel's practices than those in the U.S. Last year, Japanese investigators raided Intel's offices and seized boxes of documents. The Japan Fair Trade Commission (JFTC) discovered that Intel had paid rebates and refunds to Japanese PC makers when they bought its chips exclusively and, in other cases, when the PC makers bought 90% or more of their chips from Intel.
The JFTC deemed those as anticompetitive practices and, in March, Intel accepted a recommendation from the commission requiring it to stop them. "With the rebate -- the cash -- they tried to control the market," says Hiroshi Yamada, a JFTC official who headed the team investigating Intel. "We don't want that kind of conduct."
WHAT'S FAIR? Though Intel agreed to stop the practices in question, it maintains it did nothing wrong. "Intel believes that its practices are fair and lawful," the company said in a statement at the time. Japanese regulators say they continue to monitor Intel's conduct. If it violates the order, Intel could be fined and its employees could be sent to prison. "Our ultimate objective is to restore order in the market," says Yamada.
The EC has yet to determine whether it will take any action against Intel. Last year, the EC sent out about two dozen letters to PC makers and retailers from the U.S., Europe, and Japan, requesting information. And the commission says it's cooperating with Japanese officials because the issues are similar.
AMD is betting that its own lawsuit will strengthen the constraints on Intel's behavior, in the U.S. and elsewhere. "We want to create a level playing field for competition," says Ruiz. That may be the ultimate goal. But the latest round of the battle is just getting started.
Ante is Computers editor for BusinessWeek in New York