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FTC talking points on Intel antitrust casewriting

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1998-06-08 · 19 min read · Edit on Pyrite

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FTC talking points on Intel antitrust case

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[http://www.ljx.com/LJXfiles/antitrustsuits/ftcrelease.html] Background Concerning FTC's Action Against Intel

June 8, 1998 I. LEGAL THEORY Does this case involve in expansive reading of monopolization law? No. This is black-letter law. Under the anti-trust laws a monopolist can compete by producing better, cheaper, and more attractive products. It may not, however, cement its power by unreasonably preventing firms from challenging its dominance. Over a century of judicial interpretation have adhered to that distinction. As the Supreme Court in Aspen Ski held, relying on Judge Bork, a monopolist violates section 2 when it "attempt[s] to exclude rivals on some basis other than efficiency." 472 U.S. 585,605 n.32 (1985) (quoting R. Bork, The Antitrust Paradox 138). The key, as in any monopolization case, is whether the monopolist has a legitimate business justification for exclusionary conduct. Here, Intel's claims fall quite short of the mark. Intel cannot explain how forcing a rival to settle IP litigation by denying them crucial product information in some way improves competition or is competition on the merits. This activity is plain coercion by a monopolist -- the type of activity that Section 2 condemns. Intel cut these firms off not because it was efficient, but because they had the internerity to assert their intellectual property rights. That violates Section 2. As Judge Posner of the Seventh Circuit has observed, a monopolist steps over the line where it: Retaliates against customers who have the ternerity to compete with him by cutting such customers off...in order to discourage competition. Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370,377 (7th Cir. 1986). What cases can you rely on? As noted above, the courts have frequently condemned under Section 2 conduct by a monopolist that restricts the competitive opportunities of rivals and lack a legitimate business justification. Here are a few examples from the Supreme Court: Lorain Journal Co. v. United States, 342 U.S. 143 (1951). In the 1940s, a dominant newspaper in a town in Ohio lived the easy life with no competition. When the FCC granted a license for the sole radio station in the market, Lorain Journal lost the battle for the license. It responded by threatening its customers that if they advertised on the radio station they would not be able to advertise in the newspaper. Effectively, the newspaper was trying to protect its monopoly by using its power over its customers to drive its new rival out of business. Aspen Ski Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1984). The owner of three mountains in a four-mountain ski area cut off the fourth mountain from multi-mountain passes that allowed skiers to use all four mountains for a single package price. The Supreme Court found that the defendant had done so only to injure competition and that it had no legitimate justification for doing so, and hence that the conduct violated the Sherman Act. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). Otter Tail involved actions by a monopoly electricity utility to deter the emergence of municipal electric systems in its service area. The monopoly utility refused to transmit power for the municipalities. The Court found the utility to have engaged in illegal monopolization. Although the Court acknowledged that the customers only sought to replace the monopoly with their own municipal monopolies, the Court nevertheless found the defendant's refusal anticompetitive, noting that S: 2 is violated as much by the prevention of competition as by its destruction. Isn't this case inconsistent with well established case law such as OAG and Spectrum Sports? The cases Intel cites have nothing to do with this case. Official Airlines Guide v. FTC, 630 F.2d 930 (2d Cir. 1980), cert. denied, 450 U.S. 917 (1981). In OAG, the Second Circuit held that the publisher of the Official Airline Guide did not have a duty to publish the listings of commuter airlines. In finding no liability, the Court focused on the fact that OAG operated in a different market -- publication of airlines schedules -- from the market the commuter airlines competed in. OAG did not stand to benefit from any harm to competition in the airline market. The appeals court emphasized, moreover, that there was no evidence that OAG's actions had the purpose or effect of creating or protecting its monopoly. Here, in stark contrast, Intel took actions against customers who had patents in technologies that directly compete with Intel's. Obviously Intel stood to benefit by those actions. Spectrum Sports v. McQuillan, 506 U.S. 447 (1993). In that case, the Supreme Court held that in order to find that a non-monopolist attempted to monopolize, a court had to find a dangerous probability of success in achieving monopoly power. Intel already has monopoly power; it's taking unjustifiable actions to preserve that power. Again, Spectrum Sports is simply inapplicable. Why was Intel's conduct exclusionary? Three factors set this conduct off as particularly pernicious and therefore particularly unlikely to lead to anticompetitive effects. First, Intel acted against its own short-term interests in terminating relationships with valuable customers. A raft of court decisions have treated refusals to deal with customers who also compete or who work with competitors as inherently suspect off the bat. The courts frequently condemn as "exclusionary" conduct which is contrary to a monopolist's short-term interests. Second, as in Aspen Ski, Intel disrupted a mutually beneficial pattern of dealing with customers that reflected a profitable business practice that ensures that customers of microprocessors and computer systems receive the best products for their money. In other words, Intel ended a pattern of dealing that made economic sense for both parties and benefited customers. Third, Intel discriminated, targeting only those customers who were also competitors or potential competitors and who were refusing to license valuable intellectual property in rival microprocessor and related technologies. It acted in a discriminatory fashion and only ended the c onduct when the other side gave in. II. Competitive Harm Don't you have to demonstrate that prices are higher or that the three firms suffered a great deal of harm? Intel argues that the FTC must demonstrate that Intel's actions directly led to higher prices or decreased output. But that is not the requirement of the law. Rather, the law prohibits monopolists from engaging in activities that cement or preserve their monopoly position. By definition, when a monopolist improperly maintains a monopoly position, nothing changes. Prices do not go up; output does not fall. It is competition that would have brought about change and dynamism. Thus in cases like Lorain Journal, Otter Tail and Kodak, courts struck down exclusionary conduct even when there was no demonstrable effect on price or output. As the Supreme Court explained in Lorain Journal: "S: 2 is violated as much by the prevention of competition as by its destruction." The focus in a monopolization case is whether a dominant firm uses its power to entrench its monopoly power. Although the evidence here will show that the firms targeted by Intel suffered from the conduct, whether the target of the monopolist's actions loses sales is not necessarily dispositive. There are many cases where courts find a violation even though some of the targets actually do no appear to lose sales. Examples: Kodak Technical Servs. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 1998 U.S. LEXIS 2831 (1998). The Ninth Circuit found a violation even through some of the independent service operator plaintiffs still prospered. What was central to the court's decision was the fact that the ISOs offered a product consumers preferred and that Kodak's policy effectively denied customers that alternative. Aspen Ski. The Supreme Court found a violation even though there was no evidence that Aspen's conduct led to higher prices or supracompetitive profits, the usual indicia of what we normally think of as harm to competition. Rather the Supreme Court focused on harm to consumers -- that is, whether some customers did not receive what they would have liked. Shouldn't the FTC wait until there is evidence of direct harm to consumers? No. That is not the law. Intel seems to suggest that the government should stay its hand until it has perfected its monopoly, all potential competitors have been forced into treaties, and it begins charging supracompetitive prices. If the government stayed its hand in that fashion we would be unable to cure many monopolies. Moreover, the FTC had the power, under Section 5 of the FTC Act, "to stop in the incipiency acts which when full-blown lead to monopoly or undue hindrance of competition." This reflects a powerful policy rationale that antitrust cannot and should not wait until a scheme to monopolize has wreaked havoc on consumers and damaged the national economy. Put simply, the antitrust laws seek to prevent the acts of illegal monopolization; they do not prohibit enforcement until the monopolist begins to enjoy the fruits of those illegal acts. What is the risk to competition posed by Intel's conduct? Intel's actions harmed competition by chilling both current and future innovation in the microprocessor market and thereby cementing Intel's dominance into the next-generation of microprocessors. Intel took targeted, discriminatory actions against only those customers who dared to protect their intellectual property rights in microprocessor and related technology. By doing so, Intel told the world that it would use its market power in current generation microprocessor chips to obtain an "easement" to share in the fruits of any other's innovations. This action was particularly threatening and exclusionary because of the importance of patent protection to these innovators. In a market where the patent system is the only protection that fringe innovators have to protect the fruits of their research from the reaches of the monopolist, Intel's actions send a powerful message that it is not worth the time, effort and expense to innovate in order to compete with Intel. Rocket science is not needed to see how this message would have a chilling effect. As the district court judge in the Intergraph v. Intel lawsuit found, the chilling effect which Intel's arbitrary enforcement of the NDAs in this manner must have on other members of the industry, who are dependent on Intel for microprocessors, is obvious. Intergraph v. Intel, slip op. at 45-46 (N.D. Ala. Apr. 10, 1998). If Digital ultimately settled with Intel, how was competition harmed by Intel's actions? Our concern is with competition and not just whether Digital received a fair price in its settlement. The Commission believed that the settlement would have harmed competition by diminishing Digital as an alternative source of microprocessor technology. That is why the Commission took enforcement action in April and required Digital to find alternative manufacturers for its Alpha chip. Moreover, our complaint alleges that Intel's conduct has even broader anticompetitive effects. By challenging the exercise of IP rights by some of its rivals, Intel was sending a signal to other firms that they dare not challenge Intel's IP rights. If firms know they may not be able to vindicate their IP rights, this may in turn dampen their incentive to motivate. If they know that at the end of the road there is a big Intel roadblock, they may decide the journey is not worth starting in the first place. The implication of Intel's actions was to send a message to would-be rivals in microprocessor innovation that Intel would and could use its monopoly power in current generation product to get access to the fruits of their innovations, which in turn can only lead to the chilling of such innovations. The courts have condemned exclusionary actions by a monopolist where they are intended to "signal" potential rivals or customers of those rivals. For example, in Reazin v. Blue Cross & Blue Shield of Kansas, 899 F.2d 951 (10th Cir. 1900), hospitals in Kansas were beginning to team up with new rival HMOs to offer health care to consumers. Most hospitals, however, still needed to contract with Blue Cross, because of its overwhelming market share in the geographic area. The court found that, by cutting off a hospital that had decided to affiliate with a rival HMO, Blue Cross sought to send a message to other hospitals that Blue Cross would and could punish them for teaming up with rival HMOs. Without looking for evidence of price or quality effects, the court was satisfied that the only logical result of such a message would be to harm competition in the market for health care financing, and quickly condemned it. Similarly, here, Intel's actions were designed to send a message to would-be innovators that Intel would and could use its monopoly power in current generation product to get access to the fruits of their innovation, a threat would logically lead to less innovation by such competitors. The end result in the examples you have given were that firms entered into cross licenses. What is wrong with that outcome? Cross-licensing in many cases will be procompetitive. But this case has very little, if anything, to do with cross-licensing negotiations and agreements based on the respective value of intellectual property portfolios. Instead, this case focuses on Intel's use of monopoly power to coerce (or attempt to coerce) agreements that reduce the incentives of Intel's actual and potential competitors to innovate in the microprocessor market. With respect to Digital, it was the very absence of cross-license that gave rise to Digital's patent lawsuit against Intel. Digital had a reasonable, good-faith belief that Intel had simply stolen its superior microprocessor technology in an allegedly naked and illegal attempt to close the performance gap between Digital's Alpha and Intel's microprocessors. When Digital sought compensation for Intel's misappropriation of its technology, Intel could have negotiated a cross-license based solely upon the respective value of their microprocessor technology. Instead, Intel attempted to "negotiate" by using its monopoly power to punish Digital for attempting to secure just compensation for its technology. This is injury to customers in order to diminish competition. III. Business Justifications Isn't Intel justified in terminating its business relationships with someone that sues it? The key question in any monopolization case is whether there is a legitimate business justification. But the law does not countenance any justification. Rather, the rule of law, as articulated by the Supreme Court and Professor Bork, is that if a firm has been "attempting to exclude rivals 'on some basis other than efficiency' it is fair to characterize its behavior as predatory." In monopolization cases, legitimate business justifications permit a monopolist to show that the conduct at issue permits it to offer better of cheaper products to consumers without unreasonably excluding the monopolists's competitors. Here Intel can not show their conduct met these standards. What justifications did they present? Self help. Intel argues that they acted out of concerns that these firms would use the product information to get extra discovery that would hurt Intel in litigation or to create new litigation claims. But the courts have never recognized self-help as legitimate reason for a monopolist to cut off arrangements with customers or competitors. As in many areas of the law, recognizing self help as a defense would only exacerbate disputes and actually diminish the respect for the law. More importantly, such an argument was pretextual. Intel admits that it did not have reason to believe that these firmed posed a threat of misusing Intel's product information. Instead, Intel's defense is that the other companies might gain information useful in the litigation. Given that our system of civil litigation is based on full disclosure, Intel's argument can hardly justify the kinds of actions it took here. In the fast-paced microprocessor industry, legal rights -- particularly those protecting intellectual property -- are essential to the ability of firms like Digital to challenge Intel's dominance. The inability to vindicate these rights significantly reduced the incentive of Intel's competitors to innovate. But aren't there cases that say you can terminate a customer if it has sued you? Intel may cite some cases that permit suppliers to terminate relationships with customers that have asserted their legal rights against the supplier either through lawsuits or adverse testimony. But none of these cases involved a dominant firm, and none involved allegations of monopolization. Indeed, most of the cases explicitly noted that the supplier was not a monopolist. Moreover, other cases suggest that monopolists like Intel may not refuse to deal with customers when the effect of their conduct discourages customers from vindicating their legal rights. Isn't Intel's conduct justified under the IP laws? To be sure, intellectual property rights provide a powerful incentive for firms to produce innovations that benefit consumers. The ability to protect and exercise those rights are at the heart of this case. But Intel's arguments would undermine, not uphold, intellectual property protections. Intel admits that it did not believe that any of its customers were misappropriating its patents, copyrights, or trade secrets when it terminated its nondisclosure agreements. It also admits that much of the information in question is made widely available to OEMs so that OEMs can build computers based on Intel's chip. What it is asserting is thus not the right to protect its own intellectual property, but rather to prevent others from enforcing theirs. This would be an extraordinary position. As the Court of Appeals for the Federal Circuit in Atari Games Corporation v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990) noted: When a patent owner uses his patent rights not only as a shield to protect his invention, but also as a sword to eviscerate competition unfairly, that owner may be found to have abused the grant and may become liable for antitrust violations when sufficient power in the relevant market is present. Intel's intellectual property arguments would undermine both antitrust principles and the protections that intellectual property laws are intended to provide to innovators, especially those that live in the shadow of a dominant firm. Intel claims a blanket right to restrict use of its IP under any circumstances. Don't they have that right? There is no such blanket right. Numerous Supreme Court cases (Lorain Journal, Aspen Ski, Kodak v. Image Technical) recognize that a firm's right not to deal does not apply where the purpose of effect is to create or maintain a monopoly. Intel is also wrong that courts give holders of intellectual property carte blanche to do whatever they want. A long line of tying and other court cases recognizes that the intellectual property owner's right to exclude does not confer power to use that right to force others to benefit the monopolist in some collateral way. The cases also find no justification where the claim to protect intellectual property is pretextual. Here, Intel candidly admits that it had no reasonable basis to be concerned that any of these customers would misuse the information. If there were a legitimate risk of misappropriation our order would allow them to stop sharing the technical information. Allowing Intel to act without a business justification would in fact undermine the intellectual property patent system. Intel should not be allowed to use intellectual property as a justification for preventing its licensees from asserting their intellectual property rights in court. To do so would be to undermine the premise of the patent system, in which intellectual property protections are designed to encourage innovation. The Supreme Court has made it clear that it is improper to use intellectual property in order to prevent licensees from asserting challenges to the validity of that intellectual property. It is even more clear, then, that Intel should not be able to use its intellectual property in order to prevent licensees from protecting the validity of their own intellectual property. Isn't Intel's conduct protected under Noerr-Pennington because it mostly concerned actions related to lawsuits -- for example, demanding return of technical information from these customers before suing to enforce contracts about this technical information? No. This argument is unavailing for three reasons. First, the challenged conduct involves refusals to deal rather than the filing of lawsuits or other forms of petitioning government. Even though these refusals were consistent with written contracts, courts have repeatedly held that legally enforceable contracts may be part of an unlawful scheme that violates antitrust laws. Courts have also found that merely seeking the judicial enforcement of a contract does not shield the underlying behavior from the antitrust laws. Second, the only actions arguably protected would relate to Digital and would concern information Intel demanded to be returned. But the harm to Digital was not from information that it had to return, but more importantly new information that was not given. Third, even if some aspect of this conduct might have been protected, a great deal of Intel's conduct is not protected, and courts have repeatedly held that an isolated instance of legal petitioning in an overall course of anticompetitive conduct does not shield the entire conduct from legal scrutiny. IV. Other concerns over government enforcement Why won't this case just be another IBM case that will go on forever and be outdistanced by technological change? Technological change can occur very quickly, but Intel's actions were designed to slow that change down. If competitors know that at the end of the day Intel can coerce them to give up valuable property rights (or force them not to pursue conflicts with Intel's IP) the incentive of these firms to innovate will be dampened. What happened to Integraph and DEC sends a signal to potential innovators that it may not be worth trying to invade Intel's domain; or if you try to you should expect to be faced with threats that you will be cut off at the knees unless you enter into a "bearhug" settlement. The IBM case also sought something much greater than relief. They were looking for structural relief and the competitive conditions in the computer industry changed to make that relief unnecessary. Here we are seeking narrow relief focused on the specific conduct in this case. Intel is a monopolist and monopolists face special rules and in this case Intel went over the line in using their monopoly power to coerce settlements that harmed competition. That is what this case is about and that is what it seeks to remedy. Aren't you asking Intel to pull its competitive punches or cut its own throat? That isn't what the antitrust laws are about, is it? Under the antitrust laws a monopolist is encouraged to compete on the merits, offer low prices, better services, innovate, and do other things to compete in the marketplace. It can and should compete aggressively on the merits. But a monopolist goes too far when it acts not to gain customers by offering better products, but instead punishes customers in order to discourage competition. Even an argument that Intel's conduct was in its self-interest would provide no justification. That is what the Supreme Court said 25 years ago in Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), the Supreme Court rejected the monopolist electrical utility's argument that it would be cutting its own throat (by creating new competitors) if it agreed to transmit power to the plaintiff municipalities that wanted to sell their own electric power at retail. The Court asserted that the mere promotion of self-interest was insufficient to justify the conduct as issue. [Section 2 of the Sherman Act] assumes that an enterprise will protect itself against loss by operating with superior service, lower costs, and improved efficiency. Otter Tail sought to substitute for competition anticompetitive use of its dominant economic power. 410 U.S. at 380. Isn't Intel just securing "value for value" when it requires its customers to turn over their intellectual property in return for Intel's intellectual property? Some would suggest that Intel is engaging in legitimate hard bargaining in providing its technical information. Here the anticompetitive problems arose not because Intel was engaging in hard bargaining. Rather it tried to use its dominance to force other companies to give up their intellectual property. V. Remedy What relief is the FTC seeking? The proposed remedy is narrow and focused and seeks to prevent Intel from repeating the kind of conduct that it has engaged in with respect to Digital, Intergraph, and Compaq: using the threat of a discriminatory cut-off of products or technical information to force competitors to license or sell their property, including intellectual property, to Intel. Intel would be free to undertake actions that it could demonstrate were taken for legitimate business reasons rather than to coerce licensing or sale of property. Is Intel correct that this amounts to compulsory cross licensing? The relief would not be compulsory licensing. First, the technical information provided is not a technology license; rather, it is a simple technical information about how to make the rest of the computer compatible with the microprocessor. Second, Intel is not universally required to provide this information; rather, they are only compelled not to terminate it when there is an intellectual property dispute. ```

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