Intel faces New York antitrust lawsuit

By Suzanne Deffree, Managing Editor, News -- Electronic News, 11/4/2009

New York Attorney General Andrew M Cuomo today filed a federal antitrust lawsuit against Intel Corp  alleging that the MPU maker bribed and coerced PC OEMs Dell, HP, and IBM.

According to the filing, Intel violated state and federal antimonopoly laws by engaging in a worldwide, systematic campaign of illegal conduct to maintain its top-ranking place in the MPU market. The filing cites Dell, HP, and IBM e-mails as evidence of the alleged antimonopoly activity. 

The New York Attorney General's office began its investigation into Intel in January 2008, at that time serving a wide-ranging subpoena seeking documents and information on Intel to investigate whether the company violated state and federal antitrust laws.

According to the state office's current filing, over the last several years Intel has extracted exclusive agreements from large PC OEMs in which they agreed to use Intel’s microprocessors in exchange for payments totaling billions of dollars. Intel also threatened to and did punish computer makers that it perceived to be working too closely with its competitors, the filing alleged, further stating that threats included cutting off payments, directly funding a computer maker’s competitors, and ending joint development ventures.

“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” said Attorney General Cuomo 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. These illegal tactics must stop and competition must be restored to this vital marketplace.”

Intel could not be immediately reached for comment on the filing.

According to Cuomo, who is expected to make a run for the New York governor's seat in 2010, Intel paid hundreds of millions of dollars annually in “rebates” to computer makers, which in some cases exceeded a company’s reported quarterly net income.

The suit was filed today in federal court and seeks to bar further allegedly anticompetitive acts by Intel, restore lost competition, recover monetary damages suffered by New York governmental entities and consumers, and collect penalties. Cuomo's office did not offer further details on the sought monetary damages and penalties.

Cuomo's office did, however, offer specific examples of the alleged illegal activity and cited e-mail evidence. According to the filing, in 2006, Intel paid Dell almost $2 billion in rebates and in two quarters of that year such payments exceeded Dell’s reported net income. From 2001 to 2006, Intel granted Dell a privileged position vis-à-vis other computer makers in return for the OEM's agreement not to market any products from its chief competitor Advanced Micro Devices, the statement claimed, adding that Intel and Dell collaborated to market MPUs and servers at prices below cost "in order to deprive AMD of strategically important competitive successes."

As to HP, Cuomo's office claimed Intel threatened the OEM, saying it would derail development of a server technology on which HP’s future business depended if HP promoted products from AMD. Cuomo's office also claimed that Intel paid HP hundreds of millions of dollars in rebates in return for HP’s agreement to cap sales of AMD-based products at 5% of its business desktop PCs. And Cuomo's office claimed that in 2006 Intel and HP entered into a broader, company-wide agreement to pay HP $925 million to increase Intel’s shares of HP’s sales at AMD’s expense.

As to IBM, Cuomo's office claimed Intel paid IBM $130 million not to launch an AMD-based server product and Intel threatened to pull funding for joint projects if IBM marketed AMD-based server products. Cuomo's office further claimed that Intel pressured IBM to launch another AMD-based server only on an “unbranded” basis.

The lawsuit counts e-mail correspondence including an internal e-mail from an unnamed IBM executive in January 2005 questioning if Big Blue could "afford to accept the wrath of Intel.”

A cited internal e-mail from an HP executive in June 2004 stated that the OEM's announcement of an AMD Opteron-based product has cost Intel several billion dollars and that "they [Intel] plan to punish HP for doing this.” Other cited HP e-mails discussed Intel rebates and whether HP could "make it financially" without the money.

Cuomo's office further cited internal Dell e-mails from February 2004 implying that if the OEM ended its exclusive relationship with Intel: “PSO/CRB [then Intel CEO Paul Ottelini and Intel Chairman Craig Barrett] are prepared for jihad if Dell joins the AMD exodus."

Further, Cuomo's office offered a November 2005 e-mail from Dell CEO Michael Dell to Intel's Ottelini in which Dell states his company has "lost the performance leadership and it’s seriously impacting our business in several areas.” According to the filing, Otellini replied: “There is nothing new here. Our product roadmap is what it is. It is improving rapidly daily. It will deliver increasingly leadership products. … Additionally, we are transferring over $1B [billion] per year to Dell for meet comp efforts. This was judged by your team to be more than sufficient to compensate for the competitive issues.”

Tim Luke, a semiconductor market analyst at Barclays Capital, chimed in on the filing, maintaining his "equal weight" rating on Intel's stock and saying his estimates for Intel are unchanged. "We highlight that no other US state is currently filing charges against Intel," he said in a research note this afternoon. "Separately, we note that AMD is building a large multi-billion dollar facility (Fab 2) in upstate New York with subsidy from the state of New York. New York has committed up to $1.2 billion in grants."

Indeed, AMD through its GlobalFoundries manufacturing spin-off broke ground on the New York fab in July.  AMD is separately suing Intel for allegedly antitrust behavior. Luke said he expects an update on that legal action at AMD's November 11 analyst day.

Intel has also been investigated concerning anticompetitive behavior claims by the Federal Trade Commission,  the European Commission, Japan's Fair Trade Commission, and Korea's Fair Trade Commission.