FTC sues Intel over chip dominance

NEW YORK (CNNMoney.com) -- The Federal Trade Commission said Wednesday it is suing Intel Corp., the world's largest chipmaker, for alleged anticompetitive practices.

The commission says Intel (INTC, Fortune 500) has acted to keep rivals from competing with the company in the semiconductor marketplace. The chipmaker allegedly threatened the biggest computer companies like Dell (DELL, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and IBM (IBM, Fortune 500) to coerce them not to install rivals' microchips in their PCs. Intel then manipulated its costs to price out competition, according to the complaint.

The FTC also says that Intel made software that was deliberately designed to function better on a computer running an Intel processor rather than a competitor's. The FTC said competitors had superior products but Intel stifled its competition by using illegal methods.

"Intel has engaged in a deliberate campaign to hamstring competitive threats to its monopoly," said Richard Feinstein, director of the FTC's Bureau of Competition, in a statement. "It's been running roughshod over the principles of fair play and the laws protecting competition on the merits. The commission's action today seeks to remedy the damage that Intel has done to competition, innovation, and, ultimately, the American consumer."

The commission voted 3-0 on the complaint, which says that Intel engaged in "illegal monopolization," "unfair methods of competition" and "deceptive acts and practices in commerce."

Intel attempted to settle the complaint, and the company said the negotiations with the FTC went far, but stalled over the settlement amount and when the commission insisted on "unprecedented remedies," Doug Melamed, Intel's general counsel, said on a conference call with reporters. Intel claimed the FTC is trying to restrict lawful price competition and enforce intellectual property rights that would make it "impossible for Intel to conduct business."

"The FTC's case is misguided," Intel said in its statement. "It is based largely on claims that the FTC added at the last minute and has not investigated. In addition, it is explicitly not based on existing law but is instead intended to make new rules for regulating business conduct. These new rules would harm consumers by reducing innovation and raising prices."

Brent Landau, partner at Washington-based antitrust firm Hausfeld LLP, said the FTC is pursuing its case against Intel to set the bar for monopolies in the future.

"The FTC is pursuing new theories against anticompetitive practices," said Landau. "It is definitely trying to set a precedent."

In addition to the allegations made in the complaint, the commission also says that Intel is attempting to expand its monopoly into new markets, and the company has a "dangerous probability" of monopolizing the graphics processing unit market in addition to its current dominance in the market for central processor units. A graphics chip leader, Nvidia (NVDA), filed a lawsuit against Intel in March on similar grounds.

"We applaud today's action by the U.S. Federal Trade Commission," said Nvidia spokesman Robert Sherbin. "We are particularly pleased to see scrutiny being placed on Intel's behavior toward GPUs, which have become an increasingly important part of the PC industry."

Rival Advanced Micro Devices (AMD, Fortune 500) declined to comment.

Piling on the lawsuits against Intel: In May, European regulators levied a record $1.5 billion fine against Intel for unfairly paying computer makers to delay or even cancel products that contained chips made by AMD.

Last month, New York Attorney General Andrew Cuomo filed a very similar antitrust suit against Intel, which alleged that Intel abused its monopoly position and paid billions of dollars to large computer makers who agreed to use Intel's microprocessors exclusively.

"I applaud today's action by the FTC against Intel, which has repeatedly engaged in unfair practices and has used its monopoly power to maintain a stranglehold on this vital marketplace," Cuomo said in a statement on Wednesday. "The FTC's action reinforces the allegations we made in our lawsuit against Intel and adds momentum to the effort to stop Intel's illegal activities and restore competition to the market."

Also in November, Intel and rival chipmaker AMD agreed on a $1.25 billion settlement of all of their long-standing legal disputes. The companies had been feuding about antitrust violations and patent disputes in American and Japanese courts.

Keith Hylton, antitrust professor at Boston University's school of law, said that Intel's settlement with AMD is likely to spur even more lawsuits.

"The funny thing about a public settlement is that others will notice that $1.25 billion and try to get something like that for themselves," Hylton said.

Hylton said the FTC may have a tough time proving its case in court based on the argument that Intel priced out competition. The commission will likely have a higher degree of success in the argument that it designed products to work better with its own processors, which was the core of the United States' landmark case against Microsoft earlier this decade.

"The FTC will have to convince the court that the negative consequences of recognizing the monopolization theory don't outweigh positive effects that Intel's business has on consumers," said Hylton. "U.S. courts have been distant from claims of monopolization based on aggressive discounting, but they're also weary of discouraging innovation. It all depends on how strong the evidence is."