The Smell Of Blood At Intel
While everybody was watching Microsoft Corp.'s battle in the Beltway, a federal judge in Alabama dropped a bombshell on the other half of the "Wintel" duopoly. On Apr. 10, U.S. District Judge Edwin L. Nelson held that Intel Corp. likely violated U.S. antitrust law when it withheld products and technical information from Intergraph Corp., a maker of computer workstations. Nelson's preliminary injunction, the first court to label Intel an abusive monopoly, could lead to further legal troubles for the chip giant--specifically by giving the Federal Trade Commission more firepower in its investigation into the company's business practices. "It's a very damaging ruling," says Drew Peck, a Cowen & Co. analyst. "The aftershocks could be extraordinarily strong."
"UNCONSCIONABLE." Intel insists the judge is wrong. But legal experts think the ruling could embolden the FTC, which is expected to decide by this summer whether to launch a formal action. "Just as Orrin Hatch [with his Senate Judiciary Committee hearings] gave the Justice Dept. support in its fight against Microsoft, so this decision gives the FTC [support] against Intel," says Howard Morse of Washington's Drinker, Biddle & Reath, an ex-staffer at the FTC who had worked on the Intel inquiry.
The ruling could also encourage other would-be litigants. Intel customers and rivals have typically shied away from confronting the company, which is known for its aggressive legal tactics. But now they may smell blood. Morse compares it to tobacco lawsuits: "Once that wall is broken, a trickle can rapidly turn into a stream," he says.
A surge of private litigation could even cause the FTC to shift the focus of its probe. The agency won't comment on its inquiry, but Intergraph staffers say the FTC has interviewed the company about its complaints. The FTC is looking at whether Intel is leveraging its dominance in processors into adjacent markets and at its use of nondisclosure agreements on future products to keep customers in line. Nelson called Intel's withdrawal from such agreements with Intergraph "unconscionable."
The key element in the ruling: Nelson said Intel chips have become an "essential facility," a legal standard that, for instance, requires the owner of the only bridge into a town to offer equal access to all traffic. If upheld, Pentium chips would be treated like any public asset. Many legal analysts suspect Nelson went too far. But "if a federal court has already found that Intel's chips are an essential facility, it makes it easier for the FTC," says Art Amolsch, editor of newsletter FTC Watch in Washington.
Such a far-reaching impact wasn't on Intergraph's radar when the Huntsville (Ala.) company filed its patent claim last November. The $1.2 billion workstation maker argued that it owned patents on technology used in Intel's Pentium Pro and Pentium II processors. "Intel wanted access to the patents we had, and they were unwilling to pay," says James W. Meadlock, Intergraph's CEO. Intel stopped supplying Intergraph with technical data and early samples of its upcoming processors--a move Intergraph says cost it $100 million in lost sales in the fourth quarter. So in December, Intergraph added antitrust claims to its suit.
Intel's version of events differs greatly: It says the patents aren't valid. What about cutting off shipments to Intergraph? "It's prudent not to ship intellectual property to a company that is going to sue you," says spokesman Chuck Mulloy.
The Huntsville ruling is only a preliminary injunction that forces Intel to resume the relationship it had with Intergraph before the first suit was filed. The case could still go to trial--though Intergraph will likely ask for a summary judgment--and Intel says it may appeal the ruling. "We think the judge is wrong," says Intel's Mulloy. Intel also filed a countersuit in '97 that was stayed, pending Nelson's decision.
Will the Huntsville ruling tame the notoriously aggressive Intel? Or stop the kind of behavior that, according to former FTC Commissioner Christine Varney, prompted the agency to probe the chip giant in the first place? Maybe not. But even if the smaller company hasn't felled the Goliath, it has landed a stunning blow.