On 13 May 2009 the European Commission announced that it had fined Intel Corporation (Intel) €1.06bn for violating Article 82 of the EC Treaty (Article 82).1 The Commission found that Intel abused its dominant position by offering loyalty rebates and direct payments both to computer manufacturers and to a major European retailer to exclude its only significant rival, Advanced Micro Devices (AMD), from the market. Announcing the decision, the EU Commissioner for Competition, Neelie Kroes, denounced Intel’s activities, stating:
‘Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years. Such a serious and sustained violation of the EU’s antitrust rules cannot be tolerated.’
Intel has announced that it will appeal the decision.
Background
Intel is the largest manufacturer of computer chips known as x86 central processing units (CPUs), an essential hardware component of computers. AMD filed complaints regarding Intel’s business practices with the Commission twice, in 2000 and 2003. It also made a complaint to the German competition authority in 2006, which was subsequently examined by the Commission.
Commission finds Intel abused its dominant position
The Commission determined that, during the period October 2002 to December 2007, Intel had at least a 70% market share of the global market for x86 CPUs, constituting a dominant market position. The Commission found that Intel engaged in two types of practices that violated Article 82: first, illegal loyalty rebates; and secondly, restricting the commercialisation of AMD’s products through payment schemes to manufacturers and retailers.
Illegal loyalty rebates
Intel’s loyalty rebates were conditional on the manufacturers purchasing the vast majority of their x86 CPU requirements from Intel. Intel structured its pricing policy to ensure that a computer manufacturer that decided to buy AMD CPUs (for those CPU sales that were open to competition) would lose its rebate (or a large part of it), leaving the manufacturer with no choice but to buy from Intel. To be able to compete with Intel’s rebates, a rival CPU manufacturer that was as efficient as Intel would have to offer a price below the cost of producing those CPUs, even if the average price of its CPUs was lower than Intel’s average price. For example, one manufacturer’s rebates applied only after the manufacturer purchased 95% of its requirements from Intel, while another manufacturer was required to cross an 80% threshold before it was eligible for any rebates.
In the Commission’s press release on the decision, Commissioner Kroes highlighted the effect such practices have on competition, giving the example of one case where AMD offered one million free CPUs to a manufacturer but, in order not to lose Intel’s rebates, the manufacturer accepted only 160,000 CPUs. These rebates precluded competition by forcing Intel’s rival to offer prices lower than the cost of producing the CPUs. While acknowledging that some rebates are beneficial to consumers, the Commission found that Intel’s rebates both removed the ability of consumers to make a genuine choice and limited innovation.
Payments to restrict the commercialisation of AMD’s products
The Commission considered that Intel also violated Article 82 by:
- making direct payments to computer manufacturers to delay the launch of products containing competitor x86 CPUs;
- placing restrictions on manufacturers that limited the type of computers that could be manufactured using competitor CPUs; and
- paying a major European retailer to sell only Intel-based PCs.
This behaviour prevented products for which there was consumer demand from entering the market.
Intel Plans to Appeal
Intel’s chief executive officer (CEO) stated that the company intends to appeal the Commission’s decision to the Court of First Instance. In making this statement, the CEO claimed that no harm had been done to consumers and that the Commission did not understand the ‘reality of a highly competitive microprocessor marketplace’. Intel remains adamant that it never sells below cost and that its rebates were based solely on the quantity of Intel’s products purchased by the customer and not on the customer’s purchases of any competing products.
Conclusion
The Commission has several ongoing Article 82 cases in the hi-tech sector and it is expected that it will continue vigorously to prosecute those companies that abuse their dominant market position. To assist companies in complying with Article 82, the Commission recently issued detailed guidelines on exclusionary abuses.2 It should also be noted that the level of fines imposed on companies who breach Article 82 continues to rise and the Intel fine is more than double the €495m fine imposed on Microsoft in 2004. While each fine is calculated on the specific circumstances of the case, it is expected that fine levels will continue to rise.
Paul Johnson, associate, and Garrett Guillory, intern, Berwin Leighton Paisner LLP. E-mail: paul.johnson@blplaw.com
Endnotes
1) Article 82 prohibits the abuse of a dominant market position by undertakings if that abuse affects trade between member states. It is the abuse, not the holding, of a dominant position that is prohibited.
2) For further information, see IHL169, ‘European Commission publishes guidance on exclusionary abuses under Article 82 of the EC Treaty’, by Warsha Kalé and Paul Johnson.
