Commission fines Intel EUR 1.06 billion for abuse of dominance

25 September 2009

Katharine Wilson

On 21 September 2009, the European Commission published its decision of 13 May 2009 finding Intel guilty of an infringement of Article 82 of the EC Treaty (abuse of a dominant position) and imposing a fine of EUR 1.06 billion. The Commission concluded that between October 2002 and December 2007 Intel had committed a single and continuous infringement of Article 82, through the implementation of a strategy to foreclose competitors from the x86 central processing unit (CPU) market, by granting loyalty-inducing rebates and payments to certain computer manufacturers and one retailer and making payments to certain manufacturers conditional on them delaying or cancelling the launch of non-Intel x86 CPU based products (referred to by the Commission as “naked restrictions”).

The two main x86 CPU manufacturers are Intel and Advanced Micro Devices (AMD). The Commission found that Intel was dominant on the worldwide market for x86 CPUs, on the basis of its high market share, significant barriers to entry and expansion and the fact that Intel was an “unavoidable trading partner” for the original equipment manufacturers (OEMs), which incorporate x86 CPUs into desktop, laptop and server computers. The Commission’s decision concerns two types of exclusionary abuses of this dominant position, conditional rebates and “naked restrictions”, i.e. payments to cancel or delay new products, or otherwise restrict their commercialisation.

The Commission concluded that the level of rebates granted by Intel to four OEMs - Dell, Hewlett-Packard (HP), NEC and Lenovo - was conditional on them purchasing all of their x86 CPU needs from Intel (Dell), or all or substantially all of their x86 CPU needs for the corporate desktop, client PC or notebook segments (HP, NEC and Lenovo respectively). In addition, the Commission found that the level of payments made to Media Saturn Holding (MSH), a PC retailer, was conditional on it selling exclusively Intel x86 CPU-based PCs, which had an effect equivalent to a fidelity rebate. The Commission concluded that these fidelity rebates, both in relation to the OEMs and to MSH, were abusive and had the effect of restricting the freedom of choice of the OEMs and MSH. The Commission also carried out an “as efficient competitor” analysis, under which it found that the payments made by Intel were capable of having or likely to have a foreclosure effect, as an as efficient competitor would have needed to offer x86 CPUs to OEMs at a price below average avoidable cost (this being the viable measure of Intel’s cost) in order to match Intel’s conditional offers.

The Commission also found that three OEMs - HP, Acer and Lenovo - had been planning the introduction of specific AMD x86 CPU-based products, as result of customer demand. The Commission found that Intel made payments to those OEMs, which, in the Commission’s assessment, were conditional on them delaying or cancelling the launch of such products, or otherwise restricting their commercialisation (for example by restricting the OEMs to only selling such products directly to customers). The Commission referred to these payments as “naked restrictions” and stated that such conduct foreclosed Intel’s only significant competitor, AMD, meaning that AMD-based products either did not reach the market or did not do so at the time they should have done, so that consumer choice was restricted. The Commission concluded that this conduct by Intel constituted “recourse to methods different from those governing normal competition”, which was therefore abusive.

The Commission’s decision also refers briefly to Intel’s practice of providing bid pots to OEMs for making more attractive offers in the context of bids, so that x86 CPUs were actually provided below cost. In its statement of objections, the Commission stated that it considered this to be an abuse, but the practice is not considered further in the Commission’s decision.

The Commission found that the conduct described above constituted a single infringement of Article 82 and that Intel had a long-term comprehensive strategy of foreclosing AMD from the strategically most important sales channels in the market. Intel’s arguments that there was no infringement, that its conduct was objectively justified and that no fine should be imposed were rejected. The Commission therefore imposed a fine of EUR 1.06 billion and ordered Intel to stop its abusive practices.

On 22 July 2009, Intel appealed the Commission’s decision and the fine imposed to the Court of First Instance (CFI). The notice of appeal states that the Commission erred in law by finding that Intel’s conditional discounts were per se abusive, not conducting a foreclosure analysis into the “naked restrictions” and failing to analyse whether the conduct had an effect on trade between Member States. Intel also argues that the Commission did not meet the required standards of proof and that the allegation of a long-term strategy to foreclose competitors is unsupported.

In response to the publication of the Commission’s decision, Intel has also released a statement setting out why it thinks the Commission’s decision was wrong, as a matter of fact, law, economics and “elementary fairness”. One of Intel’s main criticisms of the decision is that the Commission made errors and was too selective in its factual evidence and relied on “less credible” and “less numerous” evidence, such as emails, rather than “more credible” and “more numerous” evidence. As far as the Commission’s legal assessment is concerned, Intel claims that it is apparent that competition was not foreclosed as a result of the alleged conditional rebates and that customers benefited. Intel also states that the Commission uses the phrase “naked restrictions” as a “substitute for proper analysis” and that there is no category of payments or discounts which can be found abusive without an analysis of their effects or capability for restricting competition. Intel also argues that the agreements were not conditional on exclusivity and that there is no evidence of a causal link between the rebates and the decision of the OEMs not to purchase from AMD. Intel’s conclusion is that it has “been accused of nothing more than competing vigorously to hold and win every sale that it could in this highly competitive marketplace”. 

This case is interesting because the EUR 1.06 billion fine imposed, which represents approximately 4% of Intel’s 2008 turnover, is the largest individual fine ever imposed by the Commission for anti-competitive behaviour. In addition, the Commission appears to have identified a new form of abuse under Article 82, which it terms “naked restrictions”. It remains to be seen whether the CFI will endorse the Commission’s conclusions, or whether it will agree with Intel that there is scope for a different interpretation of the evidence and that the Commission has not demonstrated that there has in fact been an infringement. The CFI’s eventual judgment will be likely to shed some light on whether the concept of an abuse under Article 82 has in fact been properly extended by the Commission’s decision in this case.

Source:

European Commission decision of 13 May 2009, available at http://ec.europa.eu/competition/sectors/ICT/intel_provisional_decision.pdf;
Notice of appeal, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:220:0041:0042:EN:PDF;
Intel statement, 21 September 2009, available at http://www.intel.com/pressroom/legal/docs/Intel_Response_to_Redacted_Decision.pdf