THE INTEL JUDGMENT - - SELECTED ISSUES

1. THE INTEL JUDGMENT - - SELECTED ISSUES James S. Venit 30 September 2014

2. Summary of the Commission’s Decisionof 13 May 2009 • Single continuous infringement of Article 82 from October 2002 until December 2007 • Strategy to foreclose AMD from the market for x86 CPUs consisting of two forms of anti-competitive conduct • Granting discounts to four OEMs (Dell, HP, NEC, Lenovo) on condition that they purchase all or almost all of their x86 CPU requirements from Intel, and granting discounts to a retailer (MSH)on condition that it sell only computers containing Intel x86 CPUs; and • Imposing “naked restrictions” on three OEMs (HP, Acer, Lenovo) by making payments to get them to stop or delay the launch of, or limit sales channels for, specific products containing AMD x86 CPUs • Intel was fined a record €1.06 billion

3. Background • While it was pursuing enforcement action against Intel, DG Comp sought to introduce an economically sound ‘effects-based’ approach to the application of Article 82 • Report of the EAGCP July 2005 • Adoption of the Guidance Paper February2009 • The Intel decision was the first case in which the Commission performed a price/cost test to support itsfinding of exclusionaryconduct • "This workability [of an effects-based approach] is proven by its application in such cases as the Intel rebate prohibition decision (from May 2009). We applied the equally efficient competitor test using the methodology set out in the Article 82 Guidance.“ CommissionerKroes, July 2009

4. Legal and Economic Analysis of Intel’s Discounts

5. The Decision’s Key Conclusions about Intel’s Discounts • Intel’s discounts were de facto conditional on customers purchasing all or almost all of their product requirements from Intel • In the case of HP the ‘exclusivity’ (for 95% of HP’scorporate desktops) represented 28% of HP’sx86CPUdemand • De facto conditionality is sufficient to establish an infringement of Article 82 • Intel’s discounts were capable of causing or likely to cause anticompetitive foreclosure but no need to show actual effects • Despite it being a de facto case, the Commission does not have to show a causal link between Intel’s discounts and its customers’ purchasing decisions. • The Commission can ignore factors such as product quality, suitability and availability or the cost of dual sourcing which may have impacted customer choice • Intel’s discounts do not pass an ‘as efficient competitor’ (AEC) test • The AEC test confirmsthe legal conclusion thatIntel’s discounts wereexclusionary

6. THE GENERAL COURT’S JUDGMENT

7. The Intel Judgment • Fully upholds the Commission’s decision on all legal (and factual) points: • Contractual or de facto exclusive or quasi-exclusive discounts (even if only applicable to certain market segments) infringe Article 102 without any need to show actual foreclosure or consumer harm even in an ex post case • The Commission is not required to employ a cost-based (AEC Test) to establish the potential to foreclose • AEC test toolenientbecauseeven if possible, accessmay made be more difficult • The Commission does not have to establish a direct causal link between the discount and customer’s purchasing decision • No de minimis threshold under Article 102, but foreclosure of 14% of worldwide demand is ‘significant’ • The competitive performance of the dominant firm’s rival (which outperformed itself during the infringement period) is not relevant to the assessment of abuse • The fact that customers may offer exclusivity in order to get more favorable pricing is irrelevant

8. The Intel Judgment • “In reaching these conclusions the Court distinguished between three types of rebate systems: • Type one – presumptively legal quantity rebates. Non-retroactive quantity rebate systems linked solely to the volume of purchases in which the dominant supplier passes on the costs savings from higher volume purchases. • Type two – per se illegal exclusive/quasi exclusive rebates conditioned on the customer's purchasing all or most of its requirements from the dominant firm which will always infringe Article 102 except in exceptional circumstances where they can be objectively justified by efficiencies. • Type three loyalty-inducing rebates which are not directly conditioned on near or total exclusivity but which may have a loyalty-inducing effect (Michelin I and Tomra). If, after consideration of "all the circumstances” (how the rebate is structured and its economic justifications), a loyalty-inducing effect is established, the rebate is per se illegal. • With both Type 2 and Type 3 rebates there is no need to show actual foreclosure or apply an AEC test and there is no de minimis threshold.

9. The Intel Judgment • Naked restrictions. Pricing conduct that has no objective justification other than to exclude a rival constitutes a naked restriction and infringes Article 102 • Intel’s conduct was part of a long-term comprehensive strategy to foreclose AMD from the strategically most important sales channels • The Commission does not have to produce direct evidence of the existence of a coherent anti-competitive plan but may demonstrate the existence of such a plan by a body of evidence

10. The Significance of the Court’sJudgment

11. The Significance of the Court’s Judgment • What’s new • No need for price/cost test to establish infringement; price cost test is too lenient since even if access possible it may still be more difficult • Extension of Hoffmann-LaRocheto a de facto case with murky facts • Finding that purchase requirement for 95% of HP corporate desktop was exclusive even though it represented only 28% of HP’s demand for x86CPUS • 95% requirement is different than 28% requirement • Length of contractual exclusivity not relevant • Use of term ‘naked restriction” Pricing conduct that has no objective justification other than to exclude a rival constitutes a naked restriction and infringes Article 102 • What’s not new • Exclusivity rebates per se illegal if not objectively justified • No need to show actual effects, causality or consumer harm • No de minimis threshold under Art 102 • Reaffirms special obligations of dominant firms and static view of dominance

12. The Significance of the Court’sJudgment • The Inteljudgment has been defended on the grounds that: • It iseconomicallycoherentbecauseitis consistent with the Treaty’s goal of preservingundistortedcompetition (as opposed to enhancing consumer welfare) • It is « effectsbased » becauseitconsiders the impact of exclusivity on the goal of preservingundistortedcompetition • An effectsbasedanalysisshouldconsider not only the effects of the business practice but alsoothereffectssuch as enforcementcosts, legalcertainty and allocation of risk • The Intel Courtapplies standards that are clear, predictable and administerable

13. The Significance of the Court’sJudgment • The AEC test has been criticizedon the grounds that: • It is not suited to the purpose of ensuringundistortedcompetition • It isinconsistentwith the objectives of the EU Treatiesbecauseitwouldtolerate exclusion of competitorsthat are not sufficiently efficient • It conflatesexclusivitywithpredatorypricing by assumingthatexclusivityinvolvesdiscounting • It assumes thatcustomers value price to the exclusion of quality or diversity of supply • The competitiveprocessisalsoharmed if rivals’ profitabilityisreducedor theirmarketaccessis made more difficult • It isresource-intensive and hard to administer

14. The Significance of the Court’sJudgment • Thesecriticismsraise the following questions: • What do wemean by ‘undistortedcompetition’? • Whatis the goal of antitrust enforcement? • Does intervention absent evidence of harm best protect the competitiveprocess and itsdiscoverypotential?

15. The Significance of the Court’sJudgment • On the latter point, Giuliano Amato notes that In the US, antitrust law delays intervention to the last, leaving the market to provide as far as possible by itself for a definition of its own dynamics and its own equilibria: only imminent risk, with no alternatives, of output restriction justifies and permits intervention. The EU seeks to prevent the risk emerging and inserts itself more frequently and earlier into ongoing market dynamics, seeking to influence their structure. The first approach sets the boundary of public power as far ahead as possible, accepting the risk of private power; the second does not accept that risk and instead runs the risk of preventive intrusions by public power.

16. The Guidance Paper • Consequences for the Article 102 Guidance Paper • Withdrawal • Awaitoutcome of Intel ECJappeal • Continued use of AEC as a priorityscreen but not in decisions