Intel open to Intergraph settlement

Intel is making settlement overtures to Intergraph in an effort to end a legal dispute that has become a central issue in the Federal Trade Commission's investigation into Intel's business practices.

Intel's is adopting its conciliatory posture as the FTC considers filing its own legal action by the end of the month. That case would focus on how Intel allegedly uses chip supplies to coerce computer vendors, according to sources.

Last year, Intergraph filed an extensive federal lawsuit against Intel principally alleging that the chipmaker arbitrarily cut off Intergraph's supply of microprocessors because it refused to license Intel technology. Intel has denied the merit of the suit.

While a settlement wouldn't guarantee the FTC action would disappear, it could relieve some of the impetus for a claim. By way of disclosure, Intel is an investor in CNET: The Computer Network.

Intel spokesman Chuck Mulloy did not comment on any connection between the ongoing FTC investigation and the Intergraph case, but said that Intel has expressed its interest to Intergraph in settling the case a number of times.

"We have indicated our willingness to Intergraph to find a solution outside of court," he said. "They know we are interested" in an out-of-court settlement. Intel is also continuing to cooperate with the FTC, he added. "We are continuing to provide them with information and talk with them."

An Intergraph spokesman denied that any settlement discussions are currently taking place. The two companies regularly discussed settlement before the case was filed last year, the spokesman said, and high-level discussions continued to take place until right before the suit was filed. Since the case was filed, however, all discussions have taken place through the court system.

Intergraph did report that the FTC has been in contact with the workstation vendor on a weekly basis and that the agency is contemplating a suit that revolves around issues similar to those raised in Intergraph's suit.

"Due to the similarity between our lawsuit and the case the FTC is investigating there is a natural interest on their part into the circumstances of our case. They are very interested in the information we have and we have had multiple requests from them for input," the spokesman said.

A number of sources have said that the FTC is considering two separate suits against Intel. The first case, which could be filed by the end of May, would center on whether Intel uses its dominant market position in microprocessors and chipsets to extract concessions from vendors. The second suit would examine whether Intel's control of its intellectual property raises anticompetitive concerns.

Of the two, the first suit is more likely to be filed, said sources close to the FTC. If it is, the FTC would likely assert that Intel technology is a necessity, or an "essential facility," for computer vendors; therefore Intel cannot summarily terminate alliances or customer relationships. Essential facility is an established doctrine of antitrust case law, but has never been applied to the computer industry.

Jeff Kingston, an antitrust expert with Brobeck, Phleger, and Harrison, earlier told CNET's NEWS.COM that the essential facility doctrine has not been conclusively applied to intellectual property (IP) in U.S. courts, but that there is no reason it can't.

"We live in an age where IP is more valuable than physical property in every way," he said, stating that European jurisdictions already apply analogous doctrines. The court could also use other theories to prove a coercion case, he added.

Evidence that might support the claims for the first suit came out in Intergraph vs. Intel. A trial court recently filed an restraining order preventing Intel from treating Intergraph differently from other large computer vendors during the trial and cited, among other doctrines, the essential facility rule. The decision also cites a number of hardball tactics allegedly used by Intel to force concessions from the Alabama workstation maker.

Among the highlights of the decision:

• Wade Patterson, president of Intergraph's hardware division, stated under sworn affidavit that Intel requested a free license for Intergraph's "Clipper" processor technology. When it was refused, Pat Gelsinger, an Intel vice president, peremptorily said that Intel would refuse to enter into further non-disclosure agreements (NDA), a move which would prevent Intergraph from releasing workstations the same time as its competitors. "The evidence suggests that Intel has used the threatened or actual termination of NDAs as a contractual weapon," the court wrote.
• Intergraph testified that Intel representative Keith Johnson promised to deliver key development information on Pentium II "Deschutes" chips prior to release of the processors so that Intergraph could prepare its own products. Intergraph never got the chips or information prior to the release of the chips. In fact, on the day the chip was released, Johnson told Intergraph that Intel would not be shipping chips to the company, thus forcing Intergraph to delay a workstation and cancel various server and motherboard projects.
• Intel failed to inform Intergraph of a bug in its processor and then used the termination of the NDA to prevent Intergraph from getting testing equipment from a third source to search for the bug. "The court can find no legitimate business justification for the bug," the court wrote.

Intel, for its part, has asserted a number of defenses, including a defense that Intergraph already has access to the patents in question. Intergraph acquired the Clipper technology from National Semiconductor, it said. National and Intel have a long-standing cross-licensing agreement, which gave Intergraph access to Clipper.

Intel is also pointing out that Intergraph's Clipper claims only came to the company indirectly. Intergraph threatened legal action against a number of other computer vendors alleging that the companies were infringing on their Clipper technology, according to documents filed with the court. These companies then went to Intel.

While this second case would be more far-ranging, it could be a difficult one to win, say analysts. As first reported, many of Intel's processor and chipset competitors have been able to get their hands on Intel's intellectual property through a series of cross-licensing agreements. And, while no processor vendor has announced plans to make a Pentium II-style chip, nearly all of the chipset vendors are on track to come out with chipsets for the Pentium II that would compete against Intel's product.

"It potentially could be a moot point," said Dean McCarron, principal at Mercury Research.

IBM, National, Siemens, and others have patent licenses that give them access to the intellectual property necessary to make Pentium II chips and chipsets also to manufacture them for others, according to several sources.

Some companies have already taken advantage of the various license agreements. Both Compaq and Micron, for instance, use their own Pentium II compatible chipsets in select products. Via Technologies is scheduled to come out with a Pentium II-compatible chipset in a month, company executives have hinted, while sources say Acer will also release a competing product.

Still, as Judge Edwin Nelson pointed out in his lengthy decision in Intergraph vs. Intel, no competitor has yet to release competing products for sale. Further, even if one of the competitors decided to come out with a competing Pentium II chip, it would take two years to develop, a delay which could lead to Intergraph's demise.

NEWS.COM reporter Dan Goodin contributed to this report.