When the chips are down
Competition investigation isn't just the domain of big companies such as Intel.
The long-running competition investigation into the world's largest chip maker, Intel Corporation (Intel), has taken some interesting turns over recent months and looks set to provide us with a suitably instructive finale. Given the competition authorities' inclination to investigate an industry or market sector from top to bottom once they have got their teeth into it, what does the Intel situation reveal about potential pitfalls for other businesses in the engineering and technology markets?
The investigations into Intel's activities started in 2001 with a complaint made by Advanced Micro Devices (AMD) to the European Commission (EC). AMD's complaint alleged that Intel was abusing a dominant position in the market for the x86 microprocessors used in the Microsoft and Linux operating systems. It's important to be aware that being dominant in a particular market, in and of itself, is not forbidden by competition legislation and need not necessarily be of concern. However, a dominant firm will always need to behave cautiously in its market sector to avoid falling foul of Article 82 of the EC Treaty, which governs abuse of a dominant position.
AMD's complaint was that Intel had attempted to force AMD out of the market using several different economic techniques. AMD accused Intel of forcing customers to enter into exclusive agreements with cash payments, large rebates or discount incentives and marketing subsidies. The complaint also alleged that Intel had instigated technical standards for products and stocking quotas, which were designed to handicap AMD. AMD asserts that Intel's anti-competitive activities were designed to coerce companies not to deal with AMD's products and cites instances of Intel forcing manufacturers to boycott AMD's product launches and promotions.
Commonly, investigations by the competition authorities will start as a result of a complaint either by a competitor or by a customer who has been affected by the activities of a particular company. Such complaints may be focused on anti-competitive practices or agreements between businesses (covered by Article 81 of the EC Treaty) or on a business abusing its dominant position in a market as in the Intel case. Once a complaint has started the ball rolling, the competition authorities tend to develop and progress their investigations throughout an industry sector, discovering new infringing parties and activities as they work their way up and down the supply chain.
At the break of dawn
The competition authorities will often use the 'dawn raid' as a tool for progressing its investigations. A dawn raid is a speculative, unannounced visit made by a competition authority to a business or businesses that it suspects of anti-competitive activity in the hope of surprising those who have been taking part in such activity. Although commonly referred to as dawn raids the competition authorities do not have a right to force entry, so will usually start simply at the beginning of the business day when the first members of staff arrive at an organisation.
Following the 2001 complaint, Intel received dawn raid visits to several of its offices in 2005. Given the prevalent use of such raids by the competition authorities, it is perhaps still somewhat surprising that the overwhelming majority of businesses who receive such a visit will not have preempted it in anyway. "It could never happen to us" is the common refrain.
Investigators do have to give a business a reasonable amount of time to call their legal advisors and undoubtedly this call should be made immediately upon the announced arrival of the authority. On arrival at a premises the investigators will need to hand over a copy of the document authorising the raid. This document will provide details of the purpose and scope of the investigation.
It might not be that your business has done anything wrong and a raid itself is not evidence of guilt, but this is how the web of competition investigations is spun.
A business may have had dealings with another business that is under suspicion and as a result is now the subject of investigation as well. The element of surprise is crucial to an investigation's success, so often raids will be conducted simultaneously across several businesses.
In February 2008, Intel found it was receiving a second wave of raids at its own offices and that these raids also now extended to several PC retailers with links to Intel. These included DSG International (owner of Currys and PC World) in the UK, Media Markt-Saturn in Germany and also PPR (owner of French retailer Fnac). This suggests that either this investigation has been expanded to encompass activities within the retail market or is in fact a new investigation, sprung from the existing one. The EC has not yet confirmed which is the case.
The EC, the authority with responsibility for regulating competition matters in the European Union, issued a Statement of Objections to Intel in July 2007. After six years of investigation, this Statement of Objections outlined the EC's view, setting out in writing the objections against Intel. As in all such instances, the accused party then has the opportunity to respond and, in fact, Intel requested an oral hearing, which took place in Brussels on the 11-12 March 2008. This hearing will have been closed to the public, but was Intel's opportunity to respond to the objections raised and defend its actions. Intel has always denied the accusations, pointing to the competitive nature of the market as evidence in its favour.
In its press release regarding the Statement of Objections, the EC confirmed that its preliminary conclusion was that Intel had infringed Article 82 as a result of its actions being an abuse of a dominant position. In essence, the statement outlined three types of anti-competitive activity. The first being the substantial conditional rebates provided to Intel's original equipment manufacturers (OEMs). These rebates were conditional upon the OEMs "obtaining all or the great majority" of their x86 processor units from Intel. Second, the EC believe that Intel had made payments to induce OEMs to delay or cancel product launches which involved AMD-based processor units. Third, Intel is accused of offering its processor units at a below average cost when bidding against AMD-based products.
A game of consequences
Competition authorities have various enforcement options to use against those found to be infringing competition laws. One of the greatest risks to a business are the substantial fines that can be imposed by the competition authorities - up to 10 per cent of their worldwide turnover. In 2004, Microsoft was found guilty of abusing its dominant position in the PC operating systems market after a five year investigation and so the EC imposed a record-breaking fine of €497m on Microsoft.
Other consequences of infringement include actions for damages from third parties and in the case of Intel, AMD is also pursuing its own claim in addition to the complaint made to the competition authorities. Given the power of the media and the importance of corporate reputation in the global market, adverse publicity can be incredibly damaging to an organisation. Investigations are long, drawn-out affairs, so the costs can be high both in management time and legal fees.
While small businesses may be more likely to be in breach of competition laws by entering into anti-competitive practices or agreements with other businesses, rather than by abusing a dominant position, they will find the potential consequences are no different for them. Indeed, if a smaller business finds itself on the wrong side of competition legislation the impact could be argued to be that much more significant.
Competition law should not just be a concern for global giants. In any industry, but particularly the engineering and technology sectors, the competition authority has already proved its appetite for pursuing investigations right to the end of the line. Competition compliance is not simply a management issue either, but should be something which staff receive regular training on. Indeed, a competition compliance policy and training programme has been found to be a considerable mitigating factor resulting in reduced fines being imposed on businesses found guilty of competition infringement.
Following Intel's closed hearing in March 2008, it remains to be seen whether there will be another record-breaking fine or whether the most recent series of dawn raids signal that there is still some way to go before the EC gives up its pursuit. Unfortunately for Intel, Microsoft's relationship with the competition authorities demonstrated that if it has locked horns with the EC over an abuse of a dominant position, it might find its activities under the spotlight for quite some time to come.