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JFTC Challenges Intel's Rebate and Marketing Programs: Key Implications for Doing Business in Japan

3/10/2005
Client Alert

On March 8, 2005, the Fair Trade Commission of Japan ("JFTC") challenged certain rebate and marketing programs of Intel Corp.’s Japanese subsidiary, Intel K.K., and recommended in a proposed order that Intel eliminate certain exclusivity conditions imposed on five Japanese PC manufacturers receiving price rebates and advertising subsidies for purchases of Intel’s microprocessors.  

Key Implications

The key implications of the JFTC’s challenge to Intel’s conduct are:

  • The case is a further sign of the growing level of antitrust enforcement in Japan.  During the past year, for example, the JFTC has brought enforcement actions against prominent firms, including U.S. companies, with global operations like Microsoft, NTT East, Citibank, J-Phone (Vodafone), Twentieth Century Fox and now Intel.  The JFTC has also recently issued new merger guidelines and proposed legislation to strengthen Japan’s Anti-Monopoly Act ("AMA").  Given the importance of Japan in today’s global economy, particularly in information technology industries, we expect that the JFTC will likely play an increasingly significant role in global antitrust enforcement efforts in the future.  
  • The Intel case provides additional insight into the JFTC’s analysis of conduct it considers to be unlawful "private monopolization."  While the AMA indicates that it only prohibits conduct that "excludes or controls the business activities of other entrepreneurs" if that conduct also causes "a substantial restraint of competition in any particular field of trade," the JFTC’s analysis in the Intel case appears in some respects to presume that the exclusion of competitors by a particular practice automatically results in a substantial restraint of competition.  The JFTC’s proposed order contains virtually no discussion of how the alleged harm to these competitors will result in adverse consequences to the PC manufacturers that purchase the relevant products and does not explain why the competitors were unable to match the price discounts or subsidies offered by Intel to retain the business of these customers. 
  • Companies doing business in Japan with large market shares should therefore carefully evaluate the potential antitrust risks of any rebate or marketing programs that may have the effect of causing Japanese customers to deal exclusively with them.  While the JFTC in the past has focused primarily on deterring price fixing activity and cartel behavior, the recent enforcement actions against Intel, Microsoft and other firms based on allegations of "unfair trade practices" and "private monopolization" demonstrate that the JFTC is more aggressively enforcing Japan’s antitrust laws to deter conduct with more subtle anticompetitive effects.
  • Finally, for firms doing business in Japan and internationally, the JFTC is increasingly coordinating with other antitrust and competition law enforcement agencies.  In the Intel investigation,  press reports indicate that the JFTC and European Commission have been cooperating on the matter, and we expect the JFTC will continue to cooperate with other authorities for future enforcement efforts.  Global businesses, therefore, need to ensure that they have effective antitrust compliance programs in place across multiple geographies to avoid costly investigations triggered by events in countries outside the company’s headquarters or primary geographic operations.

The JFTC’s Challenge to Intel’s Rebate and Marketing Program

The JFTC’s proposed order alleges that one of Intel’s chief rivals, AMD, began selling its microprocessors in 2000 at prices below those offered by Intel, and, as a result, AMD increased its share of the Japanese microprocessor market from 17% in 2000 to 22% in 2002.  In response to this action, Intel began offering the five leading Japanese PC original equipment manufacturers ("OEMs") price rebates and "subsidies" related to the "Intel Inside Program" supporting advertisements for PC manufacturers’ products using Intel’s microprocessors.  However, in order to receive these rebates and "subsidies," Intel allegedly required the PC OEMs to switch from using a competitor’s product by agreeing to either:

(1)  buy 100 % of their required microprocessors from Intel, and not use other manufacturers’ processors;

(2)  buy 90% of their required microprocessors from Intel, and only use other manufacturers’ processors in 10% or less; or

(3)  use only Intel microprocessors for certain popular or high volume lines of PC products. 

The five PC OEMs that Intel’s rebate program targeted purchase the vast majority (77%) of microprocessors sold in Japan by Intel, AMD and Transmeta between 2000-2003.  As a result, following Intel’s implementation of its rebate program, the combined shares of AMD and Transmeta declined significantly - falling from 24% in 2002 to 11% in 2003.  In addition, because the PC manufacturers relied heavily on purchasing microprocessors from Intel for certain PC products, the JFTC determined that Intel’s exclusivity conditions exclude the business activities of Intel’s competitors and restrain competition in the sale of microprocessors to Japanese PC manufacturers.  Therefore, the JFTC found that Intel’s conduct violates the prohibition against private monopolization in Section 3 of Japan’s AMA.

While the proposed order will not go into effect until the JFTC considers Intel’s expected challenge to its preliminary findings and conducts an adversarial hearing before JFTC examiners, as currently drafted, the order recommends that Intel (1) cease enforcement of these exclusivity provisions, (2) eliminate them from future sales and marketing activities and programs, (3) notify all of Intel’s PC manufacturer customers and Intel’s own employees (in a manner acceptable to the JFTC) that the rebate and marketing programs have changed and no longer require customers to deal exclusively with Intel, and (4) implement procedures for the education and training of officers and employees involved in the sale of microprocessors and for regular monitoring by Intel’s legal department.