Is AMD an American company?

The ruling was that the U.S. court had no subject matter jurisdiction over portions of AMD’s complaint, because those allegations involved “foreign commerce.” U.S. District Judge Joseph J. Farnan, Jr., was interpreting the Foreign Trade Antitrust Improvements Act of 1982, which dictates that the Sherman Antitrust Act “shall not apply to conduct involving trade or commerce … with foreign nations unless … such conduct has a direct, substantial, and reasonably foreseeable effect … on import trade … or … on export trade.” (To read Judge Farnan’s ruling, click here.)

At one level the ruling might sound dumbfounding, while at another it makes perfect sense. Those who drop their teeth when they read it look at the dispute this way: AMD and Intel are each unambiguously American companies whose headquarters are about a mile-and-a-half away from one another in Silicon Valley. (AMD’s exit off U.S. 101 is called Sunnyvale, while Intel’s is called Santa Clara.) They are each incorporated in Delaware, where AMD sued. (It sued there because of federal appellate precedents there which its lawyers find encouraging.)

Each company competes with the other globally; i.e., they sell a large number of microprocessors to customers here in the United States, and they export the rest to foreign customers. So if Intel were, as AMD alleges, illegally leveraging its monopoly power in, say, Japanese, Chinese, German and U.K. markets — allegedly bribing and threatening customers into filling 90 percent to 100 percent of their chip needs with Intel products — and if it were doing so in an effort to preserve its monopoly on the global x86 market, why wouldn’t a U.S. court have jurisdiction over the whole conspiracy?

In fact, Intel acknowledges that a U.S. court unambiguously would have had jurisdiction over all aspects of AMD’s beefs with Intel until 2002. But in that year AMD finally phased out the last of its silicon fabrication plants on U.S. soil, and began relying exclusively on fabs set up in Dresden, Germany. So Intel argues that AMD can no longer claim to be exporting American chips around the world. Instead, it is now engaged largely in foreign commerce: Its chips are made in Germany, tested and assembled in Malaysia, Singapore and China, and then sold to customers who are, more than 70 percent of the time, according to Intel, also outside the U.S.

Accordingly, argues Intel, the U.S. court now has antitrust jurisdiction only over those portions of the case that involve chips returning to this country — either because they are sold to computer makers here (e.g., Dell, HP, or an American subsidiary of Sony), or to retail consumers here (e.g., someone entering a Circuit City in Peoria and emerging with, say, an AMD-powered Hitachi notebook).

AMD protested, among other things, that it actually was still in the business of “exporting” chips, in that it continues to design its chips in this country, though it has set up its manufacturing facilities abroad. (AMD is not outsourcing its chip manufacture; AMD’s German fabs are owned by a wholly-owned AMD subsidiary.)

“We live in a world economy,” AMD’s lead outside counsel Chuck Diamond argues to me in an interview, “where the U.S. is very much involved in the export business although [actual] encasing its intellectual property in physical manifestations may be the last, and a small part, of the value-added stream. To say AMD is not an exporter of American made product because the silicon packing occurs abroad is like saying Warner Bros. is not in the business of exporting motion pictures for home viewing because its DVDs are stamped in Mexico.” (Diamond is with O’Melveny & Myers in Los Angeles.)

Nevertheless, in applying the 1982 Act, Judge Farnan agreed with Intel, and struck more than 20 meaty paragraphs from AMD’s complaint. The parties don’t yet know how important, in practice, the ruling will be. At one extreme, the ruling could mean that the foreign commerce allegations that have been stricken from the complaint have been knocked completely out of the case and that AMD cannot, therefore, even seek discovery about those acts in order to show a jury the role they allegedly played in harming AMD in this country. In that case, AMD may not be able to prove its case at all.

Alternatively, a very narrow interpretation of the ruling would allow AMD to still prove all aspects of its case, while simply limiting its damages recovery if it were ultimately to win its case many years down the road. In that event, for instance, AMD might be limited to recovering damages relating to lost sales in the United States–which could still be a very big number, especially when trebled as antitrust damages awards can be. Moreover, AMD would still be able to pursue its foreign damages in foreign forums.

At a hearing on September 27, Intel’s outside counsel Peter Moll, of the D.C. office of the Howrey law firm, said that Judge Farnan’s ruling should “dramatically narrow” the scope of discovery, though he did not get into specifics. Only after a special master rules on the crucial discovery impact of the ruling will we really know what Judge Farnan’s ruling means, and only then will AMD decide whether to seek to appeal it. (Judge Farnan has set an “immovable” trial date for April 27, 2009.)

What do people think of this 1982 Act, and Judge Farnan’s interpretation of it so far? When Congress passed the act, it evidently wanted federal courts and enforcement authorities to show deference to the competition authorities of our foreign trading partners. There’s little question that AMD’s case against Intel implicates many of the precise concerns Congress had at that time. In addition to the Delaware case, AMD has brought two civil cases against Intel in Tokyo, and has voiced grievances about Intel’s practices to government regulators with the European Commission’s Directorate-General Competition, the German Federal Cartel Office, the Japanese Fair Trade Commission, the Korean Fair Trade Commission, and maybe others. (The WSJ also reported on October 4 that the EC is now vetting a draft of formal charges investigators would like to bring against Intel before an internal “devil’s advocate” panel of legal experts. These proposed charges are apparently the culmination of an on-again, off-again probe that EC investigators have pressed for more than five years. Click here for that story.)

Obviously, there does need to be some mechanism to prevent double recoveries and the like. But is the 1982 Act the right solution? Did Judge Farnan correctly interpret it? What should the special master do? What do people think?