Suit: Intel paid Dell up to $1 billion a year not to use AMD chips

Still, the charges Lerach leveled in federal court in Austin on January 31 are hard to ignore. For one thing, they are tantalizingly detailed–describing, for instance, the goings on at “weekly server group staff meetings” and “quarterly server group town hall meetings” at Dell–suggesting that a Dell insider might be cooperating with Lerach. In any case, if the claims turn out to be true, the Olympian reputations of Intel founder Andy Grove and Dell founder Dell could be due for some unflattering makeovers–like those endured by sluggers Mark McGwire and Barry Bonds after the BALCO steroid inquiry.

Lerach’s suit alleges, among other things, that from at least 2003 to 2006 Dell received massive, undisclosed, end-of-quarter rebate payments from Intel in exchange for Dell’s agreement not to ship any computers using microprocessors made by Advanced Micro Devices (AMD). The payments were allegedly never less than $100 million per quarter and, in at least one year, totaled about $1 billion. (During this period Dell represented about 20% of the worldwide market for the x86 processors both Intel and AMD made.) Intel forbade Dell from disclosing the payments, the complaint says, so as not to draw scrutiny from antitrust regulators. The payments were allegedly known to only about 15 top Dell officers, and were negotiated with personal involvement by Grove, Michael Dell, and Rollins. Since 1999, according to the complaint, Dell Computer would secretly design AMD-powered computers every year, but it would never ship them “due to the large sums of money the Company would lose from Intel for breaching the exclusive Dell/Intel processor relationship.” These payments were allegedly in addition to, and nearly an order of magnitude larger than, the “market development funds” that Intel was known to be paying Dell and other customers under co-branding programs like “Intel Inside.” Lerach’s suit, which is brought on behalf of several institutional Dell shareholders, alleges only securities law violations, not antitrust claims, and names Intel and PriceWaterhouseCoopers (Dell’s accountants) as co-defendants.

A Dell spokesperson declined comment on the suit. In a telephone interview, Intel spokesman Chuck Mulloy was extremely dismissive of it. “Our preliminary review suggests that much of it is largely made up,” he says. “We plan to move very quickly to defend ourselves.” He also stresses that neither the SEC nor Justice Department investigators have ever approached Intel in connection with their on-going probe of accounting issues at Dell, which started, according to Dell’s disclosures, in August 2005. That SEC probe is thought to focus on possible earnings manipulation relating to the way Dell accounted for warranty revenue and expenses.

Still, Lerach’s allegations have a ring of plausibility about them, in that nearly everyone in the industry has wondered why it took Dell until late 2006 to begin offering AMD-powered computers, when AMD’s microprocessors were widely seen as having attained technological superiority over Intel’s by early 2003. The complaint’s accusations also raise eyebrows because they dovetail so explosively with allegations AMD made in a mammoth antitrust suit it filed against Intel in Delaware federal court in June 2005. (See “Intel’s Worst Nightmare,” here, about that case.) (About 80 antitrust class actions have subsequently been filed against Intel on behalf of consumers seeking treble damages from Intel for allegedly having paid inflated computer prices.)

The centerpiece of AMD’s suit was the claim that Intel was paying so-called loyalty rebates to numerous major computer makers in exchange for varying degrees of exclusivity–80%, 90%, and, in some cases, 100%. In March 2005 the Japan Fair Trade Commission had found that Intel was, indeed, paying such rebates to five major Japanese computer makers (presumably Sony, Toshiba, NEC, Hitachi, and Fujitsu, though the companies are unnamed in the public version of the JFTC order) and that the rebates violated Japanese competition law. (Intel settled the JFTC matter shortly thereafter without admitting wrongdoing.) In its suit AMD alleges that Intel has been paying manufacturers so-called first-dollar rebates, meaning that at the end of the quarter, if the customer has achieved the level of exclusivity Intel seeks, it will get a retroactive discount on every Intel processor it purchased that quarter; if, on the other hand, it falls short, it gets nothing. Unlike conventional volume discounts–from which consumers can only benefit–many competition authorities believe loyalty rebates can become illegally coercive and exclusionary when offered by a dominant industry supplier. (Intel supplies about 80% of the worldwide market for x86 processors.)

Intel has so far insisted–notwithstanding the JFTC ruling–that it does not use such rebates. “We don’t buy exclusivity,” Intel general counsel Bruce Sewell told Fortune last fall, staking out the position his company still stands by. “We offer a discount program,” he said then, “which is stepped at basically 20%, 40%, 60%, 80%. So if you buy below 20%, you get no discount. If you buy 20% to 40%, you get a discount, but it applies only to the units between 20% to 40%. . . . You don’t have this dramatic incentive, where you get nothing below 90%, and everything above 90%. In our view, this is a very traditional discount that scales with volume.”

CORRECTION: Earlier version incorrectly referred to Bobby Bonds, when I meant his son, Barry. Thanks to “Bob in St. Louis” for noticing.