Findings of Fact
There seems to be many versions of what exactly happened in the 80s chip war/truce. Here are the facts as accepted by the Calf. Supreme Court. I've deleted some of the irrelevent text. Overall, it appears both sides were partially at fault, though Amd's "inertia" prevented the award of hundreds of millions in damages for intc's breach of good faith and fair dealing. (see footnote 4)
885 P.2d 994
December 30, 1994, Decided
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FACTS AND PROCEEDINGS
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AMD and Intel are both engaged in the creation, design, production and marketing of complex integrated circuits, also known as computer chips. In the period 1978-1981 both
AMD and Intel were pursuing strategies for producing and marketing 16-bit microprocessors and the 32-bit microprocessors that were expected to follow. AMD was
attempting to secure entry into this market through an agreement with a third chip maker, Zilog, while Intel had developed its own 16-bit microprocessor, the 8086. Intel, needing another producer to "second source" n2 the 8086, approached AMD.
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n2 The chip makers' customers, computer manufacturers, frequently prefer a product be made by more than one source, as this helps ensure competition and a reliable supply. Hence the common practice of second sourcing, in which the company developing a product licenses to another company the right, for a royalty, to make and sell it. ,
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Intel hoped to establish the 8086's basic architecture, known as iAPX, as the market standard, guaranteeing future sales of the 8086's expected progeny as well. AMD, having had what it saw as a bad experience in a previous second-source agreement with Intel, wanted to be sure it would not be cut off from second-sourcing future generations of the 8086 family. In addition, reaching an agreement with Intel would mean abandoning AMD's relationship with Zilog; AMD therefore sought a long-term arrangement.
The parties entered into the contract at issue in February 1982. According to its preamble, the agreement was intended "to establish a mechanism for exchanging technical information so that each party acquires the capability to develop products suitable for sale as an alternate source for products developed by the other party." During
the 10-year term of the contract (cancelable after 5 years on one year's notice by either party), either company could elect to be a second source for products offered it by the
other. The nondeveloping company would receive technical information and licenses needed for it to make and sell the part. The developing company would receive a royalty.
In addition, the developing company would earn the right to be a second source for products developed by the other party. The terms of exchange--the respective value of
the products--were to be calculated by a specified equation from the complexity and size of the parts.
The parties had fundamentally different views of the contract. AMD believed the agreement created a partnership or joint venture under which the two companies would agree in advance on products to be developed by each of them, avoiding duplicative research expenditures and guaranteeing each a more complete product line. Intel, on the other hand, saw the agreement as "little more than an armed truce," in which each proposed second-source agreement was to be the subject of combative bargaining with no
continuing obligations from episode to episode. The arbitrator rejected both extremes, finding that, "while a party was not obligated to act substantially against its self interest in deciding to transfer or accept a part, there was an implied covenant to make the relationship work which obligated a party to consider in good faith ... the purposes of the contractual relationship ... and to negotiate reasonably to accomplish this purpose. If it could not do this it should terminate the arrangement--as Intel finally did." n3
The purposes of the agreement, according to the arbitrator, were expansion of product line and savings on research and development.
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n3 Intel gave notice of termination in April 1987, after AMD petitioned for arbitration.
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The contract provided for arbitration of "disagreements aris[ing] under this Agreement
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final and binding resolution of the disagreement." Disagreements over product exchanges led AMD to petition the superior court to compel arbitration in April 1987
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After hearings in superior court, a temporary judge (who was also the chosen arbitrator) made an order of reference
stating the issues for arbitration and providing, as to each issue, that "the Arbitrator is
authorized to fashion such remedy as he may in his discretion determine to be fair and
reasonable but not in excess of his jurisdiction."
The arbitration lasted four and one-half years and included three hundred and fifty-five days of hearings. As the current dispute focuses narrowly on two items of relief awarded, only a small portion of the arbitrator's extensive findings need be summarized here.
Under the contract AMD could initially obtain second-source rights to Intel's 8086 chip and other specified products for cash. After 1985, AMD would have open access to Intel's
product line if Intel accepted AMD products of sufficient value, as determined from the complexity-size formula. In 1984 the parties negotiated an amendment to the contract,
under which AMD was to second source the successors of the 8086--the 80186 and 80286--in exchange for substantial royalties to Intel. Intel also agreed at that time to
accept certain AMD products then in development, conditional in some instances on final specifications. The arbitrator found that "f Intel took all these
products, or even some of them, AMD would have access to the Intel line of products without restriction--and no royalties."
The arbitrator found Intel extensively breached its obligations to act in good faith and deal fairly. Beginning in mid-1984 Intel, anxious to be the sole source for the 80386 (its 32-bit chip, which was to prove vastly successful) and convinced the contract was to its disadvantage, decided to frustrate the operation of the contract by taking no more products from AMD. Intel also resolved to keep this decision from AMD and the public,
leaving AMD and others in the industry with the belief AMD would be a second source for the 80386. This "ke[pt] AMD in the Intel competitive camp" and avoided public
knowledge of Intel's sole-source strategy for the 80386, a strategy Intel feared could limit its market if known. n4 The plan succeeded: AMD continued for about two years to
believe, incorrectly, its agreement with Intel "had a future."
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n4 The arbitrator relied on numerous Intel internal memoranda produced during the
arbitration. An October 1984 memorandum states the Intel strategy succinctly: "*Assure AMD they are our primary source through regular management contact and formal
meetings. [P]* Take no more AMD products under the current agreement." In 1985 an Intel manager described the company's objective this way: "Keep AMD in the Intel
camp." THE SAME NOTE CONTINUES: "Key point--we are in no hurry. We don't need a 386 2nd source, especially since everyone assumes AMD will be one." A 1986
memorandum articulates this strategy: "Maintain a second-source, business as usual posture in the marketplace.... Our strategy is to keep talking .... We do not want them
[AMD] to go on to Hitachi or NEC, and should not stimulate them to do so."
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One concrete example of Intel's failure to negotiate in good faith was its treatment of AMD's Quad Pixel Display Manager (QPDM), a graphics chip. Although Intel promised in 1984 to accept the QPDM from AMD provided the parties agreed on its specifications, the arbitrator found Intel made no actual attempt to negotiate the remaining differences as to specifications. Instead, partly in order to avoid having both to give AMD the 80386 and to eliminate royalties on other products, Intel summarily rejected the QPDM. In doing so, the arbitrator found, Intel breached the implied covenant of good faith and fair dealing as well as "its implied covenant to negotiate reasonably to further the goals of the relationship between the parties ...."
The arbitrator also found, however, Intel was not obliged under the contract to accept the QPDM or other products that would have earned AMD the 80386 rights. Apart from Intel's breach, moreover, the arbitrator found AMD had unnecessarily delayed in seeking alternative ways to enter the 32-bit chip market. Having inferred by mid-1985 that Intel was not going to accept the AMD parts that could earn AMD the 80386, AMD should have sought arbitration at that time or immediately begun reverse engineering the 80386 when it became available in July 1986. n5 Instead, AMD did not begin reverse engineering the 80386 until a later time and did not produce its own 80386 chip--known
as the Am386--until March 1991. "In short, Intel's plan succeeded ... because of AMD's inertia." For this reason, the arbitrator declined to award AMD the hundreds of millions of dollars it sought in lost 80386 profits.
Despite AMD's delay, the arbitrator found AMD had actually been damaged by Intel's breach: "One knows that AMD lost some goodwill as the result of the Intel
conduct; one knows that AMD lost some profits from not having the 80386 as the result
of the Intel conduct .... The actual damages are immeasurable; and nominal damages only are inequitable." (Underlining in original.) The proper remedy, the arbitrator decided, was to relieve AMD from "legal harassment by Intel over AMD's alleged use of Intel intellectual property in the reverse engineered AMD 386."
The arbitrator therefore awarded AMD a permanent, nonexclusive and royalty-free
license to any Intel intellectual property embodied in the Am386 (paragraph 5 of the award). He also awarded AMD a further two-year extension of certain patent and
copyright licenses, insofar as they related to the Am386, that originated in a 1976 agreement between the parties, which had been extended under the 1982 contract to 1995
(paragraph 6 of the award). The arbitrator designated these items as remedies for breach of the covenant of good faith and fair dealing, as well as for failure to negotiate in good faith over the QPDM specifications and for other breaches .... |
