NEWS ANALYSIS : A Pyrrhic Victory for Intel, AMD : Case Cost Chip Makers Dearly but Won't Stop Others

TIMES STAFF WRITERS

The Gargantuan legal battle between chip makers Intel Corp. and Advanced Micro Devices Inc. cost more than $100 million dollars, consumed thousands of hours of executives' time, burned out at least one general counsel and wrecked a collegial Silicon Valley friendship--and it ended Wednesday with a modest net payment of $40 million.

Was it worth it? Hardly. Will such fiascoes be repeated in the litigious high-tech industry? Almost certainly.

There was plenty of pious talk Thursday about the horrors of lawsuits, about how "nobody won" in the seven-year struggle, about how, in the words of Intel general counsel Tom Dunlap, "we'd rather put our money into paying engineers . . . than lawyers."

And yet, all across the high-tech industry, companies obviously believe that in many situations, fighting in court can be good business. Copyright lawsuits are rampant in the software business. Compaq Computer, a staunch critic of Intel's aggressive tactics in the microprocessor business, has itself filed a patent infringement suit against Packard Bell.

About the only clear lesson anyone seemed to be taking Thursday was to be cautious about the wording of technology-sharing contracts, the better to stay out of court--or to win if you land there.

"This is a lesson for us to be concerned about what intellectual property rights we give to others," said James Pooley, a lawyer in nearby Menlo Park. "You can't be clairvoyant about the industry, but you can be careful."

At a time when alliances and partnerships of all stripes are the rage in the industry, not enough attention is being paid to who owns the new information and ideas that come out of such collaborations, Pooley said.

Another question is whether Intel, a notorious litigator which has used lawsuits as a weapon whenever the opportunity has presented itself, is seeing the strategic merits of a gentler approach. The company has now resolved most of its outstanding high-profile cases against its rivals, including Cyrix and ULSI.

Battered by a public relations fiasco over a flaw in the Pentium computer chip and more vulnerable than ever to competitors, Intel may have decided that its go-for-the-jugular business philosophy--so evident in the courtroom--was doing more harm than good.

Dunlap denies that is the case. But employees speak privately about being sick of the whole matter.

Retired Judge J. Barton Phelps, who spent an almost unheard-of 4 1/2 years arbitrating a key aspect of the battle, acknowledged that most laypersons might view the whole episode as a big waste of time and money. He maintained, however, that the issues were complex and deserved to be aired.

"It was so complicated that the parties had to have a forum in which to ventilate their differences," he said. "It would have taken far longer in court."

The legal rumpus began in 1987 after the collapse of a 1982 agreement between the companies to collaborate in the development of microprocessors and other products. Each accused the other of failing to honor the terms.

Santa Clara-based Intel, the world's leading semiconductor maker, filed several suits in an effort to protect its chips from being illegally copied; for its part, AMD maintained that it had the right to use certain Intel technologies. The clash shattered the friendship of Intel Chief Executive Andrew Grove and W.J. (Jerry) Sanders III, AMD's flamboyant CEO, who haven't spoken since 1986.

Most important for AMD, the settlement terms announced Wednesday free it of an albatross of litigation that had threatened at times to saddle the Sunnyvale chip maker with hefty damage payments to Intel.

AMD agreed to pay Intel $58 million--instead of the $1 billion Intel had sought--and to limit the number of its 486 clones to be made by outside foundries. (Intel will pay AMD a mere $18 million, a pittance compared to the more than $2 billion AMD had gone after.)

AMD also received a perpetual license to the microcode of Intel's 386 and 486 chips. It agreed not to copy any other Intel microcode, including that used in the Pentium chip. (The 386 has been largely eclipsed by technology improvements, but 486 clones such as AMD's continue to represent a highly profitable market. But the market is moving inexorably to more powerful chips such as the Pentium.)

To reflect the settlement charges, AMD on Thursday restated its 1994 earnings, reducing its net income by about $36 million--to $305 million.

Yet, as pleased as Sanders is with the settlement, the resolution came as somewhat of a pyrrhic victory.

"We'd probably be a $3-billion company rather than a $2-billion company" if it weren't for the legal tussle, he said. The reason, he explained, is that AMD could not make enough chips to satisfy customers' demands. With the litigation hanging over its head, lenders were reluctant to finance the construction of new fabrication plants.

"Any time this kind of litigation is settled, it's good for the industry," said Safi Qureshey, chief executive of AST Research, a personal computer maker based in Irvine. "It frees up energy that was being drained." However, he added, "I'm not sure what was positive about all this."

And for many individuals involved, the toll was immense.

"This was something (my colleagues and) I lived with day and night," said AMD general counsel Thomas Armstrong, 54, whose stressful experience contributed to his decision to resign last spring. "I'd wake up at 4. I'd lie awake in bed, terrified. To paraphrase Napoleon, no man is a hero at 4 in the morning."

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