Intel sues Digital, alleging breach of contract World's top chip maker retaliates after firm's patent-infringement charge

THE BALTIMORE SUN

SANTA CLARA, Calif. -- Intel Corp. sued Digital Equipment Corp. yesterday for breach of contract and raised the possibility that the chip maker may stop sales to Digital, two weeks after Digital accused Intel of patent infringement.

Intel is asking Digital to return documents and materials regarding Intel's future processors and related technology used in personal computers.

Intel also wants Digital to clarify top executives' statements about a long-standing "supply agreement." Intel said no agreement exists other than standard purchase orders.

The suit and threat of cutting off Digital's chip supply was simply a matter of time, analysts said, as Intel flexes its muscles as the world's largest chip maker. While Intel stands to lose little if the relationship ends, Digital jeopardizes the quarter of its computer line that uses Intel's chips.

Digital Chairman "Robert Palmer started the war and now the other side is getting more engaged. I don't see any way Digital comes out ahead," said John Rutledge, an analyst at Loomis, Sayles & Co., which owns stock in both companies.

Digital's stock fell $1.25 to $36 yesterday. Intel's shares fell $2.1875 to $167.125 and were the second most active in U.S. trading, with more than 13.8 million changing hands.

Intel filed its suit in U.S. District Court in San Jose, Calif. The suit covers information and documents given to Digital by Intel so that Digital could do advanced engineering work to get its computers using Intel chips to market quickly. Intel had given Digital data and prototypes of processors that are still under development and not due to be released until 1998 and 1999.

Intel also canceled meetings with Digital engineers and requested the return of documents and parts. Digital hasn't returned either, according to Intel.

Digital said it expected the suit but has seen no disruption in its supply of Intel chips.

Analysts and investors still believe the two companies will try to settle the suits rather than engage in a long legal battle that could cost as much as $200 million.

"I would expect a settlement in a year or so," said Graham Tanaka of Tanaka Capital, which has $240 million under management and owns Intel stock. Before that, Tanaka said, he expects more legal wrangling as the firms try to get a leg up in negotiations.

Two weeks ago, Digital sued Intel, claiming that the chip maker used technology in 10 Digital patents in its Pentium Pro and Pentium II processors. That suit came as a surprise, analysts said, because usually the two companies would have tried to settle the dispute in negotiations before filing suit.

Digital is both a customer and a competitor of Intel's, and that competitive relationship threatens its status as a customer. Digital makes the Alpha chip, a processor used in high-end workstations and server computers. The Alpha is the world's fastest processor and competes with Intel's fastest chips.

It is patents on the Alpha chip that Digital claims Intel infringes with aspects of its Pentium Pro design. Intel denies that its chips use any disputed technology.

Sales of Alpha-based computers have been falling and the company's market share for Alpha servers has dwindled as servers with Intel's chips gain. In the fiscal third quarter, Alpha sales fell about 12 percent from the year-earlier quarter.

Intel sells about $250 million of products to Digital each year and buys about $40 million from the computer maker, according to a letter from Digital included in the suit.

Pub Date: 5/29/97

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