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Barbara's Sales, Inc. v. Intel Corp.

November 29, 2007

BARBARA'S SALES, INC., ET AL., INDIV. AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, APPELLEES,
v.
INTEL CORPORATION ET AL. (INTEL CORPORATION, APPELLANT).



JUSTICE FITZGERALD delivered the judgment of the court, with opinion.

Justices Freeman, Kilbride, Garman, and Karmeier concurred in the judgment and opinion.

Chief Justice Thomas and Justice Burke took no part in the decision.

OPINION

In the early part of this decade, Intel Corporation (Intel) engaged in a massive worldwide advertising campaign touting the high performance of its "Pentium 4" microprocessor. The alleged disappointment of a nationwide group of purchasers led to this class action filed in Madison County, Illinois, by named plaintiffs from Illinois and Missouri against Intel, a Delaware corporation with its principal place of business in California. With alternate counts under California and Illinois consumer fraud laws, plaintiffs alleged that Intel deceived the entire class with a false representation implicit in the name Pentium 4, that the microprocessor was the best and fastest processor on the market. The circuit court ruled that Illinois substantive law controls this case and certified a class of Illinois consumers only. Pursuant to Supreme Court Rule 308 (155 Ill. 2d R. 308), the circuit court certified questions for an interlocutory appeal of this ruling. The appellate court answered that California law governs and that the circuit court should reconsider its class certification order in light of California law. 367 Ill. App. 3d 1013. We allowed Intel's petition for leave to appeal. 210 Ill. 2d R. 315(a). For the following reasons, we conclude that Illinois law governs this case and that class certification was improper.

BACKGROUND

The record reveals the following background information which, although not directly relevant to the named plaintiffs, is pertinent to the motion for class certification. A computer's microprocessor is often referred to as the "brain" of a computer. The performance of microprocessors has steadily increased since they were first introduced in the 1970s. A principal measure of performance for the common consumer is speed. As the speed of a processor increases, the more instructions a processor can process, resulting in less time a computer requires to open software applications, refresh screens, and depict ever more realistic video game characters. One historical measure of speed is called "clock speed," which is measured in hertz. Intel's first microprocessor, the 4004, ran at 108 kilohertz per second (108,000 hertz), compared to the Intel Pentium 4 processor's initial speed of 1.4 gigahertz per second (1.4 billion hertz). Intel has marketed various performance advancements in succeeding generations of microprocessors under advancing brand names such as the 286, 386, 486, Pentium, Pentium Pro, Pentium II, Pentium III, and the Pentium 4. At issue is whether the initial version of the Pentium 4 microprocessor, known within Intel as the "Willamette" family (hereinafter "Pentium 4," "P4" or "Willamette"), lived up to Intel's explicit and implicit representations as to its advancement in performance over the Pentium III and the processors of a competitor manufacturer, American Micro Devices ("AMD").

Intel introduced the Pentium 4 in November 2000 and shipped its one millionth Pentium 4 processor sometime in the first quarter of 2001. Along with various new features in its architecture, these processors had higher clock speeds than the Pentium III and AMD processors. Further, computers with a Pentium 4 processor were priced, at least initially, at a premium over similarly equipped computers containing a Pentium III processor. However, the actual superiority of the Willamette Pentium 4 over the Pentium III and the AMD processor was in doubt.

The record reveals various internet and mass media reports questioned the Pentium 4's performance immediately after it was released. These reports noted that superior clockspeed does not tell the whole story as to the actual performance of a microprocessor. Several sources criticized the microarchitecture underlying the Pentium 4 as being "marchitecture." In other words, Intel's representations as to high clock speeds were a deliberate marketing attempt to make it appear faster to the uninformed consumer than the slower-clocked Pentium III and AMD processors. Performance tests, commonly known as benchmarks, showed that the slower clocked Pentium III and an AMD processor were "faster" than the Pentium 4. The extent of the speed discrepancy between the processors depended on the benchmark and was often measured in milliseconds. Other benchmarks noted the Willamette's excessive heat dissipation and power usage. For example, the Pentium 4 was slower at some common office applications using older operating software, but faster at the video game Quake. Another common criticism of the Willamette Pentium 4 concerned its memory capabilities.

Intel's public response to these criticisms varied. According to Intel, testing software had not been optimized for the Pentium 4. Further, according to Intel, the Pentium 4's greatest advances were in areas such as 3D gaming, digital video creation, MP3 encoding, and streaming video. Intel also emphasized that the new microarchitecture had a high potential for increased performance as the manufacturing process improved. Intel explained that differences in system hardware and software design may affect actual performance for particular users, apart from the performance of the actual microprocessor. Finally, Intel emphasized that the processor itself was not defective, and that it performed well even on those benchmarks that labeled it "slower."

On June 3, 2002, plaintiffs filed a nationwide class action complaint asserting consumer fraud claims against Intel, Gateway Inc., Hewlett Packard Company, and HP Direct, Inc.*fn1 The plaintiffs' original complaint alleged that Intel misled the public by asserting in public statements that the Pentium 4 was the "highest performance processor." Intel also allegedly suppressed and concealed the Pentium 4's lack of performance gains over the Pentium III. Plaintiffs brought consumer fraud claims under California's Unfair Competition Law (Cal. Bus. & Prof. Code §17200 (Deering 2007)), the California Consumer Legal Remedies Act (Cal. Civ. Code §1750 et seq. (Deering 2005)), and, alternatively, under the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 2002)). Plaintiffs sought an award of actual damages, restitution, attorneys' fees, prejudgment and postjudgment interest, and their costs of suit, amounting to cumulatively less than $75,000 per class member.

Intel filed several motions to dismiss. The circuit court denied Intel's first motion to dismiss the California counts premised upon choice-of-law principles. A motion to dismiss based upon forum non conveniens principles was similarly denied. Intel also moved to dismiss the Illinois Consumer Fraud Act counts, arguing, inter alia, that plaintiffs failed to state a cause of action because of a failure to allege proximate cause. Specifically, Intel argued that plaintiffs were required, under Oliveira v. Amoco Oil Co., 201 Ill. 2d 134 (2002), to allege actual deception of the named plaintiffs. As no named plaintiff was allegedly aware of any specific representation made by Intel, these representations could not have proximately caused plaintiffs' injuries. The circuit court agreed and dismissed plaintiffs' Illinois Consumer Fraud Act counts.

Plaintiffs subsequently added allegations in their first amended and second amended complaints that they were actually deceived by Intel. The circuit court found, over yet another motion to dismiss based on Oliveira, that these new allegations adequately stated a cause of action. These allegations included: (1) "Plaintiffs and Class Members have been actually deceived by Defendant's failure to disclose material information and/or by their affirmative misrepresentations," and (2) "Intel has conditioned the consumer, through its marketing and naming practices, to believe that each of its high-performance processors is superior in speed and performance to the previous model." On April 24, 2004, plaintiffs filed the current, third amended complaint, which included another relevant allegation that Intel, through its marketing practices, "conditioned the market to believe that megahertz measures relative performance and that a processor with a higher clock speed will deliver faster performance."

Plaintiffs thereafter moved for certification of the nationwide class. The evidence submitted by both parties is voluminous, and we highlight only those portions of the evidence submitted to the court that are necessary for this opinion. Plaintiffs relied on extensive evidence obtained in discovery concerning Intel's marketing practices and the performance of Pentium 4 processors. Plaintiffs stressed Intel's massive advertising campaign and its overall strategy for that campaign. Plaintiffs noted that as part of Intel's worldwide billion dollar marketing scheme, the Pentium 4 campaign garnered roughly $300 million worldwide and $100 million in the United States. Those dollar amounts included Web site promotions, television, radio and print advertisements, informational brochures, product demonstrations, training of retail sales agents, and promotional events. Intel made a number of public statements that its processor was the highest performing processor on the market. Several statements made by computer manufacturers that the Pentium 4 was the "fastest" were also highlighted in the motion.

Plaintiffs' essential complaint common to all class members is that Intel was teaching the market that "4 is better than 3." As such, plaintiffs highlighted several statements by computer manufacturers that the Pentium 4 processor was the "fastest" processor on the market. Plaintiffs repeatedly emphasized an Intel "consumer campaigns overview" slide shown to a group at Comp USA, which they assert summarized Intel's core strategy. It stated, in part:

"I would like to focus on what we will do to promote the Pentium 4 processor this year, which is at the core of this strategy.

Specifically, why buy a P4P?

The most important thing is our Brand and what it stands for. We have taught the market that four is better than three." Plaintiffs also directed the circuit court's attention to several other places in the record to demonstrate that Intel was trying to teach the market that "four is better than three."

The "four is better than three" scheme of which plaintiffs complain is also reflected, according to plaintiffs, in the deposition testimony of Intel employees Ann Lewnes and Pam Pollace. Lewnes, Intel's vice-president of sales and marketing and the director of the "Intel Inside" program, testified in her deposition "that the name Pentium 4 is intended to communicate that it's better than Pentium III." Lewnes testified that she was unaware if Intel had communicated to the public that the Pentium 4 was not better for particular usage models. She was also unaware if the word "best" was ever used in connection with the marketing of the Pentium 4. Pam Pollace, head of Intel's Corporate Marketing Group, stated in her deposition that: "Our intent was that 4 was better in many ways than III," and that "it was better for many aspects."

Plaintiffs submitted expert opinions concerning the effect of Intel's marketing campaign. One of plaintiffs' marketing experts, Dr. Tulem Erdem, opined in an affidavit that processor performance matters to consumers in the personal computer market and is a key driver of consumer decisionmaking. Professor Urdem stated, "Intel strategically chose the Pentium 4 sub-brand to signal higher overall performance compared to Pentium 3. To amplify this effect, Pentium 4 was offered at higher clock speed levels than Pentium 3." He also asserted, "Intel communications clearly positioned Pentium 4 as Intel's 'best,' Pentium 3 as Intel's 'better' and Celeron as Intel's 'good' performance processors. Pentium 4 was also depicted as the best performing chip in the industry at the time."

According to another of plaintiffs' marketing experts, Dr. Joel Cohen, Intel communicated to purchasers that the Pentium 4 processor was the fastest and highest processor available for PCs. In other words, according to Dr. Cohen, it is a fact that the Pentium 4 processor name universally communicates increased performance as compared with the Pentium III processor name, and that representation was material to purchasers. Dr. Cohen stated that it was reasonable for purchasers to believe the promises of increased speed and performance of the processor. Intel's market segmentation of consumers on a spectrum of those having little computer knowledge, to those highly knowledgeable, does not diminish the fact that Intel's implicit promise of increased performance associated with the Pentium 4 would be reasonably believed by all segments of the class. Further, Intel failed to properly qualify its representations and promises of increased performance associated with the Pentium 4 processor. Dr. Cohen concluded, "To the extent that Pentium 4 based personal computers do not deliver these expected results, the naming, advertising, marketing and promotion efforts by Intel are misleading and deceptive."

Each plaintiff testified in deposition form and in interrogatory answers that they were misled by the "four is better than three" marketing scheme. Several named plaintiffs submitted the following, virtually identical, interrogatory answer and affirmed these answers in deposition testimony:

"Plaintiff states that while she remembers seeing advertisements, printed materials and commercials about Pentium 4/P4 processors in personal computers, she cannot specifically remember any particular advertisement or statement. She based her decision to purchase the computer on the label Pentium 4/P4 which meant to her that the computer was faster than the Pentium III or PIII."

Other named plaintiffs could not recall any specific advertisements, from any source, containing a specific statement made by Intel that the Pentium 4 microprocessor was faster than the Pentium III processor. Each named plaintiff took advantage of sources of information other than the mere name "Pentium 4." These included advertisements from computer manufacturers; consultations with ...


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