OEMs get patent wake-up call -- Companies urged to scrutinize supply agreements as DRAM disputes send up warning flares
Sep. 01, 2000 (Electronic Buyers News - CMP via COMTEX) -- Rambus Inc.'s royalty
campaign should be placing PC makers and other OEMs on alert, according to
observers, who urge companies to protect themselves by insisting on air-tight
clauses in their supply contracts.
Such indemnity clauses are routine in most purchase agreements, and come in the
form of broad, catch-all phrasing, or boilerplate. But while such language
typically serves as a legal fire wall, OEMs would be advised to cover themselves
in the event their vendor is charged with intellectual-property violations.
"[My] advice, which is unfortunately retroactive, is the first thing you do when
you buy anything from a supplier is to have a warranty and indemnity clause,"
said James M. Burger, an attorney at Dow, Lohnes & Albertson PLLC, Washington,
D.C.
Rambus, Mountain View, Calif., has caused a stir with its licensing crusade, in
which it laid claim to the synchronous interface used to connect a huge number
of memory devices, microprocessors, and core-logic chipsets. While a variety of
components could fall under the company's legal scrutiny, it has chosen so far
to focus on vendors making SDRAM and double-data-rate SDRAM.
By forcing suppliers into licensing contracts, Rambus would reap a royalty
windfall from the billions of SDRAM chips sold each year. More to the point, by
padding SDRAM tags, the company could offset the price of its proprietary, but
costly, Direct Rambus DRAM interface, according to Danny Lam, an analyst at
Fisher-Holstein Inc., Wilmington, Del.
Adding teeth to its licensing plan, Rambus is suing Infineon Technologies AG
over the German chip maker's refusal to negotiate terms. Put on the defensive,
the DRAM industry responded last week with separate complaints filed by Micron
Technology Inc. and Hyundai Electronics Industries Co. Ltd. (See story page 1.)
But why should OEMs concern themselves with a squabble between suppliers and a
lone IP design house? The answer rests both with an earlier lawsuit initiated by
Rambus and with the potential turmoil a series of protracted legal battles could
introduce to the DRAM market.
In January, Rambus charged Hitachi Ltd. with unauthorized use of its synchronous
interface in SDRAM, DDR SDRAM, and the Super-H family of microprocessors. In a
surprise, Rambus also named Sega Enterprises Ltd. as a defendant, because it
uses the SH processors in its Dreamcast game console.
Though all charges were dropped after Hitachi agreed to an out-of-court
settlement, Rambus' willingness to involve a leading Hitachi customer in the
complaint sent shock waves through the industry.
"It's one thing to pay royalties, but another to receive an injunction where you
have a warehouse of chips you can't use," said Gene Tabachnick, a
Pittsburgh-based attorney who specializes in intellectual-property law.
And until Rambus' patents are either invalidated or honored by every DRAM maker,
OEMs face a dilemma: risk legal incrimination by buying SDRAM-based chips, or
pay a premium for Direct RDRAM.
"Quite often the customers are left out of the fray while the big boys duke it
out," Tabachnick said. "But maybe the last thing Rambus wants to do is sue
customers and lose them as potential customers, which is not uncommon in patent
litigation."
PC OEMs face an additional issue unfolding around Intel Corp.'s decision to
widen its patent suit against Via Technologies Inc. over Via's use of Intel
technology in chipsets that support Athlon processors. (See story page 14.) The
Athlon, made by Advanced Micro Devices Inc., is expected to be a big driver of
DDR SDRAM sales next year.
Of course, the issue is not so stark, and the likelihood that Rambus-or Intel
for that matter-would begin issuing subpoenas and risk alienating customers is
remote. But OEMs looking to guard themselves would do well to examine their
supply contracts.
Burger suggested contracts meet three criteria: that an indemnification clause
be present; that the clause be distinct and not part of the contract's
limitation of liability or exclusion of damages clause; and that it include
provisions to cover legal costs, travel, and related expenses.
"We use boilerplate because there's no need to reinvent the wheel. The standard
stuff we use works," Burger said. "But every company is in a unique position and
they should make sure they look at their indemnity agreements."
Suppliers may be less than eager to take on any added liability, Burger noted,
and OEMs already locked into contracts may have little negotiating room.
However, where possible, Tabachnick suggested OEMs buying SDRAM include an
indemnification clause that expressively identifies the patent litigation.
As the DRAM supply base decides its next move, OEMs may still encounter an
unsettled market if a large-scale legal battle erupts. Bob Merritt, an analyst
at Semico Research Corp. in Redwood City, Calif., said OEMs who are already
trying to keep up with rapid technology changes are loathe to confront new
uncertainty surrounding the legal state of their memory chips.
"OEMs already were facing confusing decisions over an array of memory choices in
designing PCs for next year," he said. "The escalating legal battle over Rambus
synchronous DRAM patents only makes their memory decisions more complex."
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Protecting Your Contract
- Make sure all supply deals contain an indemnity clause
- Ensure clause is separate from limitation of liability or exclusion of damages
clauses
- Include provisions to cover legal costs, travel, expenses
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