Semiconductors
Rambus On A Roll
Arik Hesseldahl, 12.11.03, 3:41 PM ET
NEW YORK - John Danforth can't sit still.
He gets up, walks around talking animatedly, trying to make a point. He then resorts to drawing pictures on a whiteboard, resisting the urge to head off on a technical tangent. All the while it seems he's about to explode in a torrent of explanation so enthusiastic, you'd think it was religious.
But the subject is semiconductor intellectual property law, and John Danforth is senior vice president and chief legal counsel at Rambus (nasdaq: RMBS - news - people ), the notorious--some say infamous--inventor of technology that allows computer chips to exchange data faster. The company has been at the center of a legal firestorm that in mid-2000 shook the $30 billion global memory-chip industry to its core. And it may be about to do it again.
In 2000 Rambus had the audacity to argue that it was due royalty payments on technology used in industry-standard memory chips. To makers of those chips, already struggling with the kind of razor-thin margins typical of a commodity business, this was heresy. Rambus was portrayed as an industry bandit that tricked the chip industry into adopting its technology by remaining silent during industry standard-setting meetings. The result has been a long and complicated series of lawsuits with such companies as Infineon (nyse: IFX - news - people ), Micron Technology (nyse: MU - news - people ) and Hynix Semiconductor.
"We're prepared to do what we have to do to defend our intellectual property right," Danforth says. "But we're also interested in setting the record straight. This company has been pilloried by litigation."
After a string of unexpected legal reversals in its favor this year, Rambus is nearing a moment when it may shift its legal posture from a defensive one to an offensive one. And that might be just enough to bring its maddeningly complicated legal odyssey to an end.
In January, a federal appeals court threw out a fraud ruling against Rambus, and sent the case back for a new trial. The fraud ruling had come from a federal jury in Richmond, Va., in 2001. German chipmaker Infineon had argued that Rambus had acted improperly while a member of a chip industry standard-setting committee, the Joint Electron Devices Engineering Council (JEDEC), during the 1990s.
Infineon had argued that from 1991 to 1995, when Rambus was a member of the JEDEC, it failed to disclose to other members that it had patent applications pending on the kinds of technologies being considered for new memory-chip standards. Those standards went on to become the two most common types of memory chips used in computers today: Synchronous Dynamic Random Access Memory (SDRAM) and Double-Data Rate (DDR) DRAM.
"They argued that JEDEC members had been lulled into adopting these technologies while we sat by idly," Danforth says. "They said we failed to disclose our patent applications in the face of a duty to disclose."
It may seem like a bit of semantic hairsplitting, but the stakes are far from small. DRAM sales are on the rise. The Semiconductor Industry Association is predicting sales of $16.5 billion for this year and $22 billion next year. Most of those memory chips--more than 75% this year, according to one estimate by market research firm iSuppli--are of the DDR variety. Court testimony during the Infineon case revealed that Rambus had sought to collect a 3.5% royalty on DDR chips. Assuming that rate would have applied to all manufacturers making DDR chips, it could have meant some $430 million in revenue for Rambus.
It has taken in nowhere near that, however, and has reported about $86 million in revenue for the first nine months of this year. Meanwhile, its litigation costs have spiraled upward by 167% to $18 million for the first nine months of this year, versus $6.8 million for the same period last year.
But Rambus' case continues to look stronger by the day. The appeals court found that the disclosure rules Infineon accused Rambus of breaking were unclear. One judge on the three-judge panel described JEDEC's patent disclosure policies as having "a staggering lack of defining details."
That ruling came after the Federal Trade Commission launched an antitrust lawsuit in 2002 against Rambus over similar charges that Rambus' silence at JEDEC was meant to ensure a steady stream of royalties from memory-chip makers. Danforth says evidence gathered by the FTC investigation so far has only made Rambus' position stronger.
"What the evidence in the FTC case has shown is that clearly there was not only confusion about what the rules at JEDEC meant, but an ongoing changing of the rules," Danforth explains.
He says the evidence submitted to the FTC shows that JEDEC's disclosure rules were at best voluntary, and that other members openly flouted them. In a 440-page filing to the FTC, Rambus argues that the evidence shows that several companies who were members of JEDEC openly flouted the stated rules. Among them was IBM (nyse: IBM - news - people ), which according to minutes of a JEDEC meeting in 1993, "noted that [its] policy has been to ignore [the] patent disclosure rule..."
FTC antitrust lawyers have filed their response to that point about IBM, countering that IBM did disclose relevant patents about which it was aware, but stipulated that such a list would likely be incomplete. The lawyers also argue that the overwhelming weight of evidence doesn't support a conclusion that patent disclosure was anything other than mandatory, and that the rules were intended to make disclosure mandatory.
Although the FTC hasn't yet decided Rambus' case, investors saw light last month when the commission threw out a case against oil giant Unocal (nyse: UCL - news - people ) that had some similar circumstances. The FTC charged that Unocal had encouraged California regulators to adopt a particular standard for clean fuel, without disclosing it had applied for patents related to the standard. Rambus stock gained nearly 19% on that news.
Erach Desai, an analyst with American Technology Research in Greenwich, Conn., says the momentum seems to be with Rambus. "It is my opinion that when a decision is made in the Infineon case, Infineon will be found to have infringed on Rambus' patents," he says. "Did Rambus take advantage of the lax rules of the JEDEC committee? Probably. But it seems the whole standards-setting process has been flawed from the outset." Desai rates Rambus as a "strong buy" but doesn't own any of its stock.
A spokesman for Infineon declined to comment on the company's ongoing case with Rambus, but said the outcome of the FTC case won't affect how Infineon intends to proceed when the two companies return to court next year. A Micron spokesman echoed that position, saying, "The FTC case does not impact Micron's case against Rambus." A spokesman for Hynix didn't return calls for comment.
What's next? A decision by an FTC administrative law judge in the antitrust matter is expected before the end of the year; that ruling may then be appealed to the full FTC commission. A retrial of the case with Infineon is expected start in the first half of 2004. Rambus' case with Hynix Semiconductor is expected to get under way in San Jose, Calif., in March of 2004. And the case with Micron is still pending before a federal court in Delaware. |
