Rambus (RMBS)

[Threejack]

It's Heating Up, Folks...


Courtesy CBS MarketWatch; find by keahou at TMF.

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Rambus remains stuck in court rooms
By Chris Kraeuter, CBS.MarketWatch.com
Last Update: 4:01 AM ET Sept. 3, 2004

SAN FRANCISCO (CBS.MW) - With several of the court cases that have tied up Rambus for the past year reaching turning points in the next two months, shares of the company are likely to be more volatile in coming weeks.

The Los Altos, Calif.-based firm (RMBS: news, chart, profile) has been entangled since the late nineties in several legal battles worth potentially billions of dollars in royalties for its intellectual property, which it licenses out to chipmakers.

Several of those cases could get preliminary or final rulings in the next two months, which could move the stock in either direction from the 18-month low it's currently hovering around. The potential, though, for the decisions to result in any sort of financial windfall remains uncertain.

Shares of Rambus are down 60 percent this year to $12.91. The trend is not encouraging to analyst Erach Desai with American Technology Research. He said the time has come for Rambus to be more accommodating at the negotiating table.

"It's getting to the point where, as much as Rambus may be in the legal right, I think they need to figure out how long they want to keep doing this," Desai said.

Alphabet soup

Rambus designs microchip circuits and interfaces that act as links, helping shuttle data back and forth between chips. It licenses these designs to chipmakers who then build the designs into their products.

The company used to focus exclusively on dynamic random access memory (DRAM) designs; its RDRAM (short for Rambus DRAM) design eventually became the subject of all its litigation woes.

When the industry adopted different technologies, SDRAM (synchronous DRAM) and its successor DDR-DRAM (double data rate-DRAM), Rambus sued claiming that SDRAM and DDR derived their technologies from RDRAM.

Samsung, which is now the world's largest memory chip manufacturer, and a few other chipmakers agreed to license Rambus' technology, but other memory chipmakers balked at paying Rambus.

Infineon Technologies (IFX: news, chart, profile), Micron Technology (MU: news, chart, profile) and Hynix Semiconductor contested the move. Each said Rambus wrongfully held back information about its patents during open meetings designed to come up with an acceptable technology for everyone.

If the patents were known, the memory chipmakers said, an industry standard incorporating those technologies would not have been adopted. The U.S. and European governments are also investigating the situation.

Desai guessed that at least another year of legal wrangling would go by before Rambus gets a final resolution in its key lawsuit against Infineon in Virginia court. With that scenario, it might be 2006 before Rambus sees any money.

"This has gone beyond the point of right and wrong, it should now be about moving forward," Desai said. He applied the same question to investors, asking how long they want to play the "waiting game."

Analyst Daniel Amir with W.R. Hambrecht also estimated another year could stretch by until a final outcome is determined in the case with Infineon. "I think we are still awhile away until there's any outcome."

Infineon

Rambus' case with Infineon in Virginia is the most important case in the near term for investors. A retrial is currently scheduled in Virginia district court for Oct. 4; Rambus lost the initial case against Infineon in 2001, but won on appeal in 2003.

Pre-trial jockeying by both sides has resulted in further stock gyrations. On Aug. 19 Rambus stock tumbled 13 percent after the company lost an appeal about the confidentiality of certain documents.

Another appellate ruling is currently in the works that will impact what is actually decided at the district court retrial. Rambus has asked the appeals court to determine if the district court isn't "acting beyond the proper scope of remand," said Rambus general counsel John Danforth. Infineon has until Sep. 10 to respond to these claims.

A decision against Rambus will tip the scales of justice back toward Infineon and cloud the picture for what the outcome of the retrial will be since the first, narrow remand was viewed as being very favorable to Rambus.

An appellate decision in favor of Rambus on the scope of the retrial will be seen as a step closer to victory for the designer in ultimately collecting money from Infineon, as well as other holdouts in a similar situation.

W.R. Hambrecht's Amir said the retrial could be a problem for Rambus. "In the long term, I think the Rambus case is much stronger and that they will probably win eventually, but in the short term the Infineon case is problematic for them."

Hynix

Another holdout company is Hynix Semiconductor, a South Korea-based memory chipmaker. Hynix and Rambus have lawsuits pending against each other going back to August 2000 in federal court in California.

Both sides have summary judgment requests before U.S. District Court Judge Ronald Whyte, which he could rule on at anytime. The actual trial is scheduled to start Jan. 24, 2005, but a ruling in the Infineon Virginia case will likely impact this case.

FTC

Following Rambus' initial defeat in the Infineon case, in 2002, where it was found guilty of fraud, several counter cases sprung up, most notably antitrust allegations by the Federal Trade Commission.

The FTC lost its case on Feb. 17, 2003, but has appealed the decision. A hearing in the matter is scheduled for Sep. 21. The appeal is viewed largely in Rambus' favor.

Danforth said a decision in the Infineon case will not likely affect the FTC appeal as the commission conducted its own extensive fact finding. "The FTC spent three months working up their own record, that is what they should be focusing on," he said.

Collusion

Rambus launched a billion dollar lawsuit on May 5 against Micron, Hynix, Infineon and Infineon's former parent company Siemens in San Francisco Superior Court alleging price fixing, monopolization, unfair competition, and intentional interference.

This suit followed the FTC's initial ruling in early 2003, where some findings of fact indicated possible collusion, according to Rambus. The suit could also get help from a technically unrelated Department of Justice grand jury investigation began in early 2002 to look into price fixing and antitrust activity within the memory chip industry.

Samsung, Micron, and Infineon have acknowledged receiving subpoenas related to the DoJ's investigation; Hynix has also been named in published reports as being under investigation.

That investigation is ongoing, but if a resolution proves price fixing, then that could provide Rambus with leverage for its collusion case or to bring the memory chipmakers to the bargaining table.

Anything short of a complete victory for the Justice Department might not help Rambus, said Desai.

"I think unless the DoJ hands down criminal penalties suggesting criminal collusion between the DRAM manufacturers, I don't see how Rambus can get any additional sort of arsenal in their legal package."

At stake

Desai has been a long time supporter of Rambus' legal claims and its efforts to collect money from the chipmakers, but he sees the odds of such rewards dimming as time goes by.

"I think the way things are shaping up -- both from what they hope to get from an antitrust collusion standpoint plus their claims of patent infringement that seem to be getting recycled in Virginia -- it may truly behoove them to see if they can settle this to more reasonable terms to the other guys and move forward."

He sees a reasonable settlement amount around $200 million, based on a royalty rate of around 1 percent to 1.5 percent. W.R. Hambrecht's Amir also cited a "realistic" settlement figure of $200 million.

Rambus, however, is seeking substantially more from its opponents; Desai cited a targeted royalty rate of 3.5 percent, equal to the rate paid by Samsung. Another source of reparations would be the collusion case which calls for damages of more than $1 billion.

This would multiply the financial picture for a company that only recorded revenue of $67.5 million during the first six months of this year.

Desai said a 3.5 percent penalty on all DRAM chips sold by Infineon, Hynix and Micron is not something those companies would agree to pay outside of a legal injunction.

Beyond that and Rambus' mounting legal costs, which currently hover around 15 percent of sales, Desai cited significant intangible costs that come with being a very litigious corporation.

"They need to get to where they are not viewed as a company that will come after you, but as more of a partner."

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You can be sure Rambus didn't initiate this article. Could have been someone representing the interests of the litigant MMs, though.

Whoever it is, they're trying too hard by half to get Rambus to soften up its demands.

Still expect a settlement, but will be disappointed if the money damages are only $200MM in total for all the litigant MMs, especially if Rambus caves in and agrees to 1-1.5% SDRAM/DDR royalties going forward. Then, there is the matter of Rambus's legal fees...

And, how about that Erach Desai?? Almost seems like Rambus's former best friend is speaking for the other side.

He does make a good point, though. It does "behoove them to see if they can settle this to more reasonable terms to the other guys and move forward."

But, Desai is plain wrong when he suggests Rambus needs to "get to where they are not viewed as a company that will come after you, but as more of a partner."

We're all for partners who license and pay royalties for the IP they use.

On the other hand, we're all for getting and staying after thieves who steal and use IP without paying for it.

These recent articles are appearing for a reason. The heat is getting turned up, folks.

Like the EPO verdict, VA2 is a given loss short-term if Judge Payne resides at the trial, but possibly can be won on appeal in 2006. My guess is Rambus would prefer not to wait another couple years to resolve their differences with their best customers.

The Wild Cards still in the deck that will bring the litigant MMs to the table are the writ and possible en banc reviews by the CAFC, SJ decisions pending in the Hynix trial, the DOJ investigation, and the FTC appeal.

A loss in any one or more of the Wild Card events might be fatal to at least one or more of the litigant MMs. The question is, do they see the worst case scenario as a possibility and does it scare them to the negotiating table?

Just my opinion.

Threejack