With loss and plummeting stock prices, Rambus's 1,000 patents could make it an attractive acquisition target

In a critical ruling, a San Francisco court jury rejected claims made by Rambus, Inc. (RMBS) against Micron Technology, Inc. (MU) and Hynix Semiconductor Inc. (KS:000660).  The loss sent Rambus share prices plummeting and called into question the future of the hardware maker, which many claim is a so-called "patent-troll".

I. How Did We Get This Far?

Rambus Inc. began as promising startup hoping to market a proprietary memory interface.  

But it gained notoriety when it attended 1995 JEDEC standards meetings, only to then abruptly quit JEDEC and patented many of the SDRAM standards that were being discussed.   Rambus claimed it was already working on the technology and merely did not realize JEDEC's strict standards with regards to open licensing of IP.  It said it quit when it realized them and pointed out that the JEDEC meetings were not private (they were widely reported on in detail in industry journals, etc. at the time).

Around 1999 it deployed its RDRAM product, but saw poor sales as the result of relatively high latencies and high production costs (owing to the complexity of the design).  

Faced with a commercial failure it adopted a “license or be sued” approach.  Many people mistakenly believe Rambus abandoned production, but for some time it continued fruitlessly to push RDRAM even as it turned to litigation.  The approach echoes that of Microsoft Corp. (MSFT), who after seeing its smartphone market share plummet has resorted to intellectual property threats to force licensing from OEMs using the industry's top operating system -- Android OS.

II. Rambus was on a Roll of Late

Initially, Rambus' broad claims to memory ownership were challenged by the U.S. Federal Trade Commission in 2002.  But in 2004 Stephen J. McGuire, the FTC’s chief administrative-law judge, dismissed claims that Rambus violated the 1890 Sherman Antitrust Act.

After that decision companies quietly complied with licensing, but some fought Rambus's licensing demands.  Most notable was Infineon, who won dismissal of Rambus' lawsuit against it, but was forced to negotiate a license by the court.  The dismissal came in part thanks to the revelation that Rambus was shredding key documents prior to the case.

In 2006 the U.S. Federal Trade Commission reversed Judge McGuire's ruling, finding that Rambus did violate the Sherman Antitrust Act.  In 2007 the fallout of that ruling was finally revealed: Rambus would receive indefinite licensing small payments on SDRAM sales, but would only receive small licensing payments on DRAM sales for 3 years.

However, in 2008 Rambus had the good fortune of seeing that decision overturned, when the U.S. Court of Appeals for the D.C. Circuit ruled Rambus had not harmed the competition, and thus was not eligible for antitrust punishments.  The U.S. Supreme Court in 2009 also ruled in favor of Rambus, blocking further FTC antitrust action.

In November 2009 Rambus scored a partial victory, convincing the U.S. International Trade Commission that NVIDIA Corp. (NVDAinfringed upon its memory patents.  The move allowed Rambus to ban imports of certain NVIDIA chips into the U.S.  The move came at the cost of the U.S. Patent and Trademark Office (USPTO) completely rejecting three of its five patents (17 claims total).

The string of victories helped propel Rambus stock prices upwards as it raked in RAM royalties.

III. The Beginning of the End?

The most recent case saw Rambus lawyer Bart Williams accuse Hynix and Micron of "a secret and unlawful conspiracy to kill a revolutionary technology, make billions of dollars and hang onto power."

The case originated when Hynix and Micron collaborated together to develop new memory technology and IP, which may have been in part an effort to avoid Rambus's licensing grasp.

Hynix memory
Hynix and Micron defied Rambus's licensing.  Rambus sued them, essentially for refusing to use its product, which it claimed was an antitrust violation. [Images Source: Hynix]

Accusing others of antitrust seemed a pretty bold move for Rambus, who had just recently been let off the hook in terms of antitrust accusations in the U.S. and still faced antitrust accusations in the European Union.

The move backfired.  Going before a jury, the company saw its claims rejected on a factual basis after 8 weeks of deliberation.  The decision cost it $4B USD in estimated royalties.  A poll found three quarters of the jurors sided against Rambus.

This follows a partial victory for Rambus in May in which a separate ruling by U.S. Court of Appeals for the Federal Circuit sent a case back to U.S. District Court in Delaware.  The Delaware court had dismissed Rambus' claims against Micron when it found Rambus had shredded important documents.  The Court of Appeals ruled that the document shredding was important, but did not necessarily warrant dismissal, encouraging the lower courts to evaluate the case.

The majority ruling stated, "It is undisputed that Rambus destroyed between 9,000 and 18,000 pounds of documents in 300 boxes."

The new loss calls into question Rambus's ability to win future trials, even if the state case does not set a precedent for other lawsuits outside the State of California.  Rambus supporters, such as John Danforth -- a former general counsel for the company -- argue the company is merely a "David" battling the chipmaker "Goliaths".  They argue that the judge in the San Francisco case denied the company's strongest evidence, which would have allowed it to emerge victorious.

But most investors saw the loss as the beginning of the end.  Stock plunged 61 percent settling at $4 USD/share, a market loss of $1.2B USD for a company that was worth $2B USD the day before.

Capstone Investments' Jeff Schreiner a key institutional investor in Rambus was among those that quickly pulled out.  He comments, "I've followed it for 10 years now and we've really seen nothing in terms of capturing the value that's been lost. That was the whole reason for owning the stock.  We don't believe there's a lot to appeal, and we're not going to stick around."

Micron attorney William Price gloated, "You can't count on winning in litigation what you can't win in the marketplace."

Rambus is considering an appeal, but its prospects look bleak.  Legal expert Robert Lande, an antitrust professor at the University of Baltimore School of Law, told Reuters, "This kind of factual determination is very rarely overturned."

Rambus is continuing to develop technology, albeit at a pace far removed from its golden age in the 1990s.

IV. Acquisition Target?

Rambus is owed $900M USD by Samsung, but has $300M USD in legal debt -- equivalent to approximately $1M USD per person it currently employs.  Though it is close to forcing NVIDIA into a licensing agreement, it's unclear how long it can carry on, particular amid ongoing antitrust scrutiny in the EU.

The company has posted profits of late, but that trend seems unlikely to continue if it continues to lose.

With stock prices plummeting, the company -- which owns over 1,000 patents -- may become an attractive acquisition target.  While its IP has been weakened by the USPTO in the recent NVIDIA case, it still has a lot of IP might.  That might make it attractive to a company like Samsung, who could use the IP to countersue Apple, Inc. (AAPL) in the pair's international court battle [1][2][3][4] [5][6][7][8].

Google, Inc. (GOOG) also might be interested in an acquisition to strength its own patent portfolio, and offer greater defense of Android allies like Samsung and NVIDIA.

Rambus's ~1,000 patents could prove a valuable defensive -- or offensive -- weapon.
[Source: U.S. Patents Blog]

On the flip side of the coin parties like Apple and Microsoft could acquire the IP and used it to force licensings or bans on their more successful Android competitors.

Source: Reuters

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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