Chip-technology designer Rambus (RMBS) was dealt a stern blow in its multi-front legal war, as the Federal Trade Commission voted Aug. 2 that the company unlawfully obtained a monopoly on certain technologies used in computer-memory chips.
Capping a case that had been underway at the FTC since 2002, the commission decided in a 5-0 vote that Rambus had used a pattern of deceptive conduct to distort the process of setting technical standards for computer memory chips in the mid-1990s. The next step will be briefings at which the commission will consider a remedy. Stock in Rambus was down Aug. 2 by more than 22%, to about $13, in trading on the NASDAQ.
Rambus attorney John Danforth says the company strongly disagrees with the FTC's finding. However, he adds that it will now focus its legal efforts on making a case for a light remedy.
RAM TIMELINE. The case dates back to the years from 1991 to 1996, when Rambus was a member of an industry consortium known as JEDEC, or the Joint Electron Devices Engineering Council. It's an industry consortium where chipmakers get together to hash out the particulars of technology standards that the industry will follow as new technologies are developed.
During those years, JEDEC was debating the finer technical points of what was to become Synchronous Dynamic Random Access Memory, or SDRAM. That was the dominant format of computer memory through the late 1990s until it was phased out by a more advanced standard, Double Data-Rate DRAM, commonly referred to as simply DDR, by 2001.
The FTC first brought its case against Rambus in 2002, alleging that during the time it was a JEDEC member Rambus failed to disclose that it had patents on certain technologies being considered for an industry-wide standard that all computer memory chipmakers would agree to follow. This, the FTC had argued, was a violation not only of JEDEC rules, but constituted a violation of federal antitrust law.
MURKY RULES. In a 119-page decision, Commissioner Pamela Jones Harbour, a former deputy of New York State Attorney General Eliot Spitzer, described Rambus' conduct at JEDEC as an anticompetitive "hold up" of the memory-chip industry. The commission held that Rambus's actions constituted exclusionary conduct under Section 2 of the Sherman Act and created a situation where Rambus held monopoly power on certain technologies in four markets.
Before the commission, Rambus had argued that the JEDEC rules about patent disclosure were not only murky—they have since been clarified—but were also openly flouted or ignored by other members of the committee, namely IBM (IBM), which at the time still manufactured memory chips. According to minutes of a 1993 JEDEC meeting, IBM stated for the record that its policy was to ignore the patent-disclosure rule.
Sean Royall, a former FTC attorney who led the case against Rambus and is now with the law firm of Gibson Dunn & Crutcher, said that while some JEDEC members such as IBM may have technically been in violation of certain JEDEC rules by not disclosing patents, there was an understanding among those members that if patented technologies were ultimately used in SDRAM standards, such patents would not be enforced.
DUTY TO DISCLOSE. "The case would have been easier and more straightforward had it not been for some of that murkiness and ambiguity in the rules," Royall said. "However I always believed that the balance of the evidence made it quite clear that there was a duty to disclose relevant patents and that Rambus was aware of that duty."
The particulars of the case and today's decision aside, Rambus attorney Danforth said opinion seemed less focused on specific violations by Rambus at JEDEC and more on what other members expected to happen in the standards-setting process. "I don't think there is much in the decision about specific rules, but it focuses more on good faith and the process of setting standards," he said.
The next phase in the case will involve determining a remedy. That process will begin next month. FTC lawyers argued in 2003 that Rambus should be prevented from collecting royalties on any DRAM chips built to JEDEC-sanctioned standards sold worldwide and containing Rambus-owned patents applied for prior to June 18, 1996.
ROYALTY ISSUE. Except in cases where it is litigating patent disputes, Rambus collects royalties of 0.75% per chip on SDRAM chips and 3.75% on DDR chips. Danforth said he expects the final decision will result in a reduction in some of the royalties it is allowed to collect.
The decision takes place against the backdrop of two other important legal issues. The first is the ongoing antitrust investigation by the U.S. Justice Dept. (DOJ) into price-fixing by memory-chip manufacturers. Launched in 2002, DOJ's antitrust office has levied more than $730 million in fines against Samsung and Hynix of South Korea, Infineon (IFX) of Germany, and Elpida Memory, which is a joint venture between Hitachi (HIT) and NEC (NIPNY) of Japan.
Four Infineon executives have served jail time. Micron has been cooperating with the DOJ under a corporate-leniency policy, the exact terms of which have not been publicly disclosed. It has said it does not expect fines, but one Micron executive was sentenced to six months of home detention after admitting to withholding and altering documents that had been subpoenaed by a grand jury.
ANOTHER LAWSUIT. Last month, 34 state attorneys general, led by California's Bill Lockyear, joined in the price-fixing fight. They announced they would sue seven memory-chip companies: Micron, Hynix, Samsung, Elpida, Infineon, Mosel Vitelic of Taiwan, and NEC Electronics. The allegations are that the chipmakers fixed prices in such a way that computer manufacturers, including Dell (DELL), Hewlett-Packard (HPQ), Apple (AAPL), Gateway (GTW), IBM, and others, were forced to pay more for memory chips and then pass those costs on to consumers.
The other major legal front is an antitrust lawsuit filed in a California State Superior Court in San Francisco in 2004. In that case, which contains evidence cited in both the DOJ and the FTC case, Rambus is alleging that the Micron, Hynix, and Samsung all colluded to fix prices on memory chips in such a way as to benefit a type of chip they preferred and to drive out of the market a type of chip Rambus and Intel (INTC) were supporting.
That chip, known as Direct Rambus DRAM or simply RDRAM, failed to gain traction in the marketplace, while DDR chips were successful. The chipmakers have all denied the Rambus allegation.
EVIDENCE OF CONSPIRACY? However, there is evidence on the record that the chipmakers did conspire to some extent. In June, internal company e-mails emerged in which executives at both Micron and Hynix indicated that they had communicated about pricing on certain DRAM chips with competitors (see BusinessWeek.com, 6/1/06, "Rambus: We Were Price Fixing Target").
And Samsung, in its settlement with the DOJ, conceded that at least some of its price-fixing actions concerned Rambus' RDRAM chips. However all the chipmakers targeted by the DOJ in the price-fixing probe have repeatedly argued that there is no link between the actions admitted to in that matter and their many disputes with Rambus (see BusinessWeek.com, 11/20/05, "Samsung's Fuller Disclosure").
For its part, Micron applauded the FTC decision, in a written statement issued on Aug. 2. It quoted Micron's Vice-President of Legal Affairs Rod Lewis as saying, "Micron believes that Rambus has engaged in a pattern of deception, destruction of evidence, false testimony and other improper activities designed to mislead courts and Micron to extract unjust licensing fees and damages. We will continue to vigorously advance those arguments, and the thoughtful ruling today by the FTC supports Micron's views."
Micron will hold a meeting with financial analysts in New York on Aug. 3. Stock in Micron was up 31 cents or more than 2% by 1 p.m. on Aug. 2. Stock in Infineon was up 18 cents or more than 1%.