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Rambus Blamed by Intel Trial Witnesses for Doomed Chip

Rambus Inc. (RMBS) can blame itself and not the semiconductor makers targeted in its $3.95 billion suit for the failure of a memory chip to become the industry standard, according to Intel Corp. (INTC) managers who worked with the company.

Paul Fahey, an Intel engineer called to testify in defense of Hynix Semiconductor Inc. (000660) and Micron Technology Inc. at an antitrust trial in state court in San Francisco, told jurors that Rambus’s technology was flawed and its engineers less competent than their peers. Rambus’s insistence on a so-called guillotine contract also led Intel to conclude its alliance with the company was “doomed,” William Swope, a former Intel strategic planning manager, testified.

Rambus engineers “were not as competent and they didn’t work as hard,” said Fahey, who in 1999 as a program manager for Intel oversaw the development of Rambus’s version of dynamic random access memory, or DRAM.

The testimony from Fahey, Swope and at least three other current and former Intel employees may undermine Rambus’s claim that Hynix and Micron colluded to drive its DRAM chips, which it called RDRAM, out of the market. By 2003, Intel abandoned its work on RDRAM as a solution to a computer-memory bottleneck that threatened to stymie the growth of the Santa Clara, California- based company, the world’s biggest chipmaker.

In the trial that began June 8, Rambus argues that Hynix and Micron conspired to lower the prices of their own chips and deserted their commitment to produce RDRAM, relegating it to a niche role. Sunnyvale, California-based Rambus, which doesn’t manufacture the chips it designs, contends it would have earned $3.95 billion in royalties without the alleged conspiracy. Under California law, a jury finding of damages in that amount would be automatically tripled to $11.9 billion.

‘Rocky at Best’

Hynix, the world’s second-largest maker of computer memory chips, and Micron are doing a “great job of using Intel to make their case by showing that the relationship between Rambus and Intel was rocky at best,” said Michael Cohen, the chief executive officer of Fremont, California-based MDC Financial Research LLC, who is following the trial for investor-clients. “And they’ve showed that Intel may have been willing to move away from Rambus even had the manufacturers not conspired.”

Rambus Shares

Rambus rose 68 cents, or 6.1 percent, to $11.86 in Nasdaq Stock Market trading today. Since the trial began, the shares have fallen 14 percent. The Nasdaq Composite Index fell 4.2 percent during that same period.

Linda Ashmore, a Rambus spokeswoman, and Chuck Mulloy, an Intel spokesman, declined to comment on the testimony by Intel employees. Ken Nissly, a lawyer representing Ichon, South Korea- based Hynix, and Micron spokesman Dan Francisco also declined to comment. Boise, Idaho-based Micron is the largest U.S. maker of computer memory chips. DRAM chips are used to store data temporarily to help devices run multiple programs at the same time on computers.

Testifying about his work with Rambus, Fahey said he spent afternoons with the company’s engineers and called suppliers in Asia after hours to work through problems “while the Rambus people went home.”

“They could have stayed with me on the call,” Fahey said, adding that he was sometimes the last one to close the doors at night. “I recall one incidence when I was feeling very sorry for myself.”

Swope testified that “for years” he was the “biggest RDRAM advocate businesswise at Intel.”

‘No Longer Viable’

That view changed by March 1999 when he wrote an e-mail to Paul Otellini, then an executive vice president, who became Intel’s CEO in 2005. Swope said in the message that, after analyzing technical manufacturing delays in Rambus memory chips that Intel relied on exclusively for its Pentium 4 processors, Intel’s dependence solely on Rambus was “no longer viable.”

Swope, who retired in April after working 20 years under Otellini, testified that he determined Intel’s relationship with Rambus suffered from the guillotine contract that obligated Intel to promote RDRAM. If certain conditions weren’t met, Rambus could block Intel from shipping any processor that relied on the chip designer’s technology, Swope said.

After failing to reach a compromise with Rambus to eliminate that provision, Swope said he concluded that the “entire industry” was threatened by the agreement and that Intel’s relationship with Rambus was “doomed.”

“My recommendation to Mr. Otellini was that we could not do business with a company that could put us out of business,” Swope told jurors.

‘Huge Win-Win’

Under cross-examination, Swope discussed a January 2000 e- mail to Rambus’s then-CEO Geoffrey Tate about how to end the guillotine contract. Bart Williams, a Rambus lawyer, asked Swope if it was true, as he said in the message, that he remained convinced Rambus and Intel had a “huge win-win” potential.

“Probably not,” Swope testified. The collaboration was “never going to win,” he said, citing the “really bad clause in the contract that was causing such animosity and was causing such damage. I did not see a way for the two teams to end up working together.”

In its effort to prove there was a conspiracy to undercut its memory chip, Rambus has introduced as evidence e-mails from employees at Intel, as well as at Micron and Hynix, that it says show a plot to stall production of RDRAM and provide an edge to competing products.

An internal Intel e-mail in May 1999 described Micron as trying to “create as much turmoil to prevent RDRAM as possible.”

‘Aggressive Pricing’

Pete MacWilliams, an Intel engineer who was one of the recipients of that message, has been the only Intel employee called by Rambus to testify.

Micron was advertising for synchronous dynamic random access memory and double data rate chips that competed with RDRAM, MacWilliams said. “They were also going out and very aggressively pricing SDRAM and promising very aggressive pricing on DDR,” he testified.

At the same time, Micron engineers “weren’t making progress” on manufacturing the RDRAM chips that it had committed to, MacWilliams testified.

“They may have been in the market trying to cause turmoil because they couldn’t build the part,” MacWilliams said. “Or they may have not been building the part because of their motivation. It’s not clear to me.”

2005 Guilty Plea

Hynix, in 2005, and some of its employees pleaded guilty to U.S. charges of fixing prices of some chips. A Hynix lawyer told the Rambus trial jury that RDRAM chips weren’t among the products cited in admissions of wrongdoing in the criminal case.

Micron avoided prosecution in the price-fixing probe by cooperating with the U.S. Justice Department. As a result, jurors in the Rambus case won’t be told about a Micron salesman’s 2004 guilty plea to obstructing the government’s investigation.

Farhad Tabrizi, a former Hynix executive called to the stand by Rambus, was asked whether he was promoted to vice president of worldwide marketing after engaging in a campaign from 1995 to 1998 called “RDRAM killing.”

Tabrizi said the term meant that he promoted an “open standard” for DRAM in opposition to Rambus’s proprietary and licensed product.

Rambus lawyer Williams asked Tabrizi about a 1998 e-mail to a colleague responding to an Intel request for Hynix’s estimates of its quarter-by-quarter RDRAM production. “My recommendation is to show bigger number than actual plan, maybe even two to three times,” Tabrizi wrote in the message.

Overstating Production

Tabrizi testified that, if he provided Intel with the actual production numbers, Intel would have produced fewer processors compatible with RDRAM. “Intel wanted to create an over-supply of RDRAM so the prices go artificially low, and I didn’t want to give that pleasure to Intel,” Tabrizi said.

Williams asked Tabrizi if he suggested during an October 1998 meeting that representatives of other chip manufacturers, including Micron, should overstate RDRAM production.

“It’s possible,” Tabrizi said. “I don’t deny it.”

Rambus lawyers presented a 2001 e-mail exchange between Linda Turner, then Micron’s vice president of international sales, and members of her staff citing the declining prices of standardized DDR chips.

In response to a comment that the declining prices were “scary,” Turner wrote, “No problem! We want DDR to explode into the marketplace so have actually been requesting Infineon, Samsung and Hynix to lower their DDR pricing to help it become a standard (and drive Rambus away completely).”

‘Totally Sarcastic’

Turner, in videotaped testimony played for the jury, said her message was “totally sarcastic.” At a time when the memory chip industry was in “dire straits,” Turner said, what she suggested in the message was “absolutely ludicrous.”

“Everybody was fighting for pennies and to think they would go lower in their pricing was crazy,” Turner said.

Cohen, the MDC Financial Research CEO, said that in a trial in which jurors are being asked to piece together “several mosaics” of sub-plots, the Turner e-mail is “one piece of evidence where you have everything you need.”

The message shows Micron directing other chip manufacturers, by name, to lower their prices, and that the purpose of the coordination was to ruin Rambus, Cohen said. He said he found Turner’s explanation that the message was sarcastic to be “unbelievable.”

Hynix and Micron have said they will finish their case by early September. Rambus will then have another chance to rebut their evidence.

The case is Rambus Inc. v. Micron Technology Inc. (MU), 04-0431105, California Superior Court (San Francisco).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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