If at first you don't succeed try, try again.
Those words seem to be the motto of memory chip designer Rambus (Nasdaq: RMBS ) in its legal fight against, well, everybody else in the industry. Rambus says it owns all the intellectual property that goes into making today's memory chips, and it keeps filing lawsuits to protect those property rights.
Yet the "sue everyone and anyone" tactic is also taking its toll on profits and shareholders. Lawyers don't come cheap, and they are slowly bleeding the corporation.
While revenues have doubled over the past five years, litigation costs have gone up more than 500%. Last year, legal costs amounted to 15% of revenues and 69% of net income. Now, if Rambus were successful in asserting its claims, shareholders might be well-served by this costly legal crusade. In reality, though, the results have been inconsistent and have produced potentially damaging consequences.
Consider the particularly nasty fight in which the company is engaged with archenemy Infineon, a company caught up in its own legal woes. In 2000, Rambus charged the rival chip maker was violating its patents and sought billions of dollars in royalties and licensing fees. In turn, Infineon countersued for breach of contract, fraud, violations of the RICO (Racketeer Influenced and Corrupt Organizations) Act, and monopolization of the industry. Infineon even sued Rambus for infringement of Infineon patents. The U.S. federal court trial judge initially found in Infineon's favor, and the jury awarded the company $3.5 million in punitive damages and $7.1 million in lawyers' fees (hey, we said they don't come cheap), but an appeals court reversed the decision and sent it back to the judge for reconsideration.
Yesterday, the U.S. federal court judge tossed out Rambus' patent infringement claims again.
The danger for Rambus and, more importantly, for its shareholders, is this: When the court of appeals sent the case back to the trial judge, it said that if Infineon ultimately prevailed in its claims, the court could consider sanctions against Rambus for "litigation misconduct."
It is alleged that Rambus shredded or otherwise hid documents that would prove it had misled the standards-setting group JEDEC when it made Rambus memory chips the industry standard. The chief administrative judge at the FTC ruled last month in Rambus' favor, legitimizing its claim that the deception did not occur, but lawyers are appealing the ruling to the full commission. And now that Infineon has prevailed once again in trial court, it could reverberate throughout the industry and affect Rambus' other lawsuits.
It was only a little more than a month ago that Rambus shareholders were celebrating a legal victory against South Korean chip maker Hynix -- a win that sent the shares soaring 16% on the news. Now, in light of the Infineon decision, those results may be called into question. And while the Micron Technology lawsuit will soon be coming to court, just last month the European Patent Office revoked one of Rambus' patents in the case.
All of these lawsuits hinge on the claim that Rambus holds the patents to SDRAM -- and its successor DDR DRAM -- which is the most common type of memory used in computers today, comprising more than 80% of the market. The defendants in the various lawsuits say Rambus hid its patents from the industry until after JEDEC adopted the Rambus design as the standard in 1996. Some analysts have noted that while Rambus had a duty to announce its patents, it is also clear that the company's design was the obvious choice to become the standard.
While it is apparent that the stakes are high, the costs of asserting its rights are climbing even higher. Rambus shareholders, in the meantime, have seen a lot of their profits eaten by legal fees; they've also seen the value of their shares decline.
It may be that Rambus will win the legal battle but lose the war. Perhaps it will just wage another one.
Read more about the twists and turns in the memory chip market here:
- Rambus Investors Get Hint of Hope
- Infineon Executives Pay High Price
- 6 Reasons to Love Rambus
- Infineon Does Infinitely Better
Fool contributor Rich Duprey wages war daily against his waistline growing. He does not own any of the stocks mentioned in the article.