Rambus, designer and licensor of speedy chip-to-chip technology, is betting the company on its ability to convince the world's top 10 DRAM (dynamic random access memory) makers to sign agreements paying Rambus royalties on all current DRAM. Yesterday, U.S.-based holdout Micron Technology filed suit against Rambus to stop the royalty grab. Micron concedes the validity of Rambus's patents, but asserts that Rambus obtained them fraudulently and enforces them anticompetitively. Because a verdict would almost certainly devastate the loser, the companies should settle before trial.
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What's the fighting about?
If you missed the bird's-eye lowdown in last week's Dueling Fools on Rambus, here's the cheat sheet: Rambus licenses its proprietary, patented technology for Rambus DRAM to DRAM memory makers. Rambus reportedly charges a licensee a royalty of 2% to 2.5% per RDRAM chip. But Rambus now wants all DRAM makers to pay royalties for all current DRAM -- not only for Rambus's own RDRAM, but for competitors' SDRAM and DDR DRAM.
Two-and-a-half percent is peanuts, you say? Not so. DRAM-making may be a multibillion-dollar business, but it has wafer-thin margins. Some of the DRAM makers (the "dramurai") have signed license agreements, but it's no wonder that others -- including Micron -- are fighting. Micron has pulled out all the stops: Its strategy is high-risk for both companies.
The downside for Micron: Rambus has stated that it won't license any chip maker it beats in court, and nothing says it has to. So if Rambus wins a battle over its rights to royalties for all DRAM, Micron is out of the DRAM business unless Rambus has a change of heart -- which would reduce its ability to negotiate with other DRAM makers.
It's a big gamble for Rambus, too, but here's where we need a patent expert. Micron concedes that Rambus's patents cover all DRAM. Micron does not say that the patents are too broad, or inapplicable, or otherwise plain lousy. Instead, it argues that Rambus obtained the patents illegally. So it seems to me -- definitely not a patent lawyer -- that if Micron wins and Rambus's patents are invalidated, Rambus goes home without any patent coverage left for RDRAM, and without royalties for any DRAM. Oops!
On the other hand, if Rambus wins, it owns the SDRAM market, taking 1% to 3% tolls in a market estimated to grow from $20 billion today to between $60 billion and $100 billion in three to five years.
All in all, a high-stakes battle that reminds Qualcomm (Nasdaq: QCOM) investors of the effect of last year's settlement with Ericsson (NYSE: ERICY).
Micron's argument
I'm a Rambus shareholder, so you can bet I read every line of Micron's 37-page complaint. Here's the argument in a nutshell:
Micron alleges that because Rambus planned all this and obtained its patent technology lock illegally, Micron should receive a free license for all Rambus-patented technology, Rambus's patents should be declared invalid, and Rambus should pay big money to Micron.
Rambus has 20-60 days to reply.
A very few words about patent law and litigation risk
Mercifully, I've left out a lot of lawyer stuff, but Micron's lawyers deserve their fees -- I mean this -- for writing a marvelously clear complaint. Legally, Micron is trying to align itself with a line of patent cases in which courts say they will invalidate patents fraudulently obtained but will make it really hard to do so.
There is also law on both sides of Micron's argument that Rambus used anticompetitive monopolistic practices. For example, in Rambus's favor, a court recently ruled against DRAM maker Samsung and for a technology licensor who, like Rambus, was only a research operation, made no products, and had already licensed the technology to other companies. The court said that you can't illegally monopolize or use monopoly power in a "technology market" as opposed to a product market. Hmm....
Rambus will certainly try to have the complaint dismissed or win without a trial, and the chess match may see many moves. Given the difficulties in proving facts at trial and the risks of trial court judges and juries -- and any appeals -- shareholders and the dramurai might better hope for a favorable settlement, rather than a winner-take-all verdict.
This seems more likely given that Rambus threatens not to license those it beats in court, suggesting that a Rambus victory would eject Micron from the DRAM business. Also, a loss could devastate Rambus. Investors should hope that this is just Micron's effort to extract a better deal from Rambus than it might have gotten either through negotiation or waiting for Rambus to sue, and that both sides reach a favorable settlement.
As a Rambus investor, I hope that the facts don't prove Micron right. As a Foolish news writer, I'll be watching the developments and trying to bring them to you objectively.
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