K.C. Swanson

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Rambus Soars on Supreme Court Ruling

K.C. Swanson

Shares of Rambus(RMBS Quote) vaulted 35% in midafternoon trading following a favorable U.S. Supreme Court decision. The stock climbed $6.48 to $25.21 in recent trading.

Rambus is at the center of a web of ongoing patent litigation, including an antitrust case filed by the Federal Trade Commission. The complaints have alleged that Rambus deceived an industry standards-setting organization in the early 1990s, helping to set standards in a way that favored its own technologies and later reaping royalties from memory manufacturers.

But today, Rambus scored a major victory when the U.S. Supreme Court affirmed an earlier favorable court ruling by declining to hear an appeal in a case involving memory maker Infineon(IFX Quote).

On Jan. 29 this year, a federal appeals court ruled against Infineon, which alleged that Rambus had committed fraud. The court simultaneously revived Rambus' own patent infringement claim against Infineon in a case that will be heard before a jury in a federal district court in Virginia.

Mike Crawford, an analyst at independent research firm B. Riley & Co., says the latest decision by the U.S. Supreme Court not only caps off the earlier Rambus win but also bodes well for suits that Rambus is pursuing against other memory makers. "[That] ruling gives a very broad definition to Rambus' patents, thereby making it probable that they can prove infringement by Infineon, Micron (MU Quote) and Hynix," he says. "That same [legal] claims construction would be used in the Micron and Hynix trials. That's bad news for Micron and great news for Rambus."

Crawford believes Micron, Infineon and Hynix are all racking up big contingent liabilities for nonpaid royalties on just about all the DRAM produced since 2000.

For example, he estimates that if Micron had to begin paying royalties, it would have owed Rambus about $16.5 million in the second quarter of fiscal 2003. (That estimate is based on the fact that Rambus has stipulated a royalty rate of 3.5% on the type of memory known as DDR and that 60% of Micron's revenue in the quarter, or $471 million, were from DDR.)

A Micron spokesperson was not immediately available for comment.

Crawford adds that he thinks today's legal setback could prompt memory makers to consider a settlement with Rambus instead of proceeding with litigation. "If they litigate and lose, they lose not only royalties from three years back, but if Rambus can convince a jury that there was willful infringement on its patents, [the defendants] could also face treble damages."

Today, shares of Infineon were up 8 cents, or 0.6%, to $13.98, while Micron was losing 13 cents, or 1%, to $13.53.

In another important development, the Supreme Court action seriously undermines the FTC's case against Rambus, says Crawford. "When the [Appeals Court] came out with their opinion in January, that crippled the FTC's case and this affirmation of that ruling really kills it," he says, noting that the FTC's lead prosecutor recently announced that he will resign from the agency this week. "I think the FTC case is really imploding on itself now."

Crawford, who has a buy rating on Rambus, owns shares in the stock and is short Micron. Riley does not do banking.