Chris Kraeuter

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Rambus Reprises Litigation Blues

Chris Kraeuter

Traders were left to conclude that yet another lawsuit means the company's legal battles are far from over. Shares dropped nearly 6% on Tuesday; they recently rebounded 0.7% to $14.85 in midday trading Wednesday.

But while Rambus' new litigation -- the result of the failure to reach a contract extension with Samsung -- is less than ideal, the alternative was even less appealing, according to Rambus General Counsel John Danforth. He said investors should recognize that Samsung was paying less than what it has agreed to pay under an existing license contract, a situation that resulted in Samsung losing its status as a customer supplying 10% of Rambus' revenue.

"They've been in breach for months and months," he says. "They are a huge part of the memory business, but they are not a huge part of our revenue, proportionately, and that situation needs to get fixed."

Los Altos, Calif.-based Rambus designs memory interfaces for microchips, which it then licenses out to chipmakers. The company took action late Monday against Samsung after negotiations broke down on an existing licensing agreement that centered on SDRAM and DDR, two types of electronic memory. That license was due to expire on June 30 and it has now been terminated.

Rambus named Samsung as a defendant to join a pending patent litigation suit that involves Hynix Semiconductor, Nanya Technology and Inotera Memories regarding three other memory technologies, and filed a separate suit against Samsung alleging infringement on SDRAM and DDR. The lawsuits don't impact a license Samsung continues to hold on two additional technologies, which Danforth expects Samsung to continue to use.

This lastest legal twist was seen as a blow to Rambus following the high-profile settlement in March of its most contentious legal case with Infineon Technologies(IFX Quote - Cramer on IFX - Stock Picks), which was viewed as the beginning of the end of its myriad legal issues. The terms of that settlement were disappointing, but the deal itself was still viewed as a step in the right direction.

Besides the cases involving Samsung, Rambus has litigation ongoing against Micron Technology(MU Quote - Cramer on MU - Stock Picks) and Hynix. Those cases have yet to settle and continue to wend their way through the court system.

In addition, many investors don't realize there is another development on the horizon that could affect Rambus' relationship with Samsung: The Department of Justice is conducting a price-fixing investigation into memory-chip manufacturers that covers the period from 1999 to 2002 -- the same period during which Rambus alleges its technology was forced out of the market by illegal collusion of the memory chipmakers.

In the past nine months, both Hynix and Infineon have pleaded guilty to illegally fixing prices during this period. The pleas also involved nine-figure settlements for both companies and a pledge to cooperate in an ongoing investigation.

Specifically, Hynix agreed to cooperate with the Justice Department not only on the DRAM technology but also RDRAM, which is Rambus' central technology that it is alleging was forced out of the market.

Samsung and Micron are also targeted in the probe, but with Micron repeatedly saying it doesn't expect to pay any penalties, Samsung could be left as a remaining target.

Danforth declined to comment specifically about the DoJ's investigation, but he did say that any progress the government makes in proving its case should be good for Rambus. "We think the impact is positive as more guilty pleas come in -- and we expect more to come," he said.

Investors have been waiting six months for a turnaround in a stock that was climbing toward $30 in December -- and clearly patience is wearing thin. The stock fell in March after traders questioned the deal with Infineon before Tuesday's slide when a deal with Samsung couldn't be reached.

Danforth says the company needed to move past the Infineon litigation, which accounts for only 12% of the DRAM market, and focus on the other 88% of the memory market For Rambus, the suit against Samsung -- the biggest player in DRAM -- is a necessary component of that strategy.

For investors, it means additional time for Rambus to prove its case, and possibly a more robust payoff in the end.