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Rambus Back in Legal Limbo

Alexei Oreskovic

Two things move shares of Rambus(RMBS Quote - Cramer on RMBS - Stock Picks): legal rulings and rumors about legal rulings.

On Wednesday, the Federal Trade Commission served up a heaping portion of the former when it issued an opinion concluding that Rambus had engaged in a course of deceptive conduct that allowed it to monopolize the market for computer memory.

The news sent Rambus shares down nearly 25%, as investors scrambled to assess the damage, particularly as it relates to the company's existing royalty-based revenue stream and its ongoing litigation to secure royalty payments from other memory makers.

Rambus, based in Los Altos, Calif., designs and licenses technology related to computer memory.

The FTC said it will begin considering remedies for Rambus' misconduct within the next two months.

In a conference call early Wednesday morning, Rambus' management put on a brave face.

"We believe we can continue with our litigation and licensing activities," said John Danforth, Rambus' senior legal adviser. He noted that he understood the opinion to cover only DDR memory, rather than newer memory technologies such as DDR2.

In 2002, the FTC charged Rambus with deliberately engaging in a pattern of anticompetitive acts in order to deceive an industry organization that was developing a standard for computer memory.

An administrative law judge within the FTC dismissed the charges in 2004, concluding that the evidence did not support the allegations.

Wednesday's 119-page opinion by the FTC's five commissioners unanimously overturns that ruling.

According to the opinion, Rambus took part in the standard-setting organization, known as JEDEC, without disclosing the fact that it had patents on many of the technologies it was pushing to be included as part of the standard.

"Through its successful strategy, Rambus was able to conceal its patents and patent applications until after the standards were adopted and the market was locked in," reads the opinion penned by commissioner Pamela Jones Harbour. "Only then did Rambus reveal its patents -- through patent infringement lawsuits against JEDEC members who practiced the standard."

According to the commission, Rambus violated the Sherman Antitrust Act as well as Section 5 of the FTC Act, regarding deceptive practices.

While Rambus plans to appeal the liability finding, Danforth said the company's primary focus would be to vigorously argue the forthcoming remedy portion of the case.

"Whether or not this is a major setback for us is going to ultimately depend on the remedy phase which is yet to come," said Danforth. "We think we have developed a record and can further develop a record that shows that the rates we have been charging are reasonable, but that still is yet to come."

Briefings on the remedy portion of the case are due by Sept. 15, and hearings are expected thereafter.

It's still unclear what form the FTC's remedy might take.

Pacific American Securities analyst Michael Cohen pointed to a footnote in the FTC opinion which notes that Rambus' 3.5% royalty rate is above the 1%-2% rate that is standard for RDRAM. Thus, says Cohen, it's possible that the remedy phase will involve capping Rambus' royalty rate at the midpoint of 1.5%.

Given that the worldwide DRAM market is $26 billion, Cohen estimates that a 1.5% royalty rate could potentially provide Rambus with $390 million in annual revenue, and by his calculations, a price target of $50 a share (Cohen personally owns shares in Rambus).

Of course, another possible scenario is that the FTC determines Rambus is entitled to zero royalties, given its belief that the standards-setting organization might have selected other technologies had Rambus not deceived it. And it's possible the commission could even decide that Rambus needs to repay its past royalties, with interest.

How the opinion will affect Rambus' ongoing litigation with memory makers Micron(MU Quote - Cramer on MU - Stock Picks) and Hynix Semiconductor is another open question. The courts are not bound by FTC opinions, though they could provide Micron and Hynix with some ammunition and grounds to appeal any unfavorable judgments in the cases thus far.

Micron, which is involved in various suits against Rambus, issued a statement Wednesday applauding the FTC's decision.

"Micron believes that Rambus has engaged in a pattern of deception, destruction of evidence, false testimony and other improper activities designed to mislead courts and Micron to extract unjust patent licensing fees or damages," said Micron General Counsel Rod Lewis. "We will continue to vigorously advance those arguments, and the thoughtful ruling today by the FTC supports Micron's views."

Shares of Rambus were down 24.1%, or $4.10, at $12.88 in recent afternoon trading Wednesday.