Rambus Legal Defeat Puts Other Cases in Doubt

Updated from 4:24 p.m. ET

In what may be a devastating blow to semiconductor designer Rambus (RMBS), a federal court in Virginia on Friday threw out a patent case the company had filed against competitor Infineon Technologies (IFX).

The decision could have a lasting impact on the company because it immediately raises questions about Rambus' other pending patent lawsuits. Rambus, a memory-chip designer, is seeking royalty payments for two types of dynamic random access memory, or DRAM, that it says infringe on its patents: synchronous DRAM or double-data rate DRAM. A third type of memory Rambus licenses, called Rambus DRAM, or RDRAM, isn't at issue.

Investors have placed much of their hope for Rambus' future on these royalty payments. And Rambus is a stock that has attracted true believers, those investors who grasp positive developments but shun troubling issues. But, of course, there are plenty of doubters, too, and as a result the stock often experiences wild swings.

On Friday, it swung downward, tumbling $3.55, or 20%, to $14.60 a share.

While the company says it will appeal the Infineon ruling, even the true believers may not be willing to wait for yet another battle in what has already been a lengthy and costly legal war. In the second quarter ended March 31, Rambus' legal fees totaled $7.3 million, up from $4.3 million in the previous quarter.

Rambus had troubles in this trial even before it officially began April 23. In a March pretrial ruling, the judge ruled on the definition of certain terms in the patent. The narrow definition he assigned was enough to push the stock down about 50% as investors worried Rambus might have a tough time winning. Then earlier this week, the judge made clear that the March ruling on patent definitions had reduced to three from 57 the number of patent claims Rambus could make in the case. On Friday, at Infineon's request, the judge dismissed those claims.

The ruling against Rambus weakens the company's potential revenue position by making it more difficult for Rambus to extract royalty payments on SDRAM and DDR from other manufacturers of the memory, according to one of the few Wall Street analysts who still covers the stock, Mark Edelstone of Morgan Stanley Dean Witter. (His firm underwrote Rambus' initial public offering .)

"A loss in the Infineon trial will clearly call Rambus' existing SDRAM and DDR royalties and earnings into question. In addition, we believe it will be significantly more difficult for Rambus to sign up additional licensees," Edelstone wrote Wednesday in a research note.

Friday afternoon, as the Rambus news broke, Edelstone lowered his rating on the stock to a neutral from a strong buy.

The Infineon trial has made clear that what's at stake in these trials is more than just a few dollars. During the trial, Rambus disclosed that it receives 0.75% of SDRAM revenue from the companies it has royalty agreements with and that it has agreed to take 3.5% of revenue from DDR DRAM. SDRAM makes up the vast majority of DRAM produced, while DDR is still a very small percentage. Edelstone was counting on these payments to account for one-half of earnings in 2001 and 75% in the long term.

For its part, Rambus vowed to continue fighting.

"Though Rambus is a relatively small company, we will not be cowed by the aggressive tactics of some industry giants who would take our innovations without any compensation," CEO Geoff Tate said in a statement.

Indeed, the case against Infineon is one of several in the U.S. and overseas that were scheduled to go to trial over patent infringement this year. Micron Technology(MU) vs. Rambus is due to go to trial in Wilmington, Del., in May. The other case in the U.S. is Hyundai Electronics vs. Rambus in U.S. District Court in San Jose, Calif. TheStreet.com took a look at the progress in these and other cases in Europe last month.

Of course, Rambus still has its RDRAM. But the news comes at a time when the company has yet to see its proprietary RDRAM product gather much steam. The timing of its launch last November as the sole memory compatible with Intel's (INTC) Pentium 4 microprocessor ended up being a bit off. The personal computer industry failed to see the kind of growth many in the industry had expected last fall and is still struggling with the effect of inventory buildup and light consumer demand. Intel is cutting the P4 price and ramping up production, but the company is also talking up plans for a technology by year-end that will make SDRAM compatible with the P4, to be followed up by DDR.

Rambus may indeed have lost more than just one round.

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