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Ruling Relief Sparks Rambus Shares

The stock soars after a wrist-slap decision by the FTC.

It could have been worse -- a lot worse.

That sense of relief sent

Rambus

(RMBS) - Get Rambus Inc. Report

shares soaring Monday, as investors deemed an anxiously awaited regulatory ruling to be a slap on the wrist.

In a 30-page opinion, the Federal Trade Commission capped royalty rates that Rambus can collect from companies that use certain types of computer memory.

The commission set a maximum rate of 0.5% for DDR SDRAM and 0.25% for SDRAM.

But the commission said nothing about DDR2, the current flavor of memory used in the majority of PCs, nor did they rule on DDR3, which is expected to be the next major memory standard.

"It puts a cap on a product that has largely already transitioned out of the market," says Pacific American Securities analyst Michael Cohen, who personally owns shares of Rambus. "So, from a money perspective, it really doesn't mean that much."

Rambus, based in Los Altos, Calif., designs and licenses technology related to computer memory. The company does not disclose its exact royalty rates, but analysts believe they are generally in the 3% range for many types of memory products.

The ruling represented the FTC's remedy

for its August 2006 finding that Rambus engaged in a course of deceptive conduct in order to monopolize the computer memory market.

According to the FTC, Rambus essentially ambushed the industry by participating in a 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.

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Once the standards were ratified by the group, Rambus revealed its patents by filing patent infringement lawsuits against various parties, according to the FTC opinion.

According to the commission, Rambus violated the Sherman Antitrust Act, as well as Section 5 of the FTC Act, regarding deceptive practices. The unanimous ruling overturned a 2004 finding by an FTC administrative law judge dismissing the charges against Rambus.

On Monday, Rambus issued a statement grousing that the FTC continued to ignore the previous "extensive findings of fact" exonerating the company by the commission's own administrative judge.

But while Rambus vowed to appeal both the liability and remedy rulings and move to stay the order, Wall Street's delivered its own verdict that the ruling represented the best possible outcome since it applied to a very limited slice of Rambus' business.

Shares of Rambus were recently up 17.8%, or $3.38, at $22.30 in midday trading Monday.

The ruling caps Rambus royalty rates for three years, after which the company's rates drop to zero. But analysts pointed out that most of the patents at issue expire in 2010 anyway.

Moreover, the decision is not retroactive, meaning that the royalty ceiling does not apply to instances of companies using the SDRAM and DDR memory technology in past years.

WR Hambreacht analyst Daniel Amir says the decision could still impact Rambus' ability to collect on past royalties, since it effectively sets a benchmark for royalty rates.

"If you're a company that's getting sued

by Rambus, why would you pay anything different than this number?" says Amir.

And Amir notes that while SDRAM and DDR are not found in the majority of tech products available today, there is still a fair amount of it in the market, so Rambus will feel somewhat of an impact in its revenue stream.

"The FTC decision, as it is, is a negative event," he says. "But I think the expectations were a lot worse."

Indeed, FTC commissioner Pamela Jones Harbour concurred with part of Monday's decision but penned a dissent arguing that the remedy doesn't go far enough to restore market competition.

"The Commission can and should impose a remedy reaching the DDR2 generation of SDRAM," wrote Harbour. "A remedy extending to DDR2 would be a legitimate and appropriate exercise of the Commission's remedial discretion."