Rambus: The Next Big Litigation Play

In the past few weeks, I have written Seeking Alpha articles on Tessera (TSRA), both before the ITC Ruling when the stock was at $16/share, and afterwards when the market didn’t appreciate the significance of the ITC win and the stock was still at $19/share.

Tessera now stands at $27/share and still has plenty of room to run. I also wrote an article on how the market has yet to fully appreciate the significance of the TiVo (TIVO) win in their case against DISH (EchoStar) in the Eastern District of Texas. While I think both of these plays have just begun the first stage of a long rise, investors are always looking for the next big play. I know one that is definitely worth further investigation. The name of that stock is Rambus (RMBS).

I have followed Rambus closely for over ten years. I have personally participated in the roller coaster ride that has sometimes been gut wrenching, and sometimes been thrilling. As you can see, the stock has performed like a roller coaster, going from highs of over $120 year in 2000 when Intel (INTC) announced Rambus DRAM (RDRAM) would be used in Intel computers, to lows of $3/share after the FTC filed Antitrust charges against Rambus in June 2002.

In the past four weeks, Rambus has quietly climbed from 11 to 14, and not many people have noticed. This is despite a document spoliation ruling from Delaware in January that went against Rambus (it is being appealed by Rambus to the Court of Appeals of the Federal Circuit). Before you automatically think Rambus did something illegal when they implemented a document retention policy in 1998, you should know that Judge Ronald Whyte of the Northern District of California has ruled that Rambus did nothing wrong when they implemented this policy. Judge Whyte is one of the most respected federal judges in the country, and his rulings are seldom overturned, while Judge Sue Robinson in Delaware has a much higher rate of having her verdicts overturned. It is my belief that Judge Robinson’s ruling will be overturned at the CAFC.

Why is Rambus stock climbing even though they had a major setback in Delaware back in January of this year? Here are some recent events that may be causing this rise.

1. The FTC dropped the case against Rambus after the US Supreme Court denied hearing the appeal. Rambus is one of only a very few companies to beat the FTC in Federal Courts.
2. Rambus won their DDR case against Hynix in the Northern District of Califiornia. Judge Whyte awarded Rambus 400 million in past damages and a 4.25% on-going royalty rate on US sales. Hynix is appealing this ruling, but they have to post a bond of 250 Million (plus provide 300 Million in assets as additional collateral), and they have to put the 4.25% compulsory royalty rate into an escrow account. Hynix has to post their bond later this month, and since bonding companies have changed their requirements in these tight credit markets, Hynix may have to seriously consider settlements.
3. Rambus has a case at the ITC against a dozen companies including Nvidia and Hewlett Packard. This case is proceeding to trial in late August, but there are court mandated settlement talks in process. This case covers memory controllers associated with virtually all types of DDR and GDDR memory. Nvidia has tried to get this case stayed due to the Delaware spoliation ruling, but the ITC refused to stay the case. The staff attorneys at the ITC have agreed with almost all of the Rambus claims construction terminology. From my observations, this case appears to me to be going very well for Rambus.
4. Rambus has an antitrust case against the Samsung, Hynix, and Micron in California State Court in San Francisco. ... case started in May of 2004, and it is finally coming to trial. Over the past five years, the defendants have tried numerous ways to get this case dismissed, or to delay the start of this case. But, Hon. Judge Richard Kramer just a week ago confirmed his tentative ruling that this case will start in September and that he would not allow the spoliation ruling from Delaware to stop the AT case. This news has not yet hit the mainstream business press, because the only reporter at the hearing had to leave before the judge issued his ruling from the bench.

Significance of the AT Case

Unless you have followed Rambus for 10 years like I have, you may not understand the significance of this Antitrust price fixing case they have against Samsung, Hynix and Micron. First, you should know that Samsung and Hynix signed plea agreements admitting that they fixed prices, and they both had several executives go to jail. Micron turned the other cartel members in to the US Department of Justice in exchange for amnesty. This story has been covered by major news media in the past. For example, Business Week first started putting together the pieces of the puzzle over 3 years ago in this excellent article.

Then, just a year ago, Bloomberg did an expose on the DRAM Price Fixing Cartel.

In essence, these defendants have already been proven guilty of DRAM price fixing, and now Rambus can tell the world (and a California jury) why they fixed prices. In fact, a few emails have already been made public in the early stages of this case.

The damages in this Antitrust price fixing case are huge. Rambus lost billions of dollars in royalties when the DRAM manufacturer’s actions convinced Intel to shy away from RDRAM as the standard memory for future Intel PC’s. In fact, in recently revealed court documents, Rambus alleges the damages to be 4.32 Billion dollars, which are then subject to automatic trebling because this is a Cartwright Act case.

Therefore, the total damages facing the DRAM manufacturers approach 13 Billion dollars. With Rambus having approximately 104 Million shares outstanding, that is over $120/share in past damages alone.

What About the Rambus Patent Reexminations at the US Patent Office?

Recently, we heard news that Rambus patents were invalidated in the Nvidia reexamination. This was simply the first salvo in these reexaminations, which, were all "ex parte" reexams. When the reexam process is started by a third party requesting a patent be reexamined, it is routine procedure for the patent office to initially reject all the claims as they start the process to review prior art, and other issues such as obviousness, anticipation, etc.

The US ITC will be finished with their trial and Hon. Judge Essex will have his initial decision out long before the US PTO gets around to issuing a final office action (which you will learn when you study the reexam process isn't really final). My research on ex parte reexams reveals that in only about 10% of the cases are all the claims rejected.

My suspicion is that most of those are cases when the patent owner didn't put up a fight.

In my humble opinion, this recent news flash about the PTO rejecting some patents was a non event, but it did help depress the stock price for those wanting to buy. There have been numerous “inter partes reexaminations” brought by Samsung against Rambus patents in the past 3 years. In every case, all the claims were rejected in the initial office action.

However, as Rambus worked with the US PTO to answer their questions, over 57% of the claims have been validated in the reexams where final office actions have been issued.

Why Is Rambus Undervalued?

After Judge Kramer ruled that the antitrust price fixing case is still on for September, and Judge Essex at the ITC has refused attempts to delay the case at the ITC, the DRAM manufacturers and the controller manufactures are facing huge financial consequences if they don’t settle. In fact, Rambus foes may even be betting their company if they are found guilty. So, there is an increased possibility of settlements.

In addition, now would be an ideal time for someone to acquire Rambus. While I doubt the Rambus Board of Directors would seriously entertain a buyout offer of less than $40, there could still be some major venture capital fund that would come along and offer $25 -30/share

My price target for Rambus over the next 2 months is $26, and my 1 year price target is $80 (this assumes the September trial goes forward as currently scheduled and this is a very conservative estimate)

Disclosure: Long RMBS, TSRA, and TIVO

Comments

[HerrKevin:]

There's just one problem with RAMBUS: Their tech sucks. Why should this company make any money? RDRAM is all washed up, and their only other products are DDRx series of RAM that a plethora of companies make. Maybe I'm wrong here, and I'd enjoy seeing an article from you saying why, but to be long in this stock I think you have to show how after the court cases are over a higher price is justified. For example TIVO is a successful company with millions of subscribers and TSRA has interesting tech with good growth prospects. RMBS on the other hand.. well, I can't see any good reasons, but you've been following it longer than me apparently so lets hear it!

Jun 08 09:07 AM

[Mr. B:]

HerrKevin,

Did you read the article? If Rambus technology "sucks", why have all of the memory manufacturer's "stolen" it and incorporated the technology into every generation of memory products produced over the past 10 years?

Rambus finally has a chance to get paid.

This is a very good synopsis of reams of information. NJ, thanks very much.

Disclosure: Long RMBS for 10 years

carpediem0496

Jun 08 10:16 AM

[Bull Run:]

Typical American company, No products, just litigation stock plays. Abolish patents, and let the markets decide, which products they wish to buy. Patents and their litigation have turned into major income for lawyers, spending insurmountable amount of time to find new cases, with little or NO real evidence of infringement. Pathetic attempt to create false wealth. The major problem facing the defense is that many of these cases are very technical, and difficullt for a jury to understand, which works in the litigations favour. In the end do patents really serve a useful purpose. Are companies protected? Even with defensive patents, patents that surround the original patent, products will be made to produce a similar outcome. (Pharm. drugs). Many patents should never have been allowed. eg. The variable wind shield wiper, was just a varibale resistor added to a wiper circuit. Should that be a patent? There was a patent to registra the automoble, which Ford fought for nearly a decade and won, in the early years.(GM gave up on) How can there be a patent for an automobile?? Patents are just pathetic attempts by many to gain from ill gotten gains.

Jun 08 12:33 PM

[Roger Knights:]

There was a March 19 SeekingAlpha article, "All Roads Lead to Rambus," that described two of Rambus's new products, XDR memory technology and its mobile memory initiative. Here's the link:

seekingalpha.com/artic...

Jun 08 01:34 PM

[Roger Knights:]

Here's a link to a list of all the articles and mentions of Rambus on SA:

seekingalpha.com/symbo...

Jun 08 01:53 PM

[JosephN:]

Some of the patent claims against Nvidia were withdrawn today at RMBS request. I would like to hear Nuke John's take on this action.

(*Long NVDA)

Jun 08 09:57 PM

[Nuke John:]

In my opinion, Rambus withdrew these claims for expediency and to streamline the case against Nvidia, HP and others. This case is scheduled for trial starting August 31st, and there were originally nine patents in the case. Four of those nine patents have been withdrawn. Obviously when Rambus withdrew some patents, they kept the ones they thought were stronger and easier to win on. We have yet to see the final claims construction from the ALJ, but we have seen the claims construction recommendations from the ITC staff. The staff agreed with Rambus' proposed claims construction on about 90% of the terms. Perhaps, the patent that were withdrwan were withdrwn because they related to the 10% of the claims terminology where the staff didn't agree with Rambus.

Here is a list of patents in the case.

7,177,998 7,210,016 6,470,405 6,591,353

7,287,109 7,287,119 (withdrawn)

7,330,952 (withdrawn) 7,330,953 (withdrawn)

7,360,050 (withdrawn)


On Jun 08 09:57 PM JosephN wrote:

> Some of the patent claims against Nvidia were withdrawn today at
> RMBS request. I would like to hear Nuke John's take on this action.
>
>
> (*Long NVDA)

Jun 09 07:07 AM

[KarateKid:]

Does anyone knows if Hynix were able to obtain a bond for their $400 million judegment to Rambus?

What happen if they can't?

If they can, when is the appeal's date?

Thanks

Jun 09 11:13 AM

[HerrKevin:]

Of course I read the article. And just because you have a bunch of patents doesn't suddenly mean your tech is good, or even that anybody else copied it. Anybody can issue a ton of vague patents (see: Amazon) that seemingly everyone copies. Now I didn't want to go accuse RMBS of being a patent troll in my first post so that I could engage a bit of discussion, but now I will: RMBS's claims are typical patent troll claims, but that doesn't mean they won't necessarily win (That's just how our court system works at the moment)

They have no chance on patents 7,177,998 7,210,016 -- they'll get killed by prior art. There's just no way those are novel developments given when the patent apps were filed.

6,470,405 6,591,353 have a chance, I don't feel like getting into the details of them (patents are quite boring as most people know), but I'm still fairly skeptical of them simply based on the introductions.

And while I haven't been following RMBS's stock for the past 10 years, I have been following their hardware for a long time.

And disclosure: Not short or long RMBS. It's too hard to know what the court will do on these patents to go either way.

On Jun 08 10:16 AM Mr. B wrote:

> HerrKevin,
>
> Did you read the article? If Rambus technology "sucks", why have
> all of the memory manufacturer's "stolen" it and incorporated the
> technology into every generation of memory products produced over
> the past 10 years?
>
> Rambus finally has a chance to get paid.
>
> This is a very good synopsis of reams of information. NJ, thanks
> very much.
>
> Disclosure: Long RMBS for 10 years
>
> carpediem0496
>
>
>

Jun 09 11:22 AM

[Infinitus:]

Hello Nuke,

great article, as always. Many thanks.

Regarding the buyout: I would love to see a first offer which would immediately lead to a bidding war, thus propelling the price per share higher and higher.

Regarding your 1 year price target: If the AT-trial starts and it works fine for RMBS, than 80$ are far too low. As you wrote: "Therefore, the total damages facing the DRAM manufacturers approach 13 Billion dollars. With Rambus having approximately 104 Million shares outstanding, that is over $120/share in past damages alone."

So the price per share will be more a multiple of 80.

On the other hand there is the possibility that the cartel drags their end further out through appeals. So a one year target between 80 and 127 (all time high) is OK for me :-)

Once again many thanks for this fine evening lecture.

Kind regards,

Markus

Jun 09 03:34 PM

[JosephN:]

I'll be the first to admit that I'm no patent expert. Hardware has never been my strong suit, rather I gravitated towards software and computational theory in college. However I find it hard to believe a company like Nvidia would risk their business by knowingly violating valid RMBS patents.

Some people like to hate on NVDA, but the facts are the company is one of the most innovative semiconductor plays out there. They've got enough talented engineers to do their own work. My bet is in the next 10 years they will run rings around intel, amd and anyone else out there.

I don't recall RMBS withdrawing the claims for HP and other companies in the suit, so maybe they stand at fault for these alleged patent violations. However I'm sure NVDA would come clean if they're guilty and just move forward, they got bigger fish to fry.

RMBS seems to have a better chance against the memory manufacturers and their alleged collusive pricing. This could
be reason enough to be long RMBS. If RMBS wins it will go off like an earthquake through the industry.

I saw your article on TSRA when it was 19 and wish I jumped on it then ;) I'll be watching this one for a pullback, their novel notebook chip cooling solution sounds like a real winner.

I appreciate your articles Nuke John, well written and informative, please keep them coming!

Joseph

(long NVDA & AMD)

On Jun 09 07:07 AM Nuke John wrote:

> In my opinion, Rambus withdrew these claims for expediency and to
> streamline the case against Nvidia, HP and others. This case is
> scheduled for trial starting August 31st, and there were originally
> nine patents in the case. Four of those nine patents have been
> withdrawn. Obviously when Rambus withdrew some patents, they kept
> the ones they thought were stronger and easier to win on. We have
> yet to see the final claims construction from the ALJ, but we have
> seen the claims construction recommendations from the ITC staff.
> The staff agreed with Rambus' proposed claims construction on about
> 90% of the terms. Perhaps, the patent that were withdrwan were
> withdrwn because they related to the 10% of the claims terminology
> where the staff didn't agree with Rambus.
>
> Here is a list of patents in the case.
>
> 7,177,998 7,210,016 6,470,405 6,591,353
>
> 7,287,109 7,287,119 (withdrawn)
>
> 7,330,952 (withdrawn) 7,330,953 (withdrawn)
>
> 7,360,050 (withdrawn)

Jun 10 01:34 AM

[The Mustang:]

RMBS up 15% today on offer to settle EU antitrust case thereby avoiding fines. Did you take this eventuality into account in your earlier analysis? How does this impact your target price?

Jun 12 09:39 AM

[Nuke John:]

My 2 month target is now $36 and my 1 Year Target is now $100. I also now have a 3 year target at $350. I am going to do a revised article over the weekend. This clears the way for multiple licenses and we should start seeing these licenses soon.

NJ

Jun 12 02:46 PM

[beandog:]

JEDEC claiming Rambus secretly "fooled everyone" is a joke. You're talking about technology Rambus has that was way ahead of its time..from changing the then 20mhz to 500mhz memory speed. Rambus' chip design was totally novel and mind-bloggling that everyone would have wondered where it came from before JEDEC adopting it. Truth is, all the committee members knew. Most just want to steal from Rambus. It was Toshiba, a customer of Rambus, who encouraged Rambus to join JEDEC. Toshiba knew Rambus had powerful patents and thought Rambus could benefit the industry.

Besides, it was standard practice that JEDEC members did not have to reveal their patents (but that those patents that get adopted would charge reasonable rates), but Rambus revealed all of theirs (pending patents) anyways.

Is Rambus the next Qualcomm? beanieville.blogspot.c... .

Jun 20 02:40 AM