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Back in January I discussed Rambus' (NASDAQ:RMBS) patent infringement lawsuits against Micron (NASDAQ:MU) and Hynix Semiconductor. The Micron case had been heard in Delaware, and the case was dismissed by the Judge after finding that Micron had intentionally destroyed important documents. The Hynix case had been heard in California and the Judge there came to the opposite conclusion, that Rambus had done nothing wrong. Both cases were appealed to the Court of Appeals for the Federal Circuit in Washington and after reviewing the history and analyzing the matter, I wrote:

... even if Rambus did commit spoliation, for the Delaware court to hold the patents unenforceable is a very draconian penalty, one that should only result if there was substantial bad faith by Rambus and prejudice to the opposing party. I don't see either of those proven here, as there's no evidence that Rambus purposeful tried to hide evidence and neither Micron nor Hynix has pointed to any specific issue on which the missing documents will make it harder for them to win their case. So, at worst, even if the Court of Appeals believes Rambus did destroy documents improperly, I think they will say instituting the death penalty was too harsh.

On Friday, the Court of Appeals did pretty much just that (the Micron decision is here and the Hynix decision is here). It found that Rambus had indeed destroyed documents improperly, but that the harsh penalty of dismissing the case was not justified on the record relied upon by the Delaware Judge. As a result, the Court of Appeals remanded both cases back to their respective Judges for a determination of what penalty-- if any-- should be imposed on Rambus. The Court did not say a dismissal of Rambus' cases was impossible, but just that a Judge must find more specific facts supporting bad faith and prejudice before doing so (something the Delaware court had not done).

Buried underneath the finding that Rambus destroyed documents improperly, which seemed to be grab all the headlines, is that the Court of Appeals went on to uphold the California court's findings that at least some of Rambus' patents were valid and infringed. This is a strong finding in Rambus favor. Hynix had asked the Court of Appeals to find Rambus' patents invalid on several grounds, all of which the Court of Appeals rejected.

While this outcome wasn't the complete win for Rambus that I thought it should have received (a complete win would have been the Court of Appeals agreeing with the California Judge that Rambus did nothing wrong), I think the company didn't fare better or worse than Micron and Hynix. Micron had won a dismissal below, and now has to go back and try to defend itself again. Hynix had appealed various findings that Rambus' patents were invalid, and the Court of Appeals rejected each of those arguments, so its opportunity to defend itself has been significantly narrowed. Basically, before today Rambus' net-present value of the Micron case was zero, and now it's at least greater than zero. The NPV of the Hynix case has gone down because the impact of the Court of Appeal's decision will be to delay its ability to collect payment.

The critical issue now is how badly Rambus will be punished by the California and Delaware courts for destroying documents. On that, it's interesting to note that two of the five Judges on the Court of Appeals dissented from the Hynix decision, saying they completely agree with the California Judge's finding that Rambus never did anything wrong (I personally agree with those two Judges). Regardless, the majority found Rambus did commit spoliation and that may result in the California court giving some type of punishment to Rambus, but it will not likely derail its ultimately receiving a favorable infringement decision. The Delaware court may still issue the death penalty against Rambus, but that's not certain, and the Judge will have to find a greater basis for doing so than she did before. So, again, the net news today wasn't all that bad for Rambus. The Court of Appeals could have agreed completely with the Delaware judge and said it was proper to dismiss Rambus' cases. It didn't say that, and so Rambus still will have its day in court.

The market so far does not agree with me, as RMBS was down 15% Friday and has started off this week down another 6%. Or maybe the market does agree with me that this is a mixed bag of news, but was expecting a complete win for Rambus, and the news is a disappointment. Regardless, Friday was a pretty turbulent day for the stock. Reuters reported that, "Trading in Rambus was halted six times on Friday as the stock hit circuit breakers after rapidly rising and then falling through the 10 percent threshold in a matter of minutes. At nearly 7 million shares, volume was over eight times the daily average."

Bottom line, the underlying upholding of Rambus' patent claims by the Court of Appeals doesn't bode well for those trying to avoid paying a reasonable royalty for their use. As such, Micron and Hynix may dig in their heels and go back to the trial courts and try to convince them that Rambus' destruction of documents was so heinous as to merit complete dismissal of the cases. A legal realist could comment that it's likely both lower courts will come out the same way they did last time, i.e. the Delaware court will rule for Micron and the California court will rule for Rambus. That's highly possible, but so is a settlement now that the all-or-nothing nature of the spoilation-justifies-dismissal issue has been addressed by the Court of Appeals.

If the company is strategic and thinks the Delaware Judge will rule against them, Rambus could voluntarily waive its right to continue the fight against Micron, so as to prevent the issuance of another bad precedent by that judge. At the same time, Rambus can see the Hynix case through to its end, which is most likely going to be in its favor. Once that positive precedent is set in California, and the negative precedent in Delaware is avoided, it can then make sure all new cases are filed in California and walk down the trail the Hynix case will blaze for them. This is a good hedging strategy for the company. Sure, it leaves Micron with a free pass, but a bad decision from the Delaware court would do that too, in addition to perhaps putting roadblocks in Rambus' path towards going after others. Forum shopping is a very critically important factor in litigation. Micron was wise to sue in Delaware. Rambus will be wise to do everything it can to make sure all of its future cases are in California, which-- quite notably-- is where the company's antitrust trial will soon be taking place.

Only one thing's for sure, this story isn't over yet and I'm staying long RMBS.


Disclosure: I am long RMBS.

Source: Rambus, Micron and Hynix Patent Suits: It Ain't Over Yet