Rambus Soars On Potential for Huge Settlement in Hynix Case

Rambus (RMBS) shares are up about 20% Wednesday following a Bloomberg report asserting that the company could win as much as $10 billion in royalties as a result of its 7-year-old patent infringement litigation with Hynix Semiconductor and other memory chip makers over DRAM technology.

This case has been dragging on for years. As the Bloomberg piece notes, Rambus in 2006 was awarded $133.4 million in an infringement case against Hynix. The spotlight is on the case today as a trial gets underway in federal court in San Jose that will address allegations made by Hynix that Rambus received its patents based on information illegally obtained in industry meetings in the 1990s. Opening arguments in the case are scheduled for February 4. A victory for Rambus could be hugely bullish for the stock and put pressure on the memory chip companies to settle with Rambus. But a loss would likely trigger a huge drop in the shares.

The $10 billion potential payout Bloomberg cites is based on an estimate by analyst Michael Cohen of Pacific American Securities, who assumed that a 4.25% royalty is placed on the sale of memory chips not just from Hynix but for all manufacturers of the same class of components. The calculation also assumes that court grants the request from Rambus for triple damages due to willful infringement.

Well, maybe the case will pay off $10 billion; but it is no sure thing. In a research note this morning, American Technology Research analyst Jeff Schreiner asserts that a positive outcome of the case could trigger a rally of 100% or more; but that a negative outcome but result in a loss of more than 50%. He asserts that RMBS has a slight upper hand in the case, citing “several favorable key rulings.” He notes that “there are no certainties in litigation and that a jury trial adds additional risk,” but nonetheless advises buying shares during the trial.

Investors are following his advice: RMBS Wednesday is up $3.37, or 20.4%, at $19.89.