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John Danforth was late getting ready for work on April 4. His face was covered in shaving cream when the phones in his house started to ring. Unable to reach any in time, Danforth headed for his laptop, where he logged onto his office e-mail and found some very good news. A controversial appeals court ruling made earlier this year in favor of Rambus Inc., where Danforth serves as general counsel, would stand. Elated, Danforth dressed up for the occasion by donning a blue denim work shirt — just in case, he thought, a local newspaper wanted to snap a photo. Danforth had good reason to be overjoyed. The news that the full U.S. Court of Appeals for the Federal Circuit would not reconsider Rambus’s victory was part of a striking comeback for the Los Altos, California — based computer memory developer. Once hailed by Wall Street for its innovative microchip designs, Rambus had in recent years become mired in litigation with rivals and government regulators over patents covering more than 90 percent of the $15.5 billion market for computer memory. But the appeals court decision — which cleared Rambus of patent fraud and ruled against its rival, German chip maker Infineon Technologies AG — came as sweet vindication. For Danforth, the victory was also personal. He’d signed on as Rambus’s first GC in 2001, after the company lost the initial round against Infineon and was found to have committed fraud. That verdict sent Rambus’s stock price tumbling, sullied its reputation, and caught the attention of antitrust regulators and angry shareholders. It fell to Danforth and a new team of outside lawyers to revamp Rambus’s legal strategy. With the April victory, Danforth passed his first big test. It won’t be his last. In June 2002 the Federal Trade Commission brought an antitrust suit against the memory licensor; at press time the trial was slated to begin in late April. The trade regulators claim that Rambus engaged in anticompetitive acts when it simultaneously sat on an industry standards-setting body for chip memory designs and developed patents on those very standards — without disclosing that information to the group. The FTC case revisits many of the issues in the Infineon suit: Regulators are trying to block Rambus from enforcing some of its patent claims and from collecting royalties, estimated at hundreds of millions of dollars a year, on those licenses. Did Rambus cheat its competitors? Or did this aggressive young company simply find the loopholes in a flawed system? Rambus says it did neither; Danforth insists Rambus wasn’t playing fast and loose with the standards-setting body’s rules. “We weren’t that clever,” he says. The company has hired elite law firms, including Los Angeles’s Munger, Tolles & Olson and Washington, D.C.’s Wilmer, Cutler & Pickering, to make its case. Rambus officials estimate that legal fees will run as high as $22 million this year — as much as one-third of the company’s operating budget. That brings to $60 million the total it has spent on legal fees since 2001 alone. “Rambus has a lot at stake, which is why [it's] going to fight this to the bitter end,” predicts Amy Marasco, general counsel of the American National Standards Institute, a nonprofit industry group. But this story is about more than the viability of one company’s business plan. It raises troubling questions about the way in which competitors work together to steer technological innovation. Standards-setting bodies, voluntary groups that develop specifications for the components in everything from sunglasses to staplers, are central to the way that corporate America does business. These bodies operate on the understanding that any standard adopted should be freely available or, at most, licensed for a small fee. Participating companies are expected to disclose any relevant patents they own or are trying to obtain. What that means in practice — and what Rambus did or didn’t disclose while sitting on a semiconductor standards-setting group — is at the heart of the company’s litigation woes. Low Profile, High Revenues Finding Rambus is no small feat. Situated along Silicon Valley’s main north-south artery, El Camino Real, the company’s Los Altos headquarters aren’t marked by a big sign or a glass-encased office tower with a parking lot full of Land Rovers. In fact, the building that houses Rambus’s 200 employees, mostly engineers, could easily be mistaken for the Marriott Residence Inn next door. But at 45 and of medium build, GC Danforth fits the laid-back, Silicon Valley executive stereotype. His army-green jeans, leather clogs, and dark gray pullover make the local uniform of choice — denim shirts and khaki pants — look almost formal. When he smiles — and that happens often — a small gap appears between his front teeth, and the telltale signs of years spent in the California sun show up around his eyes. When he speaks, the words tumble out in a series of run-on sentences marked by a dry sense of humor (“Did [my boss] say anything about a raise?” he writes in an e-mail exchange with this reporter. “I have to buy a new suit for this upcoming [FTC] trial.”) His easygoing manner conveys either a real desire to be out mountain biking or a calculated effort to disarm. For all his schoolboy charm, Danforth is clearly no Valley bumpkin. A 1982 Columbia Law School graduate, former Morrison & Foerster partner, and ex — GC to Creative Labs Inc., a leading maker of computer sound and graphics equipment, Danforth has worked on several high-profile securities and intellectual property matters. He’s been in the hot seat before. Cedric Chao, a MoFo partner, recalls bringing in Danforth, then a junior partner, on the eve of an early 1990s trial of a Chinese drug informant who faced deportation by the U.S. government — and, according to Chao, certain death. For Danforth, who acted as second chair, and Chao, the hours were long, and the media spotlight intense. Though a latecomer to the case, Danforth got up to speed quickly and deftly handled some cross-examinations, says Chao. All the while, Danforth kept his cool. Chao says, “He is just so good under pressure.” A decade later, Danforth is back in the spotlight. And buoyed by Rambus’s recent appellate win, he’s eager to tell the company’s side of the story. It’s a fresh tactic for a corporation that’s been seen as an industry pariah since the Infineon litigation initially hit the press. “They’re reinventing themselves into this nice, cuddly Rambus,” says Richard Gordon, a research vice president at computer consultants Gartner Dataquest. “Wizards” Under The Gun Rambus was founded in 1990, at a time of crisis in the semiconductor industry. While microprocessors, the “engine” of computers, were running at ever-faster speeds, computers’ memory devices couldn’t keep the pace. The result was a virtual traffic jam that severely limited computer speed. Rambus’s founders solved the problem by designing a radically new type of memory chip that could handle the increased data flow. “From a technology standpoint, these guys are wizards,” says Lee Van Pelt, a Cupertino, California, patent lawyer and former computer engineer who has followed the Rambus saga. To capitalize on its invention, the company adopted an unusual business strategy: Rather than manufacture its own memory chips, it would live off licensing fees. Patents are, as a result, Rambus’s lifeblood; royalties accounted for 92 percent of the company’s $96.6 million in revenues last year [see "Down Pat," page 88]. Rambus prospered throughout most of the 1990s. Revenues soared as Toshiba Corporation, Samsung Electronics Co., Ltd., and NEC Corporation signed licensing deals. In 1997 the company went public in a stock debut that The Wall Street Journal later called the “hottest IPO” of the year. But just a few years later, Rambus’s luck changed. At the end of the decade, chip companies started moving away from Rambus’s early patented designs to newer, open-source technology that was cheaper to make and didn’t come with hefty licensing fees. Intel Corporation, Rambus’s largest licensee and the world’s biggest chip maker, indicated that its future microprocessors would support multiple memory designs, including a cheaper competing memory design called “SDRAM” (synchronous dynamic random access memory), which had become the industry standard. Intel’s move was a blow, but Rambus had another weapon in its arsenal. In the mid-1990s Rambus had filed for and received patents on SDRAM and other key memory technologies. Once the SDRAM standard became widely adopted a few years later, Rambus sought and found licensees. Toshiba, Samsung, and Hitachi, Ltd., agreed to license this technology from Rambus, but others, including Infineon, Hynix Semiconductor Inc., and Micron Technology, Inc., balked. Gordon, the analyst, says there was no way those businesses were going to let Rambus “sit back and charge [a fee]” for technology that these companies claimed was already freely available. In August 2000 Rambus sued Infineon for patent infringement. Soon afterward Rambus was battling Hynix and Micron in court as well. A Strategy Backfires Going to court was a risky, aggressive strategy. And at first it didn’t work. In May 2001 a federal court in Virginia tossed out all 57 of Rambus’s infringement claims against Infineon. But that wasn’t all. Infineon brought allegations of its own against its rival. Infineon claimed that Rambus had obtained some of its memory patents illegally. The counterclaims were tried before a jury, which agreed with Infineon and socked Rambus with $3.5 million in damages — later reduced to $350,000, as required under Virginia law — for committing fraud. Posttrial, the court ordered Rambus to pay Infineon $7.1 million in attorneys’ fees for litigation misconduct, including document destruction. (Note: Corporate Counsel’s parent company, American Lawyer Media, Inc., participated in a related action to unseal information on legal fees in the Rambus-Infineon litigation.) The crux of Infineon’s winning argument centered on Rambus’s participation a decade ago on an exclusive committee of industry leaders that sets semiconductor chip standards. From 1991 until 1996, Rambus was a member, along with International Business Machines Corporation, Hewlett-Packard Company, and others, of what was then known as the Joint Electron Devices Engineering Council (JEDEC). Like most such groups, JEDEC’s primary goal is to adopt open standards, using technology that is freely available, or else patented technology that is available for licensing on a “reasonable and nondiscriminatory basis.” Participants are supposed to disclose any relevant patents they hold on the standards under development. At trial the jury accepted Infineon’s argument that Rambus had not only kept quiet about patents it should have disclosed, but also had rewritten pending patent applications to update standards as JEDEC adopted them. It was, Infineon charged, a violation of both JEDEC rules and of the spirit of standards-setting bodies. For Rambus, it was the fraud finding, not the fine, that was so damaging. The verdict not only validated Infineon’s defense, it also gave Hynix and Micron, whose cases had been stayed pending the Infineon outcome, a powerful weapon in their suits. The media coverage of the Infineon verdict was also ruthless. What’s more, the outcome caught the attention of the FTC and shareholders, both of which later sued Rambus. Surprisingly, Rambus had gotten to this low point without a general counsel. CEO Geoffrey Tate says it hadn’t dawned on him that Rambus would need more than a handful of patent prosecutors on staff. He readily admits today that he was naive. But finding a chief legal officer wasn’t easy. Tate says that many attractive candidates were scared off by the company’s aggressive reputation and flagging stock price. Danforth himself recalls thinking, “Oh, that’s a bad one” when Rambus’s recruiter called in September 2001, four months after the Infineon verdict. But for Danforth, the overture came at a propitious time. He was coming off a six-year stint at Creative Labs, and an abortive GC posting at Niku Corporation, an Internet start-up. After a month’s R&R in India, he was ready for a new job. In late 2001, Rambus signed him up for a post that paid $364,000 in salary and bonus last year. He also got stock options worth as much as $5 million, according to the company’s most recent proxy statement. RIPE FOR ATTACK Danforth dove into the new position. His first priority was reframing the issues in the Infineon appeal, by focusing more on the fraud verdict. The way he tells it, Infineon’s trial lawyers at Chicago’s Kirkland & Ellis did a masterful job turning the tables on Rambus: The question wasn’t just whether Rambus had violated JEDEC’s patent disclosure policy, but whether Rambus had stolen from JEDEC. “A jury,” says Danforth, “gets a whole lot more incensed about theft than it does about nondisclosure.” But he thought an appeals court would not be swayed so easily. For one thing, JEDEC’s policy governing patent disclosure was vague and ripe for attack. Danforth is also guardedly critical of Rambus’s outside trial team at Palo Alto’s Gray Cary Ware & Freidenrich. With lawyerly reserve, he says that “they went into it thinking they were just litigating a patent case.” With Virginia’s rocket docket and pretrial rulings that went against Rambus, they didn’t have enough time to deflect Infineon’s attack. While Gray Cary still represents Rambus on some matters, Danforth has since brought in Munger, Tolles & Olson, a firm he’s worked with before, to lead the company’s defense in the FTC case and any future trials in the Infineon, Hynix, and Micron suits. To handle its Infineon appeal, Rambus brought in appellate specialists from Howrey Simon Arnold & White and Farr & Taranto, both Washington, D.C. — based. Danforth also works closely on these issues with two in-house lawyers: Robert Kramer, litigation counsel, and patent counsel Paul Anderson. Switching outside counsel and bringing in a GC paid off. On January 29 the circuit court reinstated Rambus’s patent infringement claims against Infineon. What’s more, the panel tossed out the fraud verdict and the attorney fee award. Rather than delve into Rambus’s behavior, the court found that the fundamental problem lay with the standards-setting body itself and with JEDEC’s “staggering” lack of clear patent disclosure rules. Danforth, with a typical sense of Valley irony, celebrated that day with Chee.tos and champagne. The ruling stunned Rambus’s foes — and drew a dissent from one judge on the panel. While lawyers for Infineon and other company rivals would not talk on the record, one attorney involved in the litigation complained bitterly that the circuit court had overstepped its bounds. Echoing the opinion’s lone dissent, this lawyer says the court had no business making a de novo ruling after a jury found that Rambus had engaged in “an absolutely deliberate scheme” to manipulate JEDEC for its own gain. An appeal by Infineon to the U.S. Supreme Court is likely, Infineon says. “There’s no way Infineon will give up without a fight,” predicts Gordon of Gartner Dataquest. “You’re talking about hundreds of millions of dollars. The industry is not going to give Rambus all that money.” Word of the appeals decision alarmed standards-setting bodies, which viewed the ruling as a warning to review, if not clean up, their official patent disclosure policies. But that created a catch-22 for these groups. [see "Standard Deviation," page 86] The more rigid the disclosure policy, some say, the harder it will be for the groups to function. “The whole point is to keep [the standards-setting process] as commercially viable and vibrant as possible,” says Marasco of the American National Standards Institute. “You don’t want to put too many strictures on this.” Enter The Feds While Danforth relished the win in the Infineon case, there hasn’t been time for a Silicon Valley victory lap, as he prepares for another high-stakes trial. In 2000, the FTC started looking into Rambus’s conduct while it sat on JEDEC. In June 2002 the regulators filed suit against the company; the trial was expected to start this spring. “The conduct at issue here has done substantial harm to important technology markets, and threatens to undermine participation in industry standard-setting activities more generally,” said Joseph J. Simons, director of the FTC Bureau of Competition, in a statement announcing the complaint. Danforth had tried to prevent the FTC case from getting this far. Throughout the end of 2001 and early 2002 — while also working on the Infineon case — he lobbied the agency to back off. He sent regulators a 27-page, single-spaced defense of Rambus. He met with each commissioner separately, as is agency policy. He says he told them that proving their case would be like trying to drive a huge tank across a massive gorge using a rickety rope bridge. JEDEC’s unclear and unenforced patent disclosure rules, he insisted, were the problem, not Rambus. At those meetings, Danforth also raised a new defense. He told agency officials that Rambus was the victim of an industry conspiracy to drive it out of business. When Rambus joined JEDEC in 1991, he reminded the commissioners, the company was a small fish swimming in a very big shark tank. Over time, the industry cartel argument has become central to Rambus’s strategy; and it is, Danforth says, an argument that grew out of reports last year that the U.S. Department of Justice has been investigating many of the company’s rivals for alleged price-fixing. Danforth thought he’d made a convincing case. At a minimum, he figured that the FTC would wait until after the circuit court ruled on Infineon before filing suit. On that count, Danforth was wrong. Only two weeks after the June 2002 oral arguments in Infineon, the FTC sued Rambus for allegedly violating federal antitrust laws. In essence, the FTC is trying to accomplish what Infineon couldn’t: preventing Rambus from enforcing its patent claims and collecting royalties on those licenses. Analysts estimate that those claims, if successful, are worth about $400 million a year. Had Danforth missed a critical sign during his FTC tête-à-têtes? An FTC lawyer who spoke on the condition of anonymity says he did. The FTC was mostly concerned about evidence showing that Rambus had intended to deceive JEDEC and then tried to cover that up. (Danforth says those claims are unfounded.) The GC’s arguments about the industry cartel only made agency lawyers more suspicious. “What it communicated was that they were not comfortable dealing with the case on our terms because they didn’t have a defense,” says this lawyer. “Deal straight up on the allegations we’re making rather than keep trying to change the subject.” At press time the two sides were headed for a two-month trial due to begin April 30. While Danforth says he is confident that Rambus will prevail, the champagne isn’t on ice and the Chee.tos are still in the cabinet.

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