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In a bet-the-company case with more than $1 billion on the line, lawyers for memory chip designer Rambus Inc. squared off against the Federal Trade Commission last week in the opening round of a massive, eight-week administrative trial. The FTC has charged Los Altos, Calif.-based Rambus with abusing its intellectual property rights to illegally monopolize the market for a widely used form of computer memory. “We are here because Rambus simply refused to play by the rules,” said M. Sean Royall, deputy director of the Bureau of Competition, in opening arguments April 30 before Administrative Law Judge Stephen McGuire. “Rambus seeks to cling to a potential fortune in royalties that it acquired not through competition, but through deception.” The FTC is seeking an order that would bar Rambus from enforcing its patents at home and abroad — a remedy that could cost the company more than $1 billion in lost royalties and that Rambus lawyer Gregory Stone of Los Angeles’ Munger, Tolles & Olson calls unprecedented. Stone says his client has done nothing wrong. Rambus’ conduct, he argues, “had a legitimate, pro-competitive purpose.” The case, which involves 500,000 pages of documents and 18 major law firms, is among the biggest administrative proceedings in FTC history. It could also mark a subtle shift in the boundary between patent rights and illegal monopolistic practices. “It shows the FTC is being more careful about the abuse of intellectual property rights,” says David Balto, an antitrust partner at the D.C. office of White & Case. “They’re not being as deferential as antitrust enforcers have been in the past.” Rambus currently collects royalties of $50 million to $100 million a year from companies that make chips used in computers, printers, fax machines, video games, and more. That’s because Rambus holds patents on key aspects of digital computer memory known as SDRAM, which was adopted as the industrywide standard in 1999. The question is, how did Rambus come to be in such an enviable position? STANDARD-BEARER From 1991 to 1996, Rambus participated in an electronics industry standard-setting body called Jedec, formerly known as the Joint Electron Device Engineering Council. Jedec selected SDRAM as the technology of choice. One of the group’s goals was to avoid using patented technology in its standards whenever possible. The FTC alleges that Rambus violated Jedec’s rules by failing to disclose its patent applications related to SDRAM. Even when asked point-blank by group members, Rambus repeatedly offered no relevant information about its intellectual property holdings, the FTC contends. In opening arguments, Royall displayed a 1999 document from Rambus CEO Geoff Tate, which admonished company employees “not to indicate/ hint/ wink/ etc.” that the Jedec standard infringed on Rambus’ patents. “Rambus fundamentally subverted the purpose of Jedec’s open standards process,” Royall argued before the standing-room-only crowd, accusing the company of acting in bad faith and engaging in unfair methods of competition in violation of Section 5 of the FTC Act. Furthermore, the company kept amending its patent claims in response to what it learned at the Jedec meetings. According to the complaint, filed in June 2002 and approved 5-0 by the FTC commissioners, a Rambus representative regularly attended Jedec meetings. During the meetings, he would send e-mails to Rambus headquarters and to patent counsel Lester Vincent of Blakely, Sokoloff, Taylor & Zafman “suggesting that Rambus’s pending patent applications be reviewed, and if necessary amended to ensure they covered such technologies” being discussed. Vincent practices in the Sunnyvale, Calif. office of the L.A.-based firm. Had the members of Jedec, which include most major electronics makers, known about Rambus’ patents and the “unlimited royalty demands” that ensued, said Royall, “there is little doubt Jedec would have worked around Rambus’ patents by shifting to an alternative technology, of which there were many.” Upon advice from counsel, Rambus dropped out of Jedec in 1996 in the wake of an FTC consent decree with Dell Computers, which involved charges of anti-competitive conduct in another industrywide standard-setting organization. Rambus lay low until late 1999. When the new standard was firmly in place, Rambus began demanding licensing fees from chipmakers. Companies that refused to pay were hit with lawsuits for patent infringement. ATTRACTING LAWYERS Not surprisingly, the case has attracted widespread interest among electronics companies — 11 have retained counsel in connection with the proceedings. Among the firms involved: Kirkland & Ellis for Infineon Technologies; Hogan & Hartson for the IBM Corp.; Arnold & Porter for Micron Technology; O’Melveny & Myers for Hynix Electronics; Jones Day for Texas Instruments Inc.; Pillsbury Winthrop for Toshiba American Electronic Components Inc.; and Weil, Gotshal & Manges for Samsung Semiconductor Inc. The case is costing Rambus a small fortune in legal fees. In addition to Munger, Tolles, Rambus is being represented by a team from Wilmer, Cutler & Pickering led by A. Douglas Melamed and by attorneys from the San Diego office of Gray Cary Ware & Freidenrich. The company spent $7.1 million on lawyers between January and March, according to CFO Robert Eulau in an April 14 earnings conference call, and expects to spend another $5 million to $8 million this quarter, largely due to the FTC suit. Rambus is also currently involved in private litigation with competing claims of patent infringement, fraud, and antitrust violations against Hynix in U.S. District Court for the Northern District of California, and in Europe; against Micron in federal court in Delaware, and in Europe; and against Infineon in Europe. The company also faces a shareholder class action in the Northern District of California. In opening arguments at the FTC, Munger, Tolles’ Stone mounted a vigorous defense of the company’s actions. With just 125 employees, Rambus doesn’t own a factory or make chips itself. All the company does is license its technology. Competitors, said Stone, “knew exactly what Rambus’ business model was, and they knew Rambus would seek the broadest intellectual property protection it could.” While FTC lawyers “suggest Rambus somehow stole ideas from what was heard in Jedec meetings,” U.S. Patent and Trademark Office rules make such a scheme impossible, Stone said. Rambus filed its initial patent application for computer memory technology in 1990 — before it joined Jedec. That application described “a huge invention,” said Stone, and the PTO split it into 11 parts. (It has since been divided into 43 separate inventions.) As Rambus lawyers prosecuted these patents, they added claims to define and expand what the inventions covered — standard procedure at the PTO. But, he stressed, the PTO won’t allow inventors to add anything new — claims can only be “based on the initial [patent] description.” That means Rambus could not have patented Jedec ideas unless they were already part of its original invention. Royall from the FTC counters, “It is not [our] contention that amending patent applications to cover competing technology is itself a wrongful act, but simply that the rules and procedures of Jedec do not allow companies to do what Rambus did.” Stone also argued that “this case turns on allegations that Rambus should have disclosed its patent applications.” But he pointed out that there are many legitimate reasons for not revealing such information, since it could clue in competitors about future plans or result in an interference proceeding at the PTO. Because Jedec’s rules on the disclosure of intellectual property were so vague, Stone argued, Rambus had no duty to reveal pending patents, nor was it common for other Jedec members to do so. Backing up his contention is a Jan. 29, 2003, decision from the U.S. Court of Appeals for the Federal Circuit in the first fully litigated Rambus patent infringement suit, brought against Germany’s Infineon Technologies. Infineon counter-sued Rambus, alleging fraud under Virginia state law. Infineon prevailed before a jury in May 2001, but in a split decision, the Court of Appeals threw out the fraud verdict. The reason, wrote Federal Circuit Judge Randall Rader, who was joined by Judge William Curtis Bryson, was the “staggering lack of defining details” in the Jedec patent disclosure policy. “A policy that does not define clearly what, when, how, and to whom the members must disclose does not provide a firm basis for the disclosure duty necessary for a fraud verdict,” Rader wrote. Yet Judge Sharon Prost disagreed. “Nothing required JEDEC to formulate its policy with precision and clarity,” she wrote in a dissenting opinion. “As I read the record, there is more than sufficient evidence upon which a jury could have concluded that Rambus had a duty to disclose pending and issued patents.” In an interview, the FTC’s Royall says the Infineon trial was “very expedited. Certain of the factual issues we’re dealing with were dealt with in the context of counterclaims by Infineon, but not all the relevant facts were put into the record.” With a more complete record, he says, he is confident the FTC will prevail. Nor can the result in the administrative case be appealed to the Federal Circuit. FTC decisions can be appealed to “any circuit in which the respondent does business.” That excludes the federal circuit, which does not have a geographic jurisdiction. The FTC will also have an easier row to hoe thanks to a pretrial order from James Timony, the administrative law judge assigned to the case until he retired in January. In December, the FTC filed a motion for default judgment based on Rambus’ destruction of “a large volume of documents … that it feared could be used against the company in anticipated future litigation.” Timony agreed it was “clear that Rambus intentionally destroyed documents” and that the company “should not be rewarded for its gross negligence concerning or reckless disregard of its obligation to maintain documents potentially relevant to litigation.” As punishment, he established seven rebuttable presumptions — facts assumed to be true unless Rambus proves otherwise. Among them: that Rambus knew the Jedec standards would require the use of its patents; that Rambus never disclosed the existence of the patents; and that Rambus was aware this failure to disclose could prevent enforcement of its patents on the grounds of equitable estoppel.

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