In what can only be called a stunning development in a high profile standards case, the U.S. Federal Trade Commission (FTC) unanimously reversed the earlier decision of one of its own Administrative Law Judges and ruled that semiconductor technology company Rambus, Inc. had "unlawfully monopolized the markets for four computer memory technologies that have been incorporated into industry standards for dynamic random access memory," or DRAM. The FTC will deliberate further before announcing the penalties to be levied against Rambus.
The FTC decision is only the latest in the series of dramatic reversals that has typified the course of a web of cases filed by Rambus against DRAM manufacturers; by the same manufacturers against Rambus; by antitrust regulators against Rambus; and by the same regulators against the same DRAM manufacturers, charging them with a price fixing conspiracy against Rambus.
This decision is very welcome to me on a personal level as well for two reasons: first, the decision is a vitally important ratification by the FTC of the need to enforce rules of trust in standard setting. And second, because I filed a pro bono "friend of the court" brief on behalf of 12 standard setting organizations (including both consortia and accredited organizations) in support of this outcome. The membership of those organizations totals over 8,600 companies, government agencies and universities, and encompasses a broad range of technologies. I've just received a phone call from lead FTC Complaint Counsel Geoffrey Oliver thanking me and the standard setting organizations in whose name the brief was filed for helping the Commissioners reach this decision, as well as welcoming any suggestions on the penalties that the Commission should impose.
To review all of the tangled history of this litigation in detail would require many thousands of words, but the following briefly describes the story to date.
All of the litigation and investigations arose from the conduct of the same participants in the same standard setting effort within the Joint Electron Device Engineering Council (JEDEC) in the 1990s. The standards under development in that effort would dictate the designs of hundreds of millions of DRAM chips worth billions of dollars in revenues — and even billions of dollars in royalties to anyone owning patents essential to those designs.
Rambus, it was alleged, dropped out of the standard setting process prior to the time when it would have been required to disclose any patents that would be infringed by the implementation of the standards being developed. After the standard was approved and widely adopted (or, in the words of antitrust, after the market had become "locked in"), it began to contact the chip vendors that were implementing the standards and demanding royalties — in short, surfacing and threatening to fire the torpedos after setting a classic "submarine patent" trap.
Four vendors refused to pay up, one of which was Infineon, a German semiconductor company. Litigation ensued, during which Rambus's conduct came to light — as did the fact that it had destroyed large numbers of documents to avoid their disclosure. A Virginia federal district court judge who was greatly angered by the document destruction refused to honor the attorney-client privilege between Rambus and its counsel, allowing evidence to reach the jury that included Rambus's counsel advising it that it was violating JEDEC's rules by not disclosing its patents. The jury found for Infineon, and the judge allowed Infineon to recover millions of dollars in attorney's fees.
The standard setting world heaved a sigh of relief when the decision was announced, since the entire standard setting process is built on trust. If one can gain more by cheating than playing by the rules, the entire system is shaken to its foundations. Had Rambus carried the day after it became clear that it had intentionally violated the rules, cheating (or not adopting standards at all) would indeed seem to be the safer course of action than obiding by those rules.
But the relief was short lived. Rambus appealed the decision to the Federal Circuit, which hears all patent-related claims. Most observers expected the same result in that venue, and were therefore shocked when the first reversal occurred: a three-judge panel found in favor of Rambus in a two to one split decision (the third judge filed a strong dissent). The principal basis for the panel's decision was a finding that the JEDEC process was not sufficiently clear to hold Rambus accountable — even though the opinion also acknowledged that Rambus believed that it was violating those same rules at the time.
Infineon then appealed the decision to the whole bench of the Federal Circuit. A number of "friend of the court" briefs were filed in support of Infineon (I filed my first pro bono friend of the court brief at that time on behalf of a smaller group of accredited and unaccredited standards bodies that I had recruited for that purpose). But the full court declined to re-hear the case.
Infineon then sought review by the US Supreme Court, and again supporting briefs were filed (I filed my second brief then, this time supported by a larger group of standards bodies). many State Attorneys General also wrote and filed their own brief as well. But the Supreme Court, which accepts only a very small percentage of all cases that seek their attention, also declined to hear the case.
Then the next reversal occurred: the Federal Circuit had remanded the case (i.e., sent it back) to Judge Payne, the Virginia Federal Court judge who had originally found in favor of Infineon - who proceeded to threw the case out of court, citing Rambus's document destruction, and leaving Rambus with no choice but to either begin the appeal process all over again, or to settle with Infinieon. Rambus chose to cut its losses at that point and entered into a settlement with Infineon that was widely viewed as being a disappointment for its stockholders: the damages would be paid over time, and Infineon would receive favorable licensing terms on other Rambus technology. However, there were three more defendants still in the queue to which Rambus could turn its now undivided attention, which is what it proceeded to do.
By now, Rambus was asserting additioinal claims against these vendors in addition to their refusal to pay royalties, alleging that they had entered into a price fixing scheme against Rambus relating to the same patented technology. The antitrust regulators then brought a suit against the four companies as well, and extracting some of the largest antitrust penalties ever collected in settlements of its charges against the companies.
In the third major litigation thread, the FTC brought an investigation against Rambus in June of 2002 in connection with Rambus's behavior in JEDEC. As noted above, an Administrative Law Judge found in Rambus's favor on every count in February of 2004, again in large part due to what it found to be defects in the JEDEC process.
The FTC complaint counsel appealed that decision to the Commissioners of the FTC (at which time I filed my third brief), and the both Commissioners heard testimony as well as reviewed the complete trial record of the earlier trial. After additional disclosures in the concurrent private litigation came to light, they delayed issuing an opinion, and investigated further. Close to two years elapsed, until the release of the Commission's opinion today.
Certainly, this has been one of the most convoluted and contradictory tales of litigation in the history of modern technology. In effect, it is as if two separate bands of criminals arrived at the same time, to rob the same bank, with each thinking that they had successfully raided the vault. Only later when they began suing each other and were charged by the regulators did each of the gloating thieves discover that it had made off with only part of the loot, and that it was as much a victim as victor.
Over the course of these events, Rambus became a day trader's darling, as its stock experienced huge swings over the years, depending on its fortunes in court (Rambus sells no products — it only develops and licenses technology). The situation in many ways was similar to the contemporaneous claims made by SCO, also a small company, in the Linux market, where SCO continues to assert claims (unsuccessfully) against IBM and others, resulting in active speculation in SCO's stock. Not surprisingly, one quarter of Rambus's market capitalization disappeared after the FTC's decision was announced earlier today.
And, of course, the saga is still not over yet. I'll be writing further about this story in the days to come, after I've had a chance to read the 120 page opinion and the 21 page concurring opinion, as well as to consider what Rambus is likely to do next. In the meantime, you can learn more about the origins and significance of the case here, and find the trail of events reported as they occurred by doing a toolbar "this page" search of "Rambus" here.
FTC Finds Rambus Unlawfully Obtained Monopoly Power
Deceptive Conduct Fostered "Hold-Up" of Computer Memory Industry
By a unanimous vote, the Federal Trade Commission has determined that computer technology developer Rambus, Inc. unlawfully monopolized the markets for four computer memory technologies that have been incorporated into industry standards for dynamic random access memory - DRAM chips. DRAMs are widely used in personal computers, servers, printers, and cameras.
In an opinion by Commissioner Pamela Jones Harbour, the Commission found that, through a course of deceptive conduct, Rambus was able to distort a critical standard-setting process and engage in an anticompetitive "hold up" of the computer memory industry. The Commission held that Rambus's acts of deception constituted exclusionary conduct under Section 2 of the Sherman Act and contributed significantly to Rambus's acquisition of monopoly power in the four relevant markets. The Commission has ordered additional briefings to determine the appropriate remedy for "the substantial competitive harm that Rambus's course of deceptive conduct has inflicted."…
"We find that Rambus's course of conduct constituted deception under Section 5 of the FTC Act. Rambus's conduct was calculated to mislead JEDEC members by fostering the belief that Rambus neither had, nor was seeking, relevant patents that would be enforced against JEDEC-compliant products. . . . Under the circumstances, JEDEC members acted reasonably when they relied on Rambus's actions and omissions and adopted the SDRAM and DDR SDRAM standards."
"Rambus withheld information that would have been highly material to the standard-setting process within JEDEC," the opinion continues. "JEDEC expressly sought information about patents to enable its members to make informed decisions about which technologies to adopt, and JEDEC members viewed early knowledge of potential patent consequences as vital for avoiding patent hold-up. Rambus understood that knowledge of its evolving patent position would be material to JEDEC's choices, and avoided disclosure for that very reason."
"Through its successful strategy, Rambus was able to conceal its patents and patent applications until after the standards were adopted and the market was locked in," states the opinion. "Only then did Rambus reveal its patents - through patent infringement lawsuits against JEDEC members who practiced the standard."
Analyzing Rambus's conduct under the standards of Section 2 of the Sherman Act, the Commission found that "Rambus engaged in exclusionary conduct that significantly contributed to its acquisition of monopoly power in four related markets. By hiding the potential that Rambus would be able to impose royalty obligations of its own choosing, and by silently using JEDEC to assemble a patent portfolio to cover the SDRAM and DDR SDRAM standards, Rambus's conduct significantly contributed to JEDEC's choice of Rambus's technologies for incorporation in the JEDEC DRAM standards and to JEDEC's failure to secure assurances regarding future royalty rates - which, in turn, significantly contributed to Rambus's acquisition of monopoly power."
"Rambus claims that the superiority of its patented technologies was responsible for their inclusion in JEDEC's DRAM standards," the opinion states. "These claims are not established by the record. Nor does the record support Rambus's argument that, even after two JEDEC standards were adopted and substantial switching costs had accrued, JEDEC and its participants were not locked into the standards. Rambus now claims that we can and should blind ourselves to the link between its conduct and JEDEC's adoption of the SDRAM and DDR SDRAM standards, as well as to the link between JEDEC's standard-setting process and Rambus's acquisition of monopoly power. These claims fail, both as a matter of fact and as a matter of law. To hold otherwise would be to allow Rambus to exercise monopoly power gained through exclusionary conduct. We cannot abide that result, given the substantial competitive harm that Rambus's course of deceptive conduct has inflicted."
"Questions remain regarding how the Commission can best determine the appropriate remedy," the opinion states. "Now that the Commission has found, and determined the scope of liability, the Commission believes it would exercise its broad remedial powers most responsibly after additional briefings and, if necessary, oral argument devoted specifically to remedial issues."
In a separate concurring statement, Commissioner Jon Leibowitz wrote, "Rambus's abuse of JEDEC's standard-setting process was intentional, inappropriate, and injurious to competition and consumers alike." He adds that Rambus's conduct not only ran afoul of the antitrust laws, but also constitutes an unfair method of competition in violation of the broader reach of the FTC Act.
The Commission vote to issue the opinion and order was 5-0….
Copies of the complete opinion and order are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580.
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