---

In previous memoranda, we have discussed some of the significant legal and business risks associated with participation in standard-setting processes. These risks are especially great when an industry standard implicates patents or other intellectual property. Recent action by the Federal Trade Commission ("FTC") against Rambus, Inc. ("Rambus") provides tangible evidence of the antitrust agencies' continued interest in investigating cases in which companies claim that an industry standard reads on their intellectual property rights, and that their intellectual property rights are infringed by their competitors' implementation of the industry standard.

The FTC complaint asserts that Rambus actively participated in JEDEC's SDRAM-related standard-setting process for more than four years without disclosing -- even when specifically asked -- that Rambus was actively working to patent the specific technologies proposed for the SDRAM standards. Rambus allegedly used its involvement in JEDEC to acquire advance notice of specific technologies that would be incorporated into the SDRAM standards so that Rambus could work secretly to perfect its patent rights over those technologies. Rambus has not yet filed its answer to the FTC complaint.

The FTC complaint requests an order requiring Rambus to (1) cease and desist all ongoing efforts to assert that the manufacture or sale of SDRAM infringes Rambus's patent rights; (2) not undertake any new efforts to assert that the manufacture or sale of SDRAM infringes Rambus's patent rights; and (3) employ, at Rambus's sole cost, an FTC-approved compliance officer who will be solely responsible for communications regarding any Rambus patent implicated by a standard-setting organization of which Rambus is a member. The relief requested would preclude Rambus from enforcing its existing licenses for SDRAM-related technology, at a cost to Rambus of $50-100 million per year.

Background

The first tangible consequence of the antitrust agencies' focus in this area came in a 1996 Consent Order between the Federal Trade Commission and Dell Computer Corporation. The FTC accused Dell of "restrict[ing] competition in the personal computer industry and undermin[ing] the standard-setting process by threatening to exercise undisclosed patent rights against computer companies" that implemented an industry standard.

The FTC alleged that Dell served on a committee of the Video Electronics Standards Association ("VESA") that designed and approved a new standard for the VL-bus. As part of this process, a Dell representative signed a certificate in 1992 stating that "to the best of [his] knowledge," the standard did not "infringe on any trademarks, copyrights, or patents" that Dell possessed. The VL-bus standard ultimately was approved by VESA members (which include virtually all major U.S. computer manufacturers) and quickly achieved commercial success. Approximately eight months after the VL-bus standard was approved, however, Dell informed certain VESA members that their implementation of the standard infringed a patent that Dell was awarded in 1991.

At the time, the FTC emphasized that when a company "misrepresents its patent rights to a standard-setting organization, thereby leading the organization to adopt a particular standard that may infringe on the company's patent rights, the company's later efforts to take advantage of market power resulting from the standard, rather than from some inherent value of the patent," violates Section 5 of the FTC Act.

Under the terms of the Consent Order, Dell agreed to drop its existing patent infringement claims relating to the VL-bus, and to refrain from making future claims that any individual's or organization's application or use of the VL-bus standard infringes Dell's patents.

The Rambus Complaint

On June 19, 2002, the FTC issued a complaint charging that Rambus "has done substantial harm to important technology markets" by engaging in fraudulent and deceptive practices during its involvement with the JEDEC standard-setting organization and by enforcing previously undisclosed patent rights against companies that implemented an industry standard for synchronous DRAM ("SDRAM"). The FTC complaint seeks an order requiring Rambus to cease and desist all efforts to enforce its patent rights against any person manufacturing or selling JEDEC-compliant SDRAM or DDR SDRAM.

Rambus's Alleged Scheme to Mislead JEDEC. The FTC complaint asserts that Rambus actively participated in JEDEC's SDRAM-related standard-setting process for more than four years without ever making it known to JEDEC or its members that Rambus was actively working to develop, and actually possessed, a patent and several patent-pending applications that involved specific technologies proposed for the SDRAM standards. During that period, Rambus representatives allegedly used their JEDEC involvement to acquire advance notice of specific technologies that would be incorporated into the SDRAM standards so that Rambus could perfect its patent rights over such technologies by amending its pending applications to cover additional claims. In addition, the FTC complaint alleges that, on at least two occasions, Rambus was specifically asked by JEDEC representatives whether Rambus had any patent-related disclosures to make pertaining to SDRAM technologies. In both instances, Rambus allegedly failed to disclose its patents and pending applications.

Following the issuance of JEDEC's SDRAM standard in 1993, memory manufacturers quickly adopted the standard, and SDRAM was a considerable commercial success. By 1999, SDRAM accounted for an extremely large majority of all memory used in mainstream computing application. Throughout this period, the computing industry became increasingly locked in to the use of JEDEC-compliant SDRAM. In late 1999, Rambus allegedly began contacting all major DRAM manufacturers worldwide, asserting that they were infringing Rambus's patent rights by manufacturing and selling JEDEC-compliant SDRAM. The FTC alleges that Rambus has succeeded in obtaining licenses covering roughly 50% of total worldwide production of SDRAM technology. Such licenses allegedly entitle Rambus to collect annual royalties in the range of $50 - 100 million, a number that could increase if Rambus is successful in enforcing its patent rights against the remaining SDRAM manufacturers.

Alleged Anticompetitive Effects.

The FTC alleges that Rambus violated Section 5 of the FTC Act, which prohibits "unfair methods of competition." In particular, the FTC alleges that Rambus's conduct unreasonably restrained competition by: (1) increasing royalties associated with the manufacture, sale, or use of SDRAM technology; (2) increasing the price and/or reducing the output of SDRAM chips and products incorporating SDRAM chips; (3) decreasing incentives for DRAM manufacturers to participate in JEDEC; and (4) decreasing incentives for companies, both within and outside the DRAM industry, to rely on standards established by industry standard-setting organizations.

Status of the FTC Proceeding.

The FTC filed its complaint on June 19, 2002. Rambus will have an opportunity to answer the FTC's allegations, and the matter initially will be resolved by an FTC administrative law judge, with the right of appeal to the full Federal Trade Commission. It will be several months before the FTC's allegations are heard and ruled upon by the administrative law judge.