Utmost Caution: The Standard of Conduct for SSO Participants

The legal odyssey of Rambus, Inc. (“Rambus”) over the last 4 years is a cautionary tale for companies that participate in standards-setting organizations (SSO) while developing and maintaining patent portfolios. Although Rambus has successfully defeated claims brought by Infineon Technologies, A.G. (“Infineon”) that Rambus engaged in fraud while participating in an SSO, and while Rambus appears poised to beat back claims brought by the U.S. Federal Trade Commission (FTC), the cost to the company has been substantial. Rambus' legal fees alone have run into the tens of millions and have consumed the lion's share of its profits, while its business reputation and prospects have sustained incalculable damage. Given the FTC's vow to continue to pursue investigations in this important area, and given new allegations of standards-setting misconduct in other cases, companies ignore the lessons learned from the Rambus actions at their own peril.

Rambus' IP Development

In the early 1990s, Rambus was in the business of developing and licensing technologies to companies that manufactured semiconductor memory devices. In 1990, Rambus filed a U.S. patent application with claims directed to a memory technology known as dynamic random access memory (“DRAM”) (“the '898 application”). Over a period of years, Rambus filed numerous “divisional” and “continuation” applications based on the same written description as the '898 application, at least 30 of which issued as patents.

Most relevant were applications Rambus filed between February 1997 and February 1999, which evolved into a series of patents, including four that ultimately would be at issue in the litigation between Rambus and Infineon (the “four patents”). The first of the four patents issued in 1999. All four patents related to synchronous dynamic random access memory (“SDRAM”) and double data rate SDRAM (“DDR-SDRAM”) technology.

Rambus' SSO Participation

From 1991-1996, Rambus participated in the development and adoption of industry standards for random access memory (RAM), a common component in computers, printers and other electronic devices. During this time, Rambus was a member of the Joint Electron Devices Engineering Council (JEDEC), a SSO, and actively participated in JEDEC Committee JC-42.3, which drafts standards for RAM. Infineon was a fellow member of JEDEC.

During Rambus' membership, the JEDEC adopted a standard for SDRAM, which increases the speed at which a computer's central processing unit (CPU) can read or write memory. In September 1993, Rambus disclosed its first issued DRAM-related patent, U.S. Patent No. 5,243,703 (“the '703 patent”) — which had evolved from a divisional of the '898 application – to the JEDEC during a committee meeting. This was the only patent or patent application that Rambus disclosed to the JEDEC at any point in time.

In June 1996, Rambus withdrew from the JEDEC. In December 1996, the JEDEC began work on a standard for DDR-SDRAM, the successor to SDRAM. While the JEDEC ultimately adopted and published the standard for DDR-SDRAM years after Rambus withdrew from the JEDEC, the JEDEC DDR-SDRAM standard included several technologies that had been generally discussed prior to Rambus' withdrawal from the committee.

Rambus' Litigation with Infineon

In 2000, Rambus sued Infineon alleging infringement of the four patents that Rambus applied for between 1997 and 1999. Infineon filed counterclaims under Virginia law alleging that Rambus engaged in fraud by failing to disclose to the JEDEC and its members that Rambus' patents and patent applications “related to” SDRAM and DDR-SDRAM technology. Of course, since Rambus was no longer a member of the JEDEC when it filed the applications for the four patents, Infineon's allegations must have related to other patents and patent applications.

The district court ruled that, as a matter of law, Infineon did not infringe Rambus' patents. Following a trial on Infineon's counterclaims, a jury found that Rambus committed fraud in connection with the standards for both SDRAM and DDR-SDRAM. In light of the fact that Rambus had withdrawn from the JEDEC before discussion of the DDR-SDRAM standard commenced, the district court threw out the fraud verdict on the DDR-SDRAM standard, but let stand the fraud verdict on the SDRAM standard.

On appeal, Rambus achieved a total victory. The U.S. Court of Appeals for the Federal Circuit reversed the fraud judgment against Rambus on the SDRAM standard, vacated the lower court's finding of no infringement by Infineon and took away Infineon's award of attorneys' fees. The federal circuit reversed the fraud judgment, based on its conclusion that Rambus had no duty to disclose its patent applications, because there was no evidence that the claims would be needed to practice the SDRAM standard.

The Lessons Learned

1) Standards-Setting Fraud Claims Dramatically Increase the Stakes of Patent Litigation. A claim of standards-setting fraud is a powerful litigation weapon that, when unleashed, can have devastating and far-reaching consequences. If successful, such claims can render the patent(s) in suit unenforceable, and result in the patent owner being liable for the other side's legal fees. Such claims will almost certainly increase the cost of the litigation for all parties, since they will be contested vigorously in discovery, at trial, and on appeal.

2) An Allegation of Standards-Setting Fraud Is a Scarlet Letter. Without regard to the success of the allegations, the simple act of making standards-setting fraud allegations can have severe negative consequences for the patent owner. The allegations themselves will likely harm the patent owner's business reputation among its peers and business partners, and diminish the patent owner's credibility before SSOs.

3) Companies That Are Accused of Standards-Setting Fraud Are “Presumed Guilty.” Any claim of standards-setting fraud will likely result in an FTC investigation. Even more troubling than an investigation, however, is the fact that the FTC may pursue a formal action against the patent owner, regardless of the outcome of the underlying litigation. For example, even after the federal circuit concluded that there was insufficient evidence on which a jury could find that Rambus had engaged in fraud, the FTC continued to pursue claims derived from standards-setting misconduct, citing different burdens of proof.

Moreover, the FTC's interest in standards-setting issues continues to grow. In March 2003, the FTC issued an administrative complaint against Union Oil Company of California (“Unocal”), claiming, among other things, that Unocal manipulated the standards-setting process of the California Air Resources Board (CARB) by persuading it to adopt certain reformulated gasoline standards while at the same time failing to disclose its prosecution of patent applications which substantially overlapped with those standards dated March 4, 2003. Even more recently, the FTC reiterated its concern about the impact of the patent system on fair competition in an October 2003 report. See FTC Report, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” October 2003. If the FTC gets involved, you have already lost.

4) Evaluate Your Standards-Setting Activities and Implement Risk Controls. Identify each and every SSO in which you participate, and obtain the SSO guidelines. Analyze the guidelines, and in particular the patent disclosure policies, and comply with them. Where there is doubt, obtain advice of counsel to ensure proper disclosure and compliance with the applicable antitrust laws.

5) IP Licensing and Enforcement Programs Are Vulnerable to Standards-Setting Fraud Claims. Your current IP licensing program is vulnerable to claims of standards-setting fraud based on alleged misconduct that occurred years earlier. Where your IP reads on or relates to an industry standard, you should re-evaluate your earlier compliance with the SSO guidelines in connection with that standard. If there is a disclosure problem, you should re-evaluate your licensing and/or enforcement strategy in connection with that IP. A reduced licensing opportunity may be less expensive than the enforcement litigation and business cost stemming from a claim of standards-setting fraud.

6) Look Before You Leap. Fraud claims are notoriously difficult to prove because they require the fact finder to find intentional wrongful conduct and any fraud verdict will receive enhanced scrutiny on appeal.

The legal odyssey of Rambus, Inc. (“Rambus”) over the last 4 years is a cautionary tale for companies that participate in standards-setting organizations (SSO) while developing and maintaining patent portfolios. Although Rambus has successfully defeated claims brought by Infineon Technologies, A.G. (“Infineon”) that Rambus engaged in fraud while participating in an SSO, and while Rambus appears poised to beat back claims brought by the U.S. Federal Trade Commission (FTC), the cost to the company has been substantial. Rambus' legal fees alone have run into the tens of millions and have consumed the lion's share of its profits, while its business reputation and prospects have sustained incalculable damage. Given the FTC's vow to continue to pursue investigations in this important area, and given new allegations of standards-setting misconduct in other cases, companies ignore the lessons learned from the Rambus actions at their own peril.

Rambus' IP Development

In the early 1990s, Rambus was in the business of developing and licensing technologies to companies that manufactured semiconductor memory devices. In 1990, Rambus filed a U.S. patent application with claims directed to a memory technology known as dynamic random access memory (“DRAM”) (“the '898 application”). Over a period of years, Rambus filed numerous “divisional” and “continuation” applications based on the same written description as the '898 application, at least 30 of which issued as patents.

Most relevant were applications Rambus filed between February 1997 and February 1999, which evolved into a series of patents, including four that ultimately would be at issue in the litigation between Rambus and Infineon (the “four patents”). The first of the four patents issued in 1999. All four patents related to synchronous dynamic random access memory (“SDRAM”) and double data rate SDRAM (“DDR-SDRAM”) technology.

Rambus' SSO Participation

From 1991-1996, Rambus participated in the development and adoption of industry standards for random access memory (RAM), a common component in computers, printers and other electronic devices. During this time, Rambus was a member of the Joint Electron Devices Engineering Council (JEDEC), a SSO, and actively participated in JEDEC Committee JC-42.3, which drafts standards for RAM. Infineon was a fellow member of JEDEC.

During Rambus' membership, the JEDEC adopted a standard for SDRAM, which increases the speed at which a computer's central processing unit (CPU) can read or write memory. In September 1993, Rambus disclosed its first issued DRAM-related patent, U.S. Patent No. 5,243,703 (“the '703 patent”) — which had evolved from a divisional of the '898 application – to the JEDEC during a committee meeting. This was the only patent or patent application that Rambus disclosed to the JEDEC at any point in time.

In June 1996, Rambus withdrew from the JEDEC. In December 1996, the JEDEC began work on a standard for DDR-SDRAM, the successor to SDRAM. While the JEDEC ultimately adopted and published the standard for DDR-SDRAM years after Rambus withdrew from the JEDEC, the JEDEC DDR-SDRAM standard included several technologies that had been generally discussed prior to Rambus' withdrawal from the committee.

Rambus' Litigation with Infineon

In 2000, Rambus sued Infineon alleging infringement of the four patents that Rambus applied for between 1997 and 1999. Infineon filed counterclaims under Virginia law alleging that Rambus engaged in fraud by failing to disclose to the JEDEC and its members that Rambus' patents and patent applications “related to” SDRAM and DDR-SDRAM technology. Of course, since Rambus was no longer a member of the JEDEC when it filed the applications for the four patents, Infineon's allegations must have related to other patents and patent applications.

The district court ruled that, as a matter of law, Infineon did not infringe Rambus' patents. Following a trial on Infineon's counterclaims, a jury found that Rambus committed fraud in connection with the standards for both SDRAM and DDR-SDRAM. In light of the fact that Rambus had withdrawn from the JEDEC before discussion of the DDR-SDRAM standard commenced, the district court threw out the fraud verdict on the DDR-SDRAM standard, but let stand the fraud verdict on the SDRAM standard.

On appeal, Rambus achieved a total victory. The U.S. Court of Appeals for the Federal Circuit reversed the fraud judgment against Rambus on the SDRAM standard, vacated the lower court's finding of no infringement by Infineon and took away Infineon's award of attorneys' fees. The federal circuit reversed the fraud judgment, based on its conclusion that Rambus had no duty to disclose its patent applications, because there was no evidence that the claims would be needed to practice the SDRAM standard.

The Lessons Learned

1) Standards-Setting Fraud Claims Dramatically Increase the Stakes of Patent Litigation. A claim of standards-setting fraud is a powerful litigation weapon that, when unleashed, can have devastating and far-reaching consequences. If successful, such claims can render the patent(s) in suit unenforceable, and result in the patent owner being liable for the other side's legal fees. Such claims will almost certainly increase the cost of the litigation for all parties, since they will be contested vigorously in discovery, at trial, and on appeal.

2) An Allegation of Standards-Setting Fraud Is a Scarlet Letter. Without regard to the success of the allegations, the simple act of making standards-setting fraud allegations can have severe negative consequences for the patent owner. The allegations themselves will likely harm the patent owner's business reputation among its peers and business partners, and diminish the patent owner's credibility before SSOs.

3) Companies That Are Accused of Standards-Setting Fraud Are “Presumed Guilty.” Any claim of standards-setting fraud will likely result in an FTC investigation. Even more troubling than an investigation, however, is the fact that the FTC may pursue a formal action against the patent owner, regardless of the outcome of the underlying litigation. For example, even after the federal circuit concluded that there was insufficient evidence on which a jury could find that Rambus had engaged in fraud, the FTC continued to pursue claims derived from standards-setting misconduct, citing different burdens of proof.

Moreover, the FTC's interest in standards-setting issues continues to grow. In March 2003, the FTC issued an administrative complaint against Union Oil Company of California (“Unocal”), claiming, among other things, that Unocal manipulated the standards-setting process of the California Air Resources Board (CARB) by persuading it to adopt certain reformulated gasoline standards while at the same time failing to disclose its prosecution of patent applications which substantially overlapped with those standards dated March 4, 2003. Even more recently, the FTC reiterated its concern about the impact of the patent system on fair competition in an October 2003 report. See FTC Report, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” October 2003. If the FTC gets involved, you have already lost.

4) Evaluate Your Standards-Setting Activities and Implement Risk Controls. Identify each and every SSO in which you participate, and obtain the SSO guidelines. Analyze the guidelines, and in particular the patent disclosure policies, and comply with them. Where there is doubt, obtain advice of counsel to ensure proper disclosure and compliance with the applicable antitrust laws.

5) IP Licensing and Enforcement Programs Are Vulnerable to Standards-Setting Fraud Claims. Your current IP licensing program is vulnerable to claims of standards-setting fraud based on alleged misconduct that occurred years earlier. Where your IP reads on or relates to an industry standard, you should re-evaluate your earlier compliance with the SSO guidelines in connection with that standard. If there is a disclosure problem, you should re-evaluate your licensing and/or enforcement strategy in connection with that IP. A reduced licensing opportunity may be less expensive than the enforcement litigation and business cost stemming from a claim of standards-setting fraud.

6) Look Before You Leap. Fraud claims are notoriously difficult to prove because they require the fact finder to find intentional wrongful conduct and any fraud verdict will receive enhanced scrutiny on appeal.