SAN FRANCISCO — Computer chip designer Rambus Inc. has lost a crucial round in its legal fight to enforce patent claims that could generate $1 billion in royalties.
A federal judge in Virginia on Friday dismissed Rambus’ allegations that German chip maker Infineon Technologies infringed on patents for chip designs that help accelerate the speed of video game consoles and personal computers.
The ruling represented a significant setback for Los Altos-based Rambus, which is pursuing a dozen patent infringement claims against Infineon, Hyundai and Micron. The chip makers are suing Rambus for breach of contract and seeking to invalidate Rambus patents.
Investors reacted swiftly to the news, released shortly before the stock market closed for the week. The Nasdaq Stock Market temporarily halted trading in the stock. When trading resumed, Rambus’ shares plunged $3.55, or 19.6 percent, to close at $14.60. However, they regained some of those losses in the after-hours session, rising 92 cents.
The outcome of the patent battles will have a huge impact on Rambus’ fortunes. If Rambus prevails, the company could collect $1 billion in annual royalties from chip sales, estimated Morgan Stanley Dean Witter analyst Mark Edelstone, who downgraded Rambus’ stock on Friday’s news.
Rambus is on a pace to generate about $100 million in royalties during its current fiscal year.
The adverse ruling could force Rambus to lower the royalties charged its licensees, which include Samsung, Hitachi, Toshiba and NEC.
“If the courts rule these patents are invalid, you have to wonder how long these other companies are going to want to pay royalties,” Edelstone said.
Rambus earned $21.1 million on revenues of $66 million during the first half of its fiscal year, which ends Sept. 30. Royalties accounted for 77 percent of the company’s revenues during the period.
Rambus intends to appeal Friday’s ruling.
“Rambus will continue to fight to protect our intellectual property,” CEO Geoff Tate said. “Though Rambus is a relatively small company, we will not be cowed by the aggressive tactics of some industry giants who would take our innovations without any compensation.”
The company, which holds more than 100 patents worldwide, will get its next chance to prove its case against Infineon in a European trial scheduled to begin May 18.
Several chip patents recently issued to Rambus aren’t affected by Friday’s ruling, according to the company.
Rambus’ unusually high royalty rates helped provoke the legal confrontation. In the Virginia trial, Rambus executives disclosed that the company charges a 3.5 percent royalty for one of its memory chip designs, about three times the industry average.
The higher royalty expense can make the difference between a profit and loss for chip makers.
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