Barrage of Lawsuits Is Business as Usual in Silicon Valley
Beneath the squeaky-clean image of Silicon Valley as the heartland of technological innovation lies a legal caldron of patent squabbles, antitrust accusations and employee poaching.
A rash of lawsuits filed last week by several of the world’s top electronics companies against one another is a reminder that the computer industry’s reputation for fair-fighting entrepreneurship stretches only so far.
Lawsuits have been as much a part of the get-rich-quick game in the computer industry as all-night engineering sessions and breakthrough business ideas have been, stretching back to the very origins of the industry.
“It’s part of the lore of the industry that sometimes people can make more in the courtroom than they can in the marketplace,” said Susan Nycum, an intellectual property attorney in Palo Alto for more than three decades.
Memory-chip technology developer Rambus Inc.--fast on its way to becoming the world’s most profitable computer chip franchise--was hit last Monday by a lawsuit from Micron Technology Inc., the world’s No. 2 memory chip maker. Micron claimed Rambus violated U.S. antitrust laws and sought to invalidate some Rambus patents.
Hyundai Electronics joined the rugby pile-on the next day by filing a suit arguing that its memory chips did not infringe Rambus patents and rejecting claims by Rambus that the Korean chip maker owed Rambus patent royalties.
In the latest move, No. 1 chip maker Intel Corp. on Wednesday sued Broadcom Corp., a top supplier of high-speed communications chips, alleging Broadcom infringed Intel patents in “nearly every aspect of its business” by luring Intel workers to reveal trade secrets.
Broadcom denied the charges. Rambus said it would contest both rivals’ claims.
The hybrid nature of chip design forces the industry to negotiate broad patent swaps. When no agreement can be reached, lawsuits follow. This contrasts with industries like pharmaceuticals, where drug companies seek exclusive rights to blockbuster drugs.
The paradox is that no semiconductor can be made with just one company’s patents. Every chip is a mix of circuit designs, manufacturing processes and material science that depend on active cross-licensing of many companies’ patents.
“Patents are a sword and a shield,” Nycum said. “Normally, intellectual property protection is used as a shield. It gives companies protection against competitors. But when competitors feel threatened, intellectual property becomes a sword.”
The Rambus suits are part of an ongoing battle by the company to force major chip makers to recognize its key memory acceleration patents. Hitachi Ltd. and Toshiba Corp. signed licenses with Rambus this summer. But Rambus remains locked in a battle with Infineon of Germany, among others, to force them to agree to its terms.
Morgan Stanley Dean Witter analyst Mark Edelstone said he believes Rambus’ patent portfolio remains strong and will prevail in court. The company is likely to drive hard bargains with manufacturers that resist it, he said.
“[Rambus] management has been quite clear that they will not license any company that they defeat in court,” Edelstone said. “Micron and Infineon . . . are involved in a high-stakes game of poker with incredibly negative ramifications for their DRAM [memory chip] businesses if Rambus prevails,” he said.
Because Rambus licenses its technology to manufacturers but builds no products of its own, the company is forced to be very aggressive in the protection of its patents, said Joe Osha, semiconductor analyst at Merrill Lynch.
Similarly, Intel has always been very litigious, but in the Broadcom case this appears to stem from competitive weakness.
“Intel has not managed to gain much traction in the Internet business. Broadcom’s success has been because it beat [Intel communications chip unit] Level One to market. Period. Repeatedly,” Osha said, speaking as a market watcher, not a legal expert.
High-tech innovation wasn’t always so litigious. Driven by often utopian visions of technical possibility, engineers during the formative years of Silicon Valley in the 1960s and 1970s freely exchanged ideas and copied one another’s work.
The milieu of free idea exchange gave birth to the PC during the 1970s. Apple co-founders Steve Jobs and Steve Wozniak and Microsoft’s Bill Gates and Paul Allen got their starts in this early freewheeling era, but they took things further by transforming the ideas into hardware and software they could patent.
That lost collaborative spirit has reappeared in the recent rise of the Linux movement, with its “open source” idea-sharing among thousands of software and hardware designers.
But the urge to litigate now lives in the very sinew of the industry, with many major electronics companies deriving a healthy share of their profits, if not their revenues, from royalty license payments by other companies. It’s why lawyers hold senior executive positions at many circuit makers.
Rambus boasts net profit margins between 50% and 55%, Edelstone said. He forecast Rambus revenue would vault above $1 billion by 2003 from $45 million in 1999.
Chip patents are big business, judging from the rush to file thousands of new patent applications each year with the U.S. Patent and Trademark Office.
Twenty-two of the 25 top patent applicants in 1999 were makers of computer semiconductor technology, according to data from market research firm IFI/Plenum in Wilmington, Del.
Intel has faced its biggest challenge from Advanced Micro Devices. Two decades ago AMD licensed the technology at the heart of Intel’s x86 microprocessor line used in most personal computers, allowing AMD to become a constant thorn in Intel’s side.
Texas Instruments, the world’s No. 1 maker of chips used in cell phones, is still fighting in Japanese courts to defend its patents on the integrated circuit, an invention pioneered by company engineer Jack Kilby in 1958.
Industry folklore runs that during one especially tough year in the 1980s, the company made more on royalty payments from technology patents than it did from actual product sales.
Texas Instruments does not reveal royalty figures and officials declined to estimate the fraction such licenses represent relative to sales of the company’s own products.
The “Kilby Patent” expires in Japan in 2001, so the fight with Japanese electronics giant Fujitsu is mainly over back payment of royalties, which at any rate are small relative to total revenues, said Fred Telecky, TI’s general patent counsel and senior vice president.
“It’s clearly becoming less and less important because the patent expires next year,” Telecky said, noting that he’s stopped raising the issue in patent negotiations over the past decade. “We’ve got so many patents in other areas,” he notes.
