"Get Rich, or Die Trying": Lessons from Rambus' High-Risk Predatory Litigation in the Semiconductor Industry

Industry and Innovation, Mar 2005 by Tansey, Richard, Neal, Mark, Carroll, Ray

ABSTRACT Patent litigation is a visible and widespread feature of the semiconductor industry, as firms pursue judicial mechanisms to defend, or promote, their intellectual property portfolios. This study highlights the antecedents, strategic goals, tactics and outcomes of the most significant US trial of this type in the last decade, namely Rambus v. Infineon, whereby a smaller company (Rambus) successfully pursued a "do or die" litigation campaign against a larger rival, thus changing the rules of engagement for the semiconductor industry as a whole. This campaign is notable, not just because of its undoubted effects on the semiconductor industry, but because of the innovative nature of Rambus' strategy, which was extremely risky both in terms of its prospects of success and its potential damage to the company if it failed. Arguing that dominant logic and operating rules are important antecedents in the development and pursuit of patent litigation strategies, this paper analyses the Rambus case using a "dominant logic" and "effectuation" framework. Doing so demonstrates the innovative nature of Rambus' "high-risk predatory strategy", the outcome of a dominant logic sustained by effectuation principles. The paper discusses the impact and significance of this new strategic form.

KEY WORDS: Patent litigation, Rambus, semiconductor industry

In the landmark 2003 Rambus v. Infineon case (Lemley, 2002; Alban, 2004), the United States Court of Appeals for the Federal Circuit (CAFC) ruled in the plaintiff's favor on several critical issues regarding patent disclosure at an industry standard-setting organization (SSO). Until then, US patent legislation, especially the 1984 Semiconductor Chip Protection Act, favored the interests of large manufacturers. This original 1984 legislation was "one of the few intellectual property laws with an express reverse engineering privilege" (Samuelson and Scotchmer, 2002: 1587). Thus both existing intellectual property (IP) laws and economic advantages of size, particularly differential advantage in effectively using trade secrets, favored the financial interests of large manufacturers of semiconductors over those of small IP rivals. The historical significance of Rambus v. Infineon 2003 was to reverse the swing of the legal patent pendulum in favor of small IP firms. A seemingly peripheral smaller company thus changed the rules of engagement in the semiconductor industry to suit itself over much larger competitors.

How was this achieved? This paper discusses the events leading up to the monumental (and unexpected) changes enacted by Rambus v. Infineon 2003. Doing so, demonstrates the novelty of Rambus' IP strategy, a novelty that partly explains the semiconductor cartel's inability to recognize the threat it posed, or to resist its campaign effectively.

Much has been written about aggressive semiconductor IP strategy (Hall and Ziedonis, 2001; Meurer, 2003; Ziedonis, 2003). This paper theorizes Rambus' IP strategies, and finds them to be novel, by recognizing that they are at once (1) predatory (Hinthorne, 1996) rather than merely "aggressive"; and (2) that the firm's dominant logic (Prahalad and Bettis, 1986; Bettis and Prahalad, 1995) is governed by "effectuation" rather than "causation" principles (Sarasvathy, 2001). This combination of predatory values and effectuation principles results in a new form of IP strategy: high-risk predatory litigation.

The favoring of large companies by IP legislation up until Rambus v. Infineon 2003 meant that challenges to the "status quo" were unlikely to be brought by large companies who were generally comfortable with current regulations. It was thus only smaller IP companies who had an interest in challenging the rules of engagement. Understandably, because of their size, most smaller IP companies were unable or unwilling to pursue an aggressive litigation campaign against their much larger rivals. Litigation is extremely expensive, and this very expense again favored the cash-rich cartel. Most small companies, although active in piecemeal litigation, were simply not rich enough to pursue long and highly contested campaigns where a negative outcome could lead to bankruptcy.

Rambus was different. The combination of predatory values with effectuation principles meant that its dominant logic sustained a "do-or-die" strategy of high-risk predatory litigation. This relatively small company thus literally risked its existence on the success of its litigation campaign. As we shall see, the unshakable nature of its (mutually sustaining) dominant logic, predatory values and effectuation principles becomes apparent when one considers the obstacles and crises it encountered en route to its 2003 victory. At one stage the judicial decision went against Rambus, resulting in a series of class action suits that threatened its very existence. It is in such crises that one can best assess the dominant logic that sustains companies' strategic courses. Rambus, facing hostile criticism from commentators and its own shareholders, continued relentlessly on to a higher level of legal engagement, risking further loss and eventual bankruptcy.