On Jan. 9, 2009, The U.S. District Court for the District of Delaware ruled that various patents held by Rambus Inc. ("Rambus") were unenforceable against Micron Technology, Inc. ("Micron") because Rambus had improperly destroyed documents that it should have retained on the reasonable expectation of future patent litigation. Because Rambus' revenues derive solely from licensing intellectual property to memory chip manufacturers, such as Micron, Intel, Hynix Semiconductor Inc., and Samsung Electronics Co., the Delaware court ruling could have a far-reaching effect on Rambus' business, and is fair warning to other IPreliant companies. Indeed, the market responded instantly to the ruling; Rambus saw its share price plunge 39 percent over the course of an hour on the day the ruling was issued. The Jan. 9 order is instructive for any company that is reliant on intellectual property as its primary source of revenue and that seeks aggressively to enforce those rights through a litigation strategy. The costs and risks of such a strategy are demonstrated by Rambus' history of aggressive efforts to capitalize on, and enforce, its intellectual property rights.
The January 9 Order: The court determined that in 1996, "Rambus contemplated industry-wide adoption of its DRAM technology [relating to computer memory chips] through an aggressive use of its intellectual property," and to this end, hired in-house counsel in 1997 to manage its patent portfolio. By March 1998, in-house counsel was tasked with developing licensing and litigation strategies for Rambus' intellectual property rights. Thereafter, in-house counsel implemented a document retention/destruction policy, and by July 1998, documents were being destroyed by Rambus pursuant to that policy. Rambus' in-house counsel also instructed outside patent counsel to purge Rambus' patent files. The district court concluded that as of December 1998, when in-house counsel "had articulated a time frame and a motive for implementation of the Rambus litigation strategy, litigation was reasonably foreseeable and a duty to preserve potentially relevant evidence arose at that time." Thus, although Rambus instituted a fairly routine document preservation/destruction policy during this time frame, it did so within the context of adopting a litigation strategy, and "knew, or should have known, that a general implementation of the policy was inappropriate because the documents destroyed would become material at some point in the future." Accordingly, the district court held that any documents purged after December 1998 would be deemed to have been destroyed intentionally or in bad faith.
The district court, in acknowledging that the burden of proof was on the party seeking sanctions for spoliation, concluded that the party seeking sanctions needed to demonstrate bad faith and prejudice to support the award of sanctions by clear and convincing evidence. The court further explained that the showing of intent, i.e., bad faith, could be proportionately less when balanced against extreme prejudice, and that a showing of intent would need to be proportionately higher when balanced against less severe prejudice to the aggrieved party. The district court concluded that Micron established prejudice by clear and convincing evidence by demonstrating that the documents destroyed were discoverable, that they were the type of documents that would be relevant to the litigation, and that these documents would be important to Micron's assertion of the defenses of unenforceability because of patent misuse, violation of the antitrust and unfair competition laws, and inequitable conduct. Finding sufficient evidence of prejudice and a very strong showing of bad faith on Rambus' part, the court concluded that the only appropriate sanction was to declare the patents in suit unenforceable against Micron.
Potential Impact of Sanctions on Rambus' IP Exploitation and Enforcement Efforts: The Delaware court's decision is particularly instructive because it follows a series of lawsuits--and wins--involving Rambus' patents covering technology that was adopted by the industry-standard-setting organization, Joint Electron Device Engineering Council ("JEDEC"). In March 2008, a jury returned a verdict in Rambus' favor on its infringement claims against Hynix Semiconductor Inc., the world's second-largest maker of memory chips. In April 2008, the U.S. Court of Appeals for the District of Columbia ruled in favor of Rambus in an action originally commenced by the Federal Trade Commission in 2002. The FTC had charged Rambus with violating the antitrust laws by engaging in a deliberate pattern of anticompetitive acts to deceive JEDEC into adopting Rambus' patented technology in JEDEC standards, which allegedly resulted in harm to competition and consumers. The FTC appealed an initial dismissal of the action by the Chief Administrative Law Judge Stephen J. McGuire, and the Commission subsequently ruled that Rambus had engaged in deceptive and exclusionary conduct under Section 2 of the Sherman Act, and unlawfully monopolized the markets for four separate technologies that the JEDEC had incorporated into its standards, in violation of Section 5 of the Federal Trade Commission Act. The FTC's February 2007 order required Rambus to license its technology and set maximum allowable royalty rates. Rambus appealed to the D.C. Circuit, which reversed the FTC in April 2008. After the D.C. Circuit refused the FTC's request for rehearing en banc in November 2008, the FTC filed a petition for certiorari with the United States Supreme Court. The Delaware court's Jan. 9, 2009 ruling holding Rambus' patents to be unenforceable essentially erases the prior wins and places at risk several other pending infringement lawsuits.
Comment: In a press release issued by Rambus on the day the Delaware decision was made public, the company noted that the "opinion is highly inconsistent with the findings of the Court in the Northern District of California which looked at the same conduct and found there was nothing improper with our document retention practices." Assuming, however, that this case is upheld on appeal, clients contemplating any type of litigation strategy as part of their overall business objectives should immediately implement a litigation hold once that strategy is developed. In other words, documents that would ordinarily be subject to destruction under the company's document preservation/destruction policies no longer should be destroyed if they could be relevant, in any way, to any type of litigation that the company might bring in the future. A document preservation/destruction policy will not shield a company from severe sanctions for spoliation of evidence with the prospect of litigation looming on the company's horizon. Clients contemplating litigation strategies for their businesses would be best served to consult counsel concerning the development and implementation of an immediate litigation hold.