Judge to Cut Hynix Royalty Payments in Light of Rambus 'Shred Days'

, The Litigation Daily

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The computer chip designer Rambus Inc. has long been haunted by its decision to shred hundreds of boxes of documents not long before it launched a litigation campaign against a big swath of the semiconductor industry. The latest blow came on Friday, when the judge most sympathetic to Rambus over the years ruled that the company willfully destroyed documents in anticipation of litigation and indicated that he would reduce a $397 million judgment that Rambus won against rival SK Hynix Inc. in 2009.

Reversing his own prior findings, U.S. District Judge Ronald Whyte in San Jose ruled that Rambus spoliated documents in bad faith when it hosted companywide "shred days" in 1998, 1999 and 2000. Whyte stopped short of finding that Rambus deliberately shredded documents that could have hurt its litigation efforts. Choosing a relatively mild sanction, the judge ruled that he would recalculate Hynix's royalty payments to Rambus under a 2009 judgment to assure that they are "reasonable and nondiscriminatory."

The case has a convoluted procedural history. Hynix sought a declaratory judgment in 2000 that it doesn't infringe 11 Rambus patents. Rambus counterclaimed that Hynix infringed all 11 patents, plus four others. After getting their hands on internal Rambus emails planning the "shred days," Hynix's lawyers at O'Melveny & Myers urged Whyte to find that Rambus spoliated evidence and to declare its patents invalid due to unclean hands. After a bench trial in 2006, Whyte ruled, in essence, that Rambus did nothing wrong because litigation wasn't reasonably foreseeable at the time of the "shred days." A jury later awarded Rambus and its lawyers at Munger Tolles & Olson $307 million in damages for past infringement, which Whyte reduced to $133 million. In 2009, Whyte tacked on another $215 million in future royalty payments and $48 million in prejudgment interest, bringing Rambus's total haul to $397 million.

Whyte's rulings contrasted sharply with those of U.S. District Judge Sue Robinson in Delaware, who heard nearly identical spoliation arguments in Rambus' separate infringement case against Micron Technologies Inc. Robinson not only found that Rambus engaged in spoliation, but she imposed the harsh punishment of dismissing the case entirely. Rambus appealed the Micron loss to the U.S. Court of Appeals for the Federal Circuit. Around the same time, Hynix appealed Whyte's rulings. The Federal Circuit scheduled oral arguments in both cases for the same day. Carter Phillips of Sidley Austin and Richard Taranto of Farr & Taranto argued for Rambus, opposite Sri Srinivasan of O'Melveny for Hynix and Matthew Powers, then of Weil, Gotshal & Manges, for Micron.

The Federal Circuit issued separate opinions in both cases in May 2011. In Micron, the court affirmed Robinson's ruling that Rambus spoliated evidence but vacated her sanction of dismissal on the grounds that her analysis was too "sparse." In Hynix, the court vacated Whyte's ruling that Rambus didn't spoliate evidence, ruling that he misapplied the test for determining whether litigation was reasonably foreseeable. The appeals court instructed Whyte to determine on remand when Rambus' duty to preserve documents began and what sanctions, if any, are appropriate.

Applying the Federal Circuit's analysis, Whyte has now found that Rambus could have reasonably foreseen litigation against Hynix as early as 1998, and that therefore Rambus engaged in willful spoliation during three "shred days" between 1998 and 2000. He declined to toss the case on unclean hands grounds, however, noting that there's no evidence Rambus deliberately shredded documents it knew were damaging. "If [Rambus] in fact requested that employees destroy potentially damaging evidence, it is surprising that there was not a single whistleblower out of the approximately 145 and 165 employees participating in Shred Days 1998 and 1999, respectively," Whyte noted. "In fact, if Rambus did intend to destroy all damaging documents, it did a poor job. A number of documents damaging to Rambus were retained and were produced to Hynix during discovery."

After weighing potential sanctions, Whyte decided the most fair approach would be to revise his prior calculation that Hynix owed Rambus $215 million in royalty payments. In his recalculation, Whyte said he would strike from the record all evidence supporting a royalty beyond what was considered "reasonable and nondiscriminatory" in the industry. "Such a remedy recognizes that Rambus' patents have been determined to be valid while at the same the recognizing that Rambus' spoliation of evidence should preclude it from entitlement to a royalty that places Hynix at a competitive disadvantage," the judge wrote. Whyte ordered the parties to file briefs indicating what a reasonably royalty should be.

Hynix said in a statement that it "welcomes" the decision and that it expects the revised damages calculation to be "considerably lower than the amount set in the previous ruling."

In a conference call with investors and analysts on Monday, Rambus general counsel Thomas Lavelle said that "while we are disappointed with the finding of spoliation, we feel this is a positive result as it clearly states that there is value in our technology and we have a right to collect royalties for the use of our patent inventions."

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