NEW YORK (CNN/Money) -
The best performing tech stock in the first quarter is a company that gets more attention for its courtroom battles than its financial performance.
Shares of Rambus, a semiconductor company that holds several patents on chip technology, nearly doubled in the first quarter, even though it is involved in four separate legal battles. The stock has soared due to some positive developments in one of those cases.
So should investors hop aboard the Rambus? Unless you possess intricate knowledge of the finer points of intellectual property and antitrust law, the answer is a resounding no.
The Rambus docket
Why is the company in court? Rambus (RMBS: Research, Estimates) has patents on various memory technologies, most notably synchronous dynamic random access memory (SDRAM), which helps PCs access data faster.
Chip manufacturers that use this technology (and many do, including Intel) pay Rambus royalties, accounting for roughly 95 percent of the company's revenues.
Therein lies the legal wrangling. In 2000, some chip companies balked at making these payments, so Rambus sued several to collect. Two firms -- Toshiba and Hitachi -- eventually agreed to pay up.
But another, Infineon Technologies (IFX: Research, Estimates), countersued, alleging that Rambus committed fraud when it did not disclose its patents and pending applications when participating in a committee during the early 1990s that was setting standards for high-speed memory chips. The agreed-upon standards wound up including technology that Rambus patented, therefore entitling it to royalties.
Infineon, a spin-off of German technology firm Siemens (SI: Research, Estimates), won the case in 2001 but the ruling was overturned earlier this year. Infineon can appeal to the Supreme Court but has yet to announce its intentions.
Micron Technology (MU: Research, Estimates), Korean company Hynix Semiconductor and even the Federal Trade Commission are also involved in similar but separate lawsuits. A spokeswoman for Rambus said that it is the company's contention that it has done nothing wrong.
Bumpy bus ride
For the time being, Rambus is ahead of the game. Still, I think investors would be wise to stay away. You need an ironclad stomach to ride the Rambus, with the stock jerking all over with every unpredictable legal development.
To wit, shares of Rambus plunged nearly 36 percent on June 19, 2002, after the FTC announced its suit. (The trial is set to start on April 30.) The stock then soared 57 percent on Jan. 29 after the Infineon victory.
It plunged more than 10 percent on March 5 after a judge disclosed that the company would have to bear the burden of proof in certain aspects of the FTC's antitrust trial. Then on April 4, the stock rose nearly 10 percent after another appeals court judge denied a request by Infineon for a full rehearing of its fraud case.
Legal battles are not over
This is murky stuff, and it's likely to continue. Commenting on the Infineon case, Rochelle Dreyfuss, a professor of patent law at the New York University School of Law, said that it is not crystal clear whether Rambus had to make full disclosure. "It's a really hard line to draw," Dreyfuss said.
And after the Hitachi and Toshiba settlement in 2000, analysts thought that Rambus's legal woes were over. Morgan Stanley even predicted that the company could generate $1 billion in royalty revenue by 2003.
But Rambus is still keeping its general counsel very busy. During the past two fiscal years, Rambus has had $38.4 million in legal expenses, a significant sum for a company with only $213.7 million in revenue during the same time frame.
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So far this fiscal year, Rambus has incurred $4.5 million in litigation costs and revenues were $25.7 million.
That's cutting into profits. Rambus is scheduled to report its fiscal second-quarter results on Monday.
To be sure, Rambus could win big in court, which would mean that eventually it will receive a substantial amount of royalties. But it could also lose. And if analysts, lawyers and judges can't seem to figure out the eventual outcome, then why should you try?