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International Business Machines Corp. (IBM - Analyst Report) was sued by chip designer Rambus Inc. (RMBS - Snapshot Report) challenging the ruling given by the U.S Patent and Trademark Office in favor of IBM in a patent infringement case.

The patent relates to a memory controller, which communicates to a memory subsystem via an independent point-to-point link.

Rambus filed the suit in a federal court in San Jose, CA. The ruling given by the office's Board of Patent Appeals and Interferences on Jun 24, 2010, stated that IBM did not violate a patent that Rambus filed in 2002. Rambus pointed out that the ruling given by U.S. Patent and Trademark Office was erroneous.

Rambus has a track record of constantly accusing large companies of patent infringements in a bid to receive royalties. Most recently, it has been involved in a bitter battle with NVIDIA Corp. (NVDA), which NVIDIA eventually lost at the end of July, 2010. If Rambus wins the case against IBM (which is unlikely in our view) IBM may need to shell out royalties, which will negatively impact results.

However, IBM does not produce dynamic random access memory (DRAM) and only uses memory controllers in select devices. IBM uses Rambus XDR memory along with its PowerXCell 8i central processing units in select applications. The XDR memory uses point-to-point links.

In 2006, IBM signed a technology licensing agreement with Rambus. The agreement allows IBM to build Cell Broadband Engine (Cell BE) processors and companion chips using Rambus' technology. The Cell BE processor was jointly developed by IBM, Toshiba and Sony Corp. (SNE - Snapshot Report).

Recently, IBM faced a number of controversies regarding its operations. The European Union (EU) accused IBM of violating anti-trust guidelines and misusing its dominant position in the Mainframe computer market. The European Commission, the executive arm of the European Union, launched two anti-trust probes against IBM.

The Computer & Communications Industry Association, which has Microsoft Corp. (MSFT - Analyst Report) and Oracle Corp. (ORCL - Analyst Report) as its members, also filed an antitrust complaint in Europe against IBM. This anti-trust complaint remain a potential headwind for IBM going forward, in our opinion.

Although IBM benefits from a strong liquidity position, operational efficiency, substantial free cash flow and earnings momentum, the company faces stiff competition from Hewlett Packard Co. (HPQ - Analyst Report), Accenture Plc. (ACN), Oracle Corp., VMware Inc. (VMW - Snapshot Report), Google Inc. and Microsoft Corp. in most of its markets. We maintain a Neutral rating on a long-term basis (6+ months).

Currently, IBM has a Zacks #3 Rank, which implies a short-term Hold rating.

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