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Thursday, June 6, 2013

Document Security Systems: The Importance of a Settlement with Jive Software and Broadvision

Document Security Systems (DSS) has been on a tear of press releases over the past month. For a quick background, Bascom Research is a wholly owned subsidiary of Lexington Technology group. Lexington Technology has entered into a definitive merger agreement with Document. Bascom Research filed a patent infringement lawsuit versus Facebook (FB), LinkedIn (LNKD), Jive Software (JIVE), Broadvision (BVSN) and Novell. This patent infringement lawsuit has been the center of a few recent press releases by Document Security, announcing settlement agreements with Defendants. These settlement agreements are sure to be good for investors in Document.
Document Security Systems announced that their soon to be subsidiary, Lexington Technology Group, settled with a Defendant in the Bascom Patent case. Unfortunately, the press release did not state which Defendant the settlement was with. The settlement granted an effective 4% royalty rate, per the press release. This settlement is with Broadvision. Although not stated in the press release, this can easily be found through a court filing available here. The settlement with Broadvision will likely provide only minimal revenue.
As of March 28th, Broadvision was listed with a market cap of $41.93 million. While the settlement grants an effective 4% royalty rate, keep in mind that this royalty rate applies only to a certain product from Broadvision, its Clearvale products. It is unclear how much of Broadvision's revenue is derived from its Clearvale products, but the product did not have any revenue in 2011, and likely did not bring in a large amount of revenue in 2012. This being said, Broadvision does seem to be scaling up its Clearvale products platform, saying in its most recent conference call discussing earnings that:
In this release, we enhance Clearvale's ability to control distribution and display of view only documents. Extend our integration capabilities with Microsoft SharePoint, and added many other security features required by our enterprise customers.
The enhanced Clearvale capabilities will also be added to our BroadVision 9 solution, announced last quarter to offer a unified and integrated engagement solutions based on Clearvale's social and mobile capabilities, and [K2 e-business] or relationship management platform, which is BroadVision's personalization and transaction management solution.
The fact that Broadvision is enhancing Clearvale can only benefit Lexington Technology and DSS, as thanks to the effective 4% royalty rate, the more sales that Broadvision obtains, the more money that DSS/Lexington will ultimately receive.
Also from the same conference call is a hint at the sales of the Clearvale product so far:
At BroadVision, we invest, create greater choices and options for our valued customers. In Q1, we did 25 Clearvale partner and paid customer transactions
Accoring to the conference call, Broadvision believes the bookings may provide significant upside in the future. With this in mind, and the fact that Broadvision according to recent quarterly filings does appear to be unprofitable, having posted a net loss of $2.1 million in the first quarter of this year. The revenue appears to be minimal out of the Clearvale product suite, and therefore seems to be minimal revenue to Lexington/ DSS. However, in the world of patent litigation or in any world money helps, so this revenue to Lexington, no matter how minimal, should help to offset some of the litigation costs with Novell, Facebook and LinkedIn.
On top of that, Lexington recently announced a settlement with asecond Defendant in the Bascom Patent case. This settlement provides for Lexington to receive an effective royalty rate of approximately 5%. This settlement appears to be with Jive Software, according to arecent court filing. Of the two, it seems as though Document/Lexington did much better with Jive, getting a higher royalty rate against the larger company. As of May 28th, Jive had a market cap according toYahoo Finance of $1.10 Billion. The complaint seems to specifically allege infringement based on Jive's API product line. According to its recent press release announcing earnings for the first quarter, Jive had product revenues of $30.7 million. Unfortunately, Jive does not seem to break down the numbers in their conference call. However, similarly to the other settlement, any revenue that is obtained by Lexington/DSS as a result of this lawsuit will help to further finance their legal actions against the rest of the Defendants. However, besides revenue why would these early settlements be important?
For an example of why this could be so important we can easily recall the days when Vringo (VRNG) announced a partial settlement with AOL(AOL). In the case of Vringo, they ended up winning a jury verdict against all of the Defendants in the case, including Google (GOOG) and AOL amongst others. The partial settlement well in advance of the trial provided minimal revenues to Vringo, but the symbolic nature of a settlement was much more revealing.
Now, jumping back to the DSS news, this settlement serves a few purposes. First of all, both of the Defendants are essentially acknowledging that the patents are valid and enforceable. If the Defendants had any beliefs that the patents were not valid and enforceable, they would probably have continued litigation and pushed hard for the judge to dismiss the case. This is a very important caveat in a patent litigation case, as if a patent is not valid and enforceable often the judge will not even let the jury hear the case.
This settlement is also important because it provides a starting base for determining what the patents would realistically be worth in terms of royalties during a jury trial. By providing a licensing history of 4-5% of the revenue for infringement, Document would be setting itself up nicely for arguing for an even larger royalty in post-trial infringement due to the changed bargaining positions of the parties involved in the litigation. Obviously, if Bascom Research wins its case than its hand will be considerably strengthened when determining ongoing royalties. Providing a licensing history will help the jury to determine reasonable damages, should they ultimately come to the conclusion that the other Defendants infringed upon the Bascom Research's Patents.
In addition to the impressive news of a partial settlement, Lexington and subsequently DSS have a very important date for their patent infringement lawsuit coming up. Lexington previously announced a markman hearing date for October 2nd, 2013. For those of you less familiar with what a markman hearing is, it is a time where both sides have presented their proposed language that a jury will hear as to what the patent covers. The judge will ultimately rule on which language will be presented to a jury. Obviously, the Plaintiff would like as broad of language as possible, as that would mean more chances for a finding of infringement from a jury. Whereas the Defense would like a very narrow definition, as it will be easier to argue that no infringement occurred. This date is very important for patent litigation, and often stocks will run up if they receive a favorable markman ruling for an example see ParkerVision (PRKR). This date will help to get a feeling for DSS about where its case will stand. The language will be very important for both sides in the sense that it will determine how they tailor their arguments to the jury. Turning back towards the settlement, the fact that a Defendant chose to settle even before the markman hearing would suggest that the infringement was pretty obvious no matter how the patent would be interpreted by the court. Given the recent settlement, I would say that there is a good chance for DSS to be successful in terms of their markman hearing.

The settlement helps to further entrench DSS shareholders, and can help to reassure shareholders that the patent litigation will ultimately be successful. While patent litigation is inherently a risky business, the settlement can be nothing but good news for DSS shareholders, which should help to encourage some other Defendants to analyze the validity of Document's claims and whether or not it would be cheaper to settle. The settlement should help to solidify the positions of long term shareholders, and helps to provide the idea that Document will be successful in their patent infringement lawsuit. We can only hope to see a repeat of the Vringo scenario for DSS shareholders and ultimately see a jury verdict in favor of DSS.


  1. Document Security Systems (DSS) has been on a tear of press releases over the past month. For a quick background, Bascom Research is a wholly owned subsidiary of Lexington Technology group. security systems corpus christi tx

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