You may have never heard of Tom Bascom. But according to Document Security Systems (NYSEMKT:DSS), his inventions are central to how many of us use the Internet. Tom Bascom is an inventor who created a system for data organization and retrieval, for which he was awarded several related patents (the "Bascom Patents"). In simple terms, the Bascom Patents provide a system for creation and search of contextual relationships between objects on a network platform. According to DSS, these patents form the underlying architecture for the explosion of social networks, such as Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD), and others.
The Bascom Patents are owned by Bascom Research, LLC, a subsidiary of Document Security Systems. In October of 2012, DSS, through its Bascom subsidiary, filed patent infringement lawsuits against the following defendants:
A Bit of History
The DSS lawsuits were originally filed in the Eastern District of Virginia last October. In December, the cases were transferred to the Northern District of California, where most of the known witnesses reside.
In April and May of 2013, DSS announced that it reached confidential settlements with two defendants in the Bascom cases, and that these defendants agreed to pay an effective royalty rate of 4% and 5% for their use of the Bascom patents at issue in the litigation. While the names of the settling defendants were kept confidential, the April settlement (4% royalty) was shortly followed by dismissal of the BroadVision case, and the May settlement (5% royalty) was shortly followed by dismissal of the Jive case.
So without going too far out on a limb, it is reasonable to conclude that BroadVision and Jive quickly folded and signed licensing agreements to pay DSS royalties of 4% and 5%, respectively, for their use of the Bascom Patents at issue in the subject litigation. In its case management statement filed on June 21, DSS confirmed that it had indeed settled with BroadVision and Jive, and that "Bascom and Novell are in discussion to settle their case."
What does this activity say? First and foremost, it tells me that two publicly traded companies, BroadVision and Jive, quickly agreed that the Bascom patents are valid, relevant to their social networks, and worth paying for. They settled with nary a peep. It tells me that Novell may be on the way to the same conclusion. And it tells me that Facebook and LinkedIn, the bigger fish in the group, may have cause for more discomfort than they care to admit.
What's At Stake?
Money, and lots of it. Last year, Facebook reported revenues of just over $5 billion. In 2011, it reported revenues of just over $3.7 billion. 3% of that is about $264 million. 5% is about $254 million. That's for 2011 and 2012 alone.
Facebook's prior year revenues are also at issue, but you get the idea. Furthermore, DSS is not only seeking damages for past revenues, but is also seeking royalties on future revenues as well. We are talking some income potential here.
While LinkedIn's revenues are more modest, they are still substantial, and growing. In 2012, LinkedIn announced revenues of $972 million, an 86% increase over the prior year. A royalty rate of 5% would come to just over $48 million, for 2012 alone.
Moreover, DSS asserts that it is a practicing entity, and therefore, it has asserted a claim for injunctive relief against Facebook and LinkedIn. This means that if DSS prevails, they will have the opportunity to seek an order preventing Facebook and LinkedIn from continuing to infringe on their patents. If that happens, you may still have a thousand Facebook friends, but you may not be able to find them.
The DSS Team
The Lawyers. DSS is represented by Kramer Levin, a top tier law firm that is said to have had prior access and experience with Facebook source code in a prior patent litigation. Kramer Levin is representing DSS on a contingent fee basis, meaning these guys have agreed to commit thousands of man hours to battling this case, in return for a piece of the pie. They are not doing this because they are nice guys. They are doing it because they believe there will be a significant pie.
The Closers. While Kramer Levin brings the legal muscle to the case, the real action is going on behind the scenes. DSS is represented by IPNAV, a patent monetization consultant that works to create licensing agreements. IPNAV's website boasts that it has monetized about $610 million in licensing fees for its clients to date.
The Merger. On June 20, 2013, DSS announced shareholder approval of its merger with Lexington Technology Group (LTG). LTG is an IP patent management company, which creates, aggregates and monetizes a significant patent portfolio, including the Bascom patents. The merger is expected to close on July 1, 2013. The merger is highly significant because it marries LTG's patent monetization expertise with DSS's existing anti-counterfeit, authentication, and security product manufacturing expertise, so as to create a practicing entity with a continuing history of manufacture and sale of product. In other words, DSS is formed as a PE instead of an NPE, and is therefore situated to avail itself of the remedy of injunctive relief in patent enforcement litigation.
Moreover, the post-merger DSS has a diversified revenue base. Whereas it has already begun to generate IP licensing income (e.g., BroadVision and Jive), and is aggressively pursuing more such income (e.g., Facebook, LinkedIn, Salesforce (NYSE:CRM)), it also receives income from DSS's existing product sales. In 2012, DSS had about $16 million in revenue, up from about $13 million in 2011.
Status of Litigation
Back to the Bascom litigation. Facebook and LinkedIn have filed answers to the Complaint. Markman hearings in the Facebook and LinkedIn cases are scheduled to occur in about three months, on October 2, 2013. This is a key milestone in the litigation, as the Court's claim constructions in the Markman hearings can be an important impetus towards settlement.
For now, the parties are engaged in discovery on the issue of claim construction. The parties' Markman Briefs are due to be filed on August 26, 2013. With the Markman hearings occurring shortly thereafter, we are edging up to some significant fireworks in a case that is shaping up to be very interesting, and likely very profitable, for DSS.
J.P. Moreno has published an extremely detailed analysis of the DSS merger, the Bascom litigation, the Bascom Patents, and the claims in the Facebook and LinkedIn, here.
DSS/LTG's announcements regarding settlements with BroadVision and Jive are here.
The Bascom patents at issue in the case are published here.