Document Security Systems' Future Depends Upon Patent Lawsuit

| About: Document Security (DSS)

Document Security Systems (NYSEMKT:DSS) is a developer, manufacturer and marketer of high tech plastic and paper items, along with infrared radio security, designed to prevent unauthorized scanning of magnetic stripes, counterfeiting, and related criminal activities. The company has a market capitalization of $80.66 million. It owns numerous patents to protect its technology, which is typically sold to financial institutions, large corporations, and governments. The stock has been volatile of late, and this volatility could present a great opportunity to investors. In this article, I will focus on the factors that have been causing this volatility, and how Document Security Systems could become a lucrative investment opportunity in the near future.

After touching just over $5 per share in early February, the stock drifted downward unevenly through late May. The stock traded as low as $2.35 per share in late May. It then took off to over $4 per share by early June, then drifting lower again, to $3.68 per share on July 11. At the time of writing, it was up about 5% on the day, to $3.89 per share.

There has been some good fundamental news for the company recently. On June 19, it won a three year, $9 million contract from a large consumer products company. Other news in the second quarter of interest is that in mid-May, consulting group ipCapital put a present 10 year value of $245 million on the license marketing potential of Document Service System's technology, assuming only modest market penetration. Effective marketing could easily advance that figure. Considering the company posted first quarter revenues of $3.8 million, and a net loss of $1.1 million, knowing that there is a lot more revenue on the table is a nice thing to know.

Perhaps the biggest current issue for Document Security Systems is its lawsuit against, now pending in federal court in the Western District of New York. It is Document Security System's position that back before 2006, was provided with a confidential and proprietary version of Document Security System's patented technology under a strict non-disclosure agreement. Beginning in 2006, began utilizing its own version that copied elements of the Document Security system. Document Security Systems now seeks royalties going forward from 2006, which would amount to about $45 million per year, or over $2.20 per share, per year. This could provide a big boost to Document Security Systems.

A press release on July 13 reflected a Federal Judge's order that moved up by two months certain already-submitted motions that had been scheduled for hearings in October, to August 16, 2012. There will undoubtedly be pressure to reach some sort of settlement as that date and other similar key dates emerge going forward. Considering that Document Security Systems has only $2 million in cash, any settlement would be a good thing.

Being involved in litigation, especially patent and trademark litigation, is never a simple matter for either party. Attorney fees can be exorbitant in that sort of litigation, and outcomes most uncertain, especially when one considers the money that is often at stake. In the case of Document Security Systems, I think the developments in this case so far present a great opportunity for aggressive investors that can tolerate a high amount of risk.

For a time, Eastman Kodak (EKDKQ.PK) looked to support its business solely by litigating to protect its patents and / or sell those patents, of which there are over 10,000 both in the United States and overseas. This former photographic and technology giant is a thin and dark shadow of its former self. The fact that it possesses over $3 billion of patents and intellectual property ought to buy Kodak time to restructure in bankruptcy court. Yet, it may well be the failure of Kodak to properly or effectively enforce its patents that deprived it of enormous revenue that may have led to the collapse of the company from which it is attempting to emerge.

A more positive example of the power of patent rights is the experience of Vringo (VRNG). Its stock is up over 40% from late May, largely on the power of a large patent dispute that was dealt with in great detail in this article. Vringo has a market capitalization of $55.12 million, and is currently involved in a merger with I/P Engine. Vringo's business is the development and marketing of support software for various internet applications. It has sued Google (NASDAQ:GOOG), Target (NYSE:TGT) and other large capitalization companies over claims that its search engine monetization protocols were used by Google and others. The alleged tort by Google was that its Adwords and AdSense products infringed on Vringo's patents. Those two divisions, it turns out, have supplied 97% of Google's revenues since 2001. Vringo had less than $4 million in cash on its ledger at the end of the first quarter of 2012. It is looking at a judgment, or even a settlement in the billions of dollars. That is quite a potential game changer.

Another small tech company, InterDigital (NASDAQ:IDCC), sold its patent portfolio to Intel for $375 million, sending its stock up nearly 30% in one day.

And so it goes with small companies with potentially valuable intellectual property and patent holdings. Undoubtedly there are many companies out there who do not even know their intellectual property rights are being infringed upon.

It has long been thought that patent and copyright laws protected inventors and served to encourage innovation. But in recent years, large companies have raced to purchase and store intellectual property rights, and then use those rights as weapons to protect their own interests. Companies, especially in the technology sector, have made a series of multibillion dollar acquisitions of patent rights. New Patent Laws passed last year appear more to nibble at the problem of the misuse of intellectual property rights than truly make meaningful reforms to encourage innovation the way the system used to do a generation ago.

How does all this play into Document Security System's future? Simply put, it depends on the outcome of the lawsuit against I urge investors to closely follow developments surrounding the lawsuit in the coming months, as they could quickly transform Document Security Solutions into a lucrative investment opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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