Overland Victorious On All 6 Claims

Jul.26.12 | About: Overland Storage, (OVRL)

Recent developments in Overland's (OVRL) patent infringement trial point to a clear victory in our opinion, and a massive blow to the business and the balance sheet of BDT.

In 2010, Overland Storage launched litigation against IBM (IBM), Dell Inc. (DELL), BDT AG, BDT-Solutions GmbH based in Germany and BDT Products. The complaint broadly claims infringement of BDT's products. IBM and Dell were named because they purchased the products that infringed on Overland's patents.

BDT is the largest tape provider in the world (60-80% of the market). Overland claims that BDT infringed on its patents and started selling equipment to Hewlett Packard (HPQ), taking away the lion's share of Overland's business. BDT won the contract with Hewlett Packard approximately 6 years ago by giving a discount with an identical product. The HP business represented 70% of Overland's revenue at the time (approximately $150mm per year).

Overland is represented by DLA Piper (the largest law firm in the world), with the case taken 100% on contingency. John Allcock (lead counsel) has never lost a case in his career; he's taken 71 infringement cases to trial and won. The win number does not include settlements. The suit was filed with the ITC (International Trade Commission) where DLA also has a perfect record - winning all nine of the cases they have filed there.

On the November quarterly conference call, Eric Kelly (Overland's CEO) surprised investors by informing them that IBM and Dell settled the case:

Now available on the ITC.US.gov site https://edis.usitc.gov/edis3-external/direct.svc is the public version of the initial determination on violation on section 337 and recommendation on remedy and bond. This recommendation has three parts to download from the site. In the decision it is my understanding that Overland has proven and been successful in all six of its claims against BDT, IBM and Dell. As we know IBM and Dell have already settled, however BDT and all other defendants may eventually have to pay substantial monetary damages.

Other Defendants include:

1. Overland Storage, Inc. v. Quantum Corp. and Venture Corp. Ltd., Case No. 3:12-cv-01599
2. Overland Storage, Inc. v. Spectra Logic Corp., Case No. 3:12-cv-01597
3. Overland Storage, Inc. v. PivotStor, Inc., Case No. 3:12-cv-01598
4. Overland Storage, Inc. v. Qualstar Corp., Case No. 3:12-cv-01605
5. Overland Storage, Inc. v. Tandberg Data GmbH and Tandberg Data Corp., Case No. 3:12-cv-01604

Now that the ITC initial decision has become public record I would expect settlements in some of the above cases.

Unfortunately, investors were misled by the headline in June that there was no infringement by BDT; this is adequately explained in the full version of the initial decision. The importer of record could not be adequately proven at trial, however there may be new evidence that leads the court to decide in favor of Overland on October 22nd. I would suggest investors look closely at PivotStor and its relationship with BDT.

It is my opinion, after doing the math on the possible size of the infringement by all company's involved that the eventual settlement may be between $250M and $600M. A portion of this will go to DLA Piper, who now has six attorneys of record pursuing this action. However, with the market cap of Overland still under $50 Million, the valuation is compelling. I would not be surprised to see one of the defendants listed above or a new defendant approach Overland for a strategic fit.

Disclosure: I am long OVRL.