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Thesis: I intend to show how Overland Storage (NASDAQ:OVRL) was the clear winner from the determinations made by Chief Administrative Law Judge Charles Bullock in his Initial Determination filed on June 20, 2012. I also intend to try and explain and speculate about why there has been so much confusion about these findings. I also hope to draw the attention of sell side analysts like Brian Freed of Wunderlich Securities, Inc to further investigate my conclusions for themselves. When Brian Freed explicitly asked the management of Quantum (NYSE:QTM) for more information on the Overland suit during the first quarter conference call, based on my reading of the initial determination, he was not given a full and complete answer.

References: Overland Storage filed a complaint against IBM (NYSE:IBM), Dell (NASDAQ:DELL), and BDT on October 19, 2010 in the International Trade Commission alleging violation of two patents. The full proceedings can be found on the USITC website. The most important document to read is the public version of the initial determination, document "486119." I will also be referencing document "483372," the notice regarding the initial determination, as well as the press release "BDT Declares Victory in Patent Dispute With Overland" filed on 7/30.

Conclusion: Defendants BDT and potentially Quantum seem to be characterizing the determinations of the ITC as a victory when in fact the findings so far have not been in their favor. There are several reasons for this confusion but it starts with the fact that many investors appear confused by the nuances of the ITC and the litigation strategy and likely don't have the time to sift through the 160 pages of legal-speak to draw their own conclusions. The brief summary notice filed by Judge Bullock on 6/20 summarizing his findings which seemingly determined no violation of section 337 did not help with the confusion either. It is my opinion that BDT and Quantum have potentially used this confusion as a smokescreen for what has been positive news for Overland so far.

In brief, Overland filed a complaint with the ITC regarding certain IBM and Dell products manufactured in part by BDT. It is important to note that the complaint was against products (this will be explained later). On 6/20 Judge Bullock published a summary of his findings and a full initial determination was filed on 7/23. The reason for the confusion is that IBM and Dell settled before an initial determination was made which seemingly let BDT off the hook. Overland settled with IBM and Dell and announced the settlement with its second quarter earnings. This settlement preceded the initial determination date. The initial determination's findings are therefore effectively a "this is what I (Judge Bullock) would have ruled had the parties whose products infringed not settled," type document. We effectively have the privilege of seeing what would have been determined had IBM and Dell not settled. What BDT and Quantum have done is take the ruling of no infringement (because the settlement obviated the alleged products from blame) and claimed victory and selectively left out the fact that Judge Bullock, the Administration Law Judge of the International Trade Commission, found the IBM and Dell products in question guilty of infringement against every single claim brought to question of the '766 partitioning patent. On top of that Judge Bullock determined that both of the patents raised are valid despite intense scrutiny brought by the lawyers of Dell, IBM and BDT who combined have almost $250bn of market cap firepower at their backs.

So again, to say that IBM and Dell products do not infringe is inaccurate. They do infringe, but they are exempted from the claims of infringement because the parties responsible for the products in question settled the dispute with Overland. This infringement is clearly spelled out in the initial determination document "486119" starting on page 23. Furthermore, the claim by BDT that "none of BDT's FlexStor II products infringe any of Overland's asserted patents" is factually inaccurate based on footnote 3 on page 6 of the initial determination document. In conclusion, the determinations so far have been in Overland's favor and the unique characteristics of the ITC process have caused a lot of confusion.

It is important for investors to understand the mandate of the ITC or International Trade Commission and how it is different than that of the federal district court. The ITC mandate is to combat unfair trade practices. The main recourse with the ITC is an exclusion order, which effectively bans products that harm domestic industry because of unfair practices from importation. The important point there is that they ban products and the cases are product specific.

If the specific products (specifically the rebranded IBM and Dell products) no longer infringe because a settlement has been made, there is no infringement and therefore no need to issue an exclusion order. Unfortunately when ALJ Bullock filed the notice regarding the initial determination document "483372" on 6/20, stating that no violation of section 337 had been made by reason of infringement, a public version of the initial determination was not made available and investors of Overland drew the wrong conclusion about the judge's findings. Defendants like BDT and Quantum seem to have used this confusion to their advantage. Overland filed an emergency motion to disclose parts of the initial determination but BDT blocked that motion (ask yourself why they would do so if it was a clear "victory") and unfortunately the summary notice caused extreme volatility in the Overland stock. Investors in Overland have become extremely nervous since the announcement and despite the favorable ruling the stock price is still below its prior levels.

BDT was exempted from an exclusion order because again, the ITC is concerned with products and where a patent is being practiced. In order to bar a manufacturer from importation of products that are no longer infringing because of a settlement agreement, Overland had to try and prove induced or contributory infringement by BDT. In other words, Overland had to try and prove that BDT tried to influence IBM to manufacture an infringing product knowing full well it was infringing. That isn't easy to prove and Overland wasn't successful at doing so (see pages 34-37). For the purposes of federal district court these issues are irrelevant. What matters is that the judge found the products infringed (until the settlement agreement was reached) and that the judge found the patents to be valid. As it stands Overland is the clear winner and BDT is the clear loser. Again, why would BDT be petitioning the findings of the initial determination if it was a clear "victory"?

For some reason the management teams of BDT and now Quantum have not been forthcoming with their stakeholders about the severity of the initial determination's findings. On their first quarter call at around the 42 minute mark, Brian Freed of Wunderlich Securities asks for management to comment on the Overland litigation proceedings. Here is part of the response of General Counsel Shawn Hall:

I mean, the patents at issue in ITC are the same as the patents that are at issue in our suit, and so there are aspects of it that are perhaps informative, but it's not binding; we're not a party to it. Specific to the infringement, I would just note that the ITC found that BDT did not infringe either of the patents. I think that's pretty clear and factual.

That is not clear and that is not factual. I have refuted why above, but again, the products were found to infringe but were exempted from the infringement because the parties settled. Secondly, the aspects of the case are not "perhaps informative." The Chief Administrative Law Judge of the International Trade Commission determined that the patents Quantum is being accused of violating are valid and found the products of two large vendors were guilty of infringement (until settlement) which would appear to be very informative.

Shawn Hall goes on to say:

The ITC found that IBM and Dell infringe in kind of limited circumstances, but Dell and IBM have both settled. That's not, as far as we can tell, very relevant to the current case against BDT was found explicitly not to infringe.

Let me start by addressing the statement made in the second sentence, that as far as he can tell, Shawn Hall doesn't think that the fact that Dell and IBM have both settled is relevant to the current case against BDT was found not to infringe. It was, as far as I can tell, the only relevant reason for why BDT was found not to have infringed. Again, the only reason the products don't infringe is because IBM and Dell settled and their products are therefore exempted from infringement. In fact the judge extended the target date four months to accommodate the changes brought to the case from the settlement because the settlement with IBM and Dell was so relevant.

In response to Shawn Hall's statement that the ITC "found that IBM and Dell infringe in kind of limited circumstances" all I can say is that from my reading I did not draw that conclusion and I would be interested in a page reference in the initial determination that leads him to draw that conclusion. It appears that Shawn Hall simply repeated the findings of BDT's "victory" press release which states:

It [the Initial Determination] merely concluded that the '766 patent was infringed only when their tape libraries were bundled in very specific configurations. "It's an uncommon configuration at best," said Anton Handal, lead counsel for BDT.

"We firmly believe that Overland's patents are invalid and although the Chief Administrative Law Judge did not reach that conclusion, he laid out a clear roadmap to accomplish invalidation," said Handal. "If Overland decides to actually pursue additional litigation against BDT, we will continue to seek invalidation of these patents," Handal added.

My reading of the initial determination does not lead me to draw the conclusion that the Administrative Law Judge Charles Bullock "found that IBM and Dell infringe in kind of limited circumstances." Overland is asserting that the IBM and Dell infringement occurs during product testing. There isn't any elaboration on this so called "limited use" being an issue that I could find in the initial determination. Clearly the judge in finding a violation of the patents didn't conclude this to be the case either.

Regarding the comments regarding invalidation of the patents, I will present what my understanding of the defense is and why I think their efforts will prove ineffective. Again all I can go on is trying to piece together the statements in the initial determination. One of the defenses appears to be that the IBM 3570 tape library invalidates the patents because it satisfies the conditions of prior art, that is, the product existed and performed the actions of the patent before the patent was issued. The judge examines the validity of the '766 patent starting on page 38. The defense argues that the IBM 3570 could be configured to partition with the help of the user manual after the time of sale and therefore was capable of performing the claims of the '766 patent before the patent was issued. The judge contends that the fact that the device could be altered after it was sold is not relevant. The product also fails to practice the second claim on page 46 and 47 and finally the defense lacks proof that the user manuals were sufficiently accessible to the public.

The only possible defense that seems to make sense is that presented in footnote 16 on page 45.

The BDT Respondents contend that Overland's argument with regard to anticipation under 102(b) is "wholly inconsistent with its infringement analysis." (RIB at 59.) Specifically, the BDT Respondents argue that Overland's anticipation position (i.e., that the prior art products must have been sold configured to partition) is untenable with its infringement positions (i.e., that the accused products infringe if a user can configure the product to create multiple partitions.). The BDT Respondents fail to recognize that this is precisely why Overland alleges contributory infringement, and not direct infringement by the BDT Respondents.

Essentially the argument seems to be, how can Overland argue that the IBM 3570 isn't prior art because it isn't sold in a configuration that would interpret the '766 patent when it suits them, and then later argue that the infringing products infringe when they are in a specific configuration for testing. In my understanding, BDT's line of argument will prove ineffective for several reasons. Firstly, the argument made by Overland that the configuration at sale was not prior art is not the comprehensive argument but an argument against claim 1 of the patent. There are several other legs to the Overland defense of their patent that were validated by Judge Bullock's ruling as well. The validity of the Overland patents remains regardless of the arguments about claim 1 (the claim for which this argument is used can be found on page 45 and 46) because the IBM 3570 fails on two other accounts. It fails to satisfy claim 2 and secondly, BDT failed to prove that the user manuals were sufficiently accessible to the public.

Secondly, my understanding of patent law is that the validity of the patents and the test of infringement are considered separately. This is consistent with the reading of the initial determination. None of the arguments addressed in the infringement assessment starting on page 24 get into the issue of when the patent was practiced, that is the fact that the patent was violated during testing never seems to be an issue in the arguments. The arguments specifically relate to whether the patents as read were violated. The validity of the patents themselves seems to follow a completely different line of examination that doesn't seem congruous with the examination of infringement. The examination framework used to evaluate why a patent is valid and why a patent is violated are not necessarily consistent.

Given that Overland has clearly gained from this outcome to date, why is it that BDT and Quantum appear to be light on concessions of loss and intent on rigorously defending their positions? I can only speculate, but an unfavorable ruling in the federal district court could be extremely costly. Overland has been light on specifics, but in their 6/28 press release "Overland Storage Files Patent Infringement Lawsuits on Tape Storage Technologies," they did give us some idea of the potential size of future settlements. Once the cash portion of the IBM and Dell settlements starts showing up in the quarterly results it will hopefully give us some additional clarity on the potential size of future settlements. Unfortunately investors have no idea when these cash payments will be paid or the potential size of those settlements which have been kept confidential. It is also worth noting that DLA Piper has been representing Overland on a contingency basis for almost two years and has spent a massive amount of time on this case, so much so that Judge Bullock had to postpone the Initial Determination because of the volume of the paperwork and evidence. Two years of sacrifice would probably warrant a significant payday.

According to recent IDC reports, the tape storage market between 2005 and 2015 will surpass $12 billion in total revenue, and the seven companies named in the patent infringement lawsuits filed today collectively represent approximately 40 percent of that market. In addition to a royalty for its patented inventions, Overland seeks to prevent each of the defendants from using its patented technologies in the United States.

The only conclusion I can draw is that Quantum either doesn't realize yet the severity of the outcome or wants to contain the potential windfall from stakeholders grasping the significance of the findings so far. The same seems to apply for BDT. If the commission confirms the decision of ALJ Bullock in its final determination due on October 22 that will be a huge endorsement for Overland heading into district court.

An interesting thing is that Overland states in their complaint against Quantum that Quantum asked for a license of the '766 from Overland in 2010. On the Quantum call management indicated that wasn't true. It sounds like the legal battle lines are starting to get drawn but based on what is publicly available, the findings of the initial determination add to the Overland arsenal. Add to it that IBM and Dell have already settled and a precedent has been set.

In my opinion Overland represents a terrific buying opportunity sitting at a $52m market cap. They just released their new SnapServer DX Series disk product that Storage Magazine awarded "Best Disk Product at the 2012 Awards" honors, and they are about to release a scale-out NAS product with an integrated private cloud solution, and they guided to non GAAP breakeven in calendar Q4. Add to that the fact that we haven't seen the terms of the IBM and Dell settlement yet and the potential for windfall settlements from the active litigation. Time will tell, but I hope at the very least that stakeholders are aware that the legal proceedings could be more serious than the commentary so far has suggested and that Overland might not be the plain vanilla tape backup company people might remember it to be.

Disclosure: I am long OVRL.

Additional disclosure: All of these comments are my own interpretations of public documents. I have no positions long or short in any of the stocks mentioned beyond OVRL and I have no intentions of initiating any trade in any of the stocks mentioned outside of OVRL. Please draw your own conclusions. My conclusions may not be correct. My interpretations of BDT and QTM comments are my own and may not be accurate.