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By way of background, in October 2010, Overland Storage (NASDAQ:OVRL) initiated a lawsuit against IBM (NYSE:IBM), Dell (NASDAQ:DELL), and BDT, accusing them of infringement of two patents. In December 2011, IBM and Dell settled. In June of 2012, the ITC judge issued an initial determination that found that the alleged products infringed the '766 patent and also found both of the patents to be valid.

Yesterday the commission came out with its conclusions on the preliminary findings of the Overland case, and it seems very negative. In fact the commission seems to have blown up the whole argument and put the '766 patent at serious risk of being invalidated. At this point it seems the legal proceedings have marginal value and are a distraction. My view is an expectation of short term weakness as the market absorbs the news and speculators exit, but over the long term I remain bullish.

The key issue is that the commission reversed the finding that certain IBM documents do not qualify as printed publications. This is very unfavorable. If you look at footnote 19 on page 52 of the initial determination it clearly explains why.

"The BDT Respondents maintain that it is undisputed that each of the asserted claims is obvious in light of the 3570, 7331, 7336, and 3494 libraries and manuals. (RIB at 71-72) Although Overland's pre-hearing brief appears to concede obviousness if the libraries and manuals are combined, Overland has consistently maintained that the BDT Respondents have not proven that the references on which they rely were publicly accessible."

BDT's defense, as they mentioned in their "victory" press release on July 30th, is to invalidate the patents. If the manuals mentioned above are now considered to have been publicly available it seems that even Overland admits that it would be obvious how to combine them with IBM products that were on the market and selling before the '766 patent was issued. This would invalidate the patent. This would be very negative and could very well destroy the case.

My advice from now is to carefully regard the optimism about the case from press releases and so on going forward and to give it little value. Companies always spin legal issues, and it is not because they are trying to be deceptive or do the wrong thing. It's probably strategic, and in my opinion none of this is management's fault, it's just an unfortunate outcome. The ITC is a different court then district court, but regardless, if one court invalidates the patents, the defendants will have good reasons to fight it out till the end and it would be years until something favorable were to happen, which at this point isn't obvious would be the case. The defendants have also proven to have pretty sharp lawyers themselves. I thought that the legal issues not only gave Overland a bit of a premium from the cases themselves, but I also felt that they gave the company a bit of a "buy out target" premium. I have eliminated both from my analysis.

It is my opinion that investors could be at risk of falling into a selectivity bias with Overland. This tiny, on-the-ropes company announced that they are suing seven companies which represent 40% of a $12bn storage market from 2005 to 2015, with the help of a top legal firm taking the case on a contingency basis. They got settlements from two top storage giants, IBM and Dell. They had a favorable first round in the ITC. Now that the unfavorable facts are on the table it could be too hard to accept they might no materialize. Unfortunately, in court it seems nothing is certain.

We still don't know what the IBM and Dell settlement amounts will be, but whatever we have won so far seems elusive. On further examination, the IBM LTFS license Overland got does not seem to be a huge win. According to Chris Mellor of the Register:

"IBM has made the LTFS access method openly available. Scheur's Tape Summit presentation stated: 'Many tape storage companies offer "freeware" versions for Windows, Mac OS, Linux and other operating systems.'"

It does not sound like they got some rare privilege to use the technology. So overall, I hope that the legal proceedings will no longer be a distraction and that the value of this company will be based on fundamentals and not immeasurable legal outcomes.

Disclaimer: I believe in the fundamentals of the company and the new products and the vision of management. The legal issues have made the stock really speculative and volatile and my hope is that investors move past it as a distraction and focus on the positive underlying business developments. This article is my opinion and could be completely wrong.

Source: Overland's Legal Case Dealt A Serious Blow