Emerging Market And Patent Lawsuit Make Document Security Systems A Good Play

| About: Document Security (DSS)
This article is now exclusive for PRO subscribers.

On October 3, 2012, Bascom Research, LLC, a wholly-owned subsidiary of Document Security Systems, Inc. (NYSEMKT:DSS), filed a patent infringement lawsuit in the U.S. District Court for the Eastern District of Virginia against Novell (NASDAQ:NOVL), LinkedIn (LNKD), Jive Software (NASDAQ:JIVE), Facebook (NASDAQ:FB), and BroadVision (NASDAQ:BVSN). The lawsuit claims these companies utilized patented technology owned by Bascom Research, which provides the means to organize data and relationships, as well as share data in a computer network.

DSS develops technology designed to eliminate the counterfeiting of important documents. For example, DSS established the industry standard for document security on U.S. Social Security cards. Last week, DSS signed a definitive merger agreement with Lexington Technology Group, Inc. (LTG), a company that manages Intellectual Property (IP) assets. Bascom Research, the company at the heart of the Facebook patent lawsuit, was originally a wholly-owned subsidiary of LTG. Following the merger, the company will continue to be known as DSS, with Bascom Research and its assets now falling under DSS ownership.

Facebook earns over 80% of its $1.18 billion quarterly revenue from advertisements hosted on its social networking platform, which attracts nearly 1 billion monthly users. If DSS were to win this lawsuit, the court could award billions to DSS. This figure would be derived from a percentage of Facebook earnings, as well as up to triple damages for the willful infringement of the DSS-owned patent. The other four companies in the lawsuit are clearly threatened as well, but Facebook is still in IPO damage control mode and has the most to lose.

The DSS lawsuit could give the company's stock significant upward mobility potential. A perfect example of this is Vringo, Inc. (VRNG), a ringtone company that filed a patent infringement lawsuit against Google (NASDAQ:GOOG). Since filing the lawsuit, Vringo is up over 600% from its 52-week low of $0.68 per share. The company's shares have traded as high as $5.55, which is over 800% higher than the 52-week low.

Remove the patent play and DSS still has considerable upside. Major companies like Pfizer (NYSE:PFE), Coca-Cola (NYSE:KO), and Kraft have long used DSS for document protection. Most importantly, in a global economy with advancing PC, tablet, and mobile technology and a rapid increase in the use of electronic documents, there is a large market for this type of service. Currently, only $4 billion is being spent each year to combat counterfeiting; however, the market is expected to grow to nearly $80 billion by 2014. There is also large potential in the defense industry as cyber-attacks from America's enemies are becoming a legitimate national security threat. Companies such as DSS could win large defense contracts to protect sensitive military and intelligence documents. Investors should give DSS a serious look considering the upside potential in the document security market, as well as the billions that could be earned via the patent lawsuit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I do not have a position in any of the aforementioned stocks. The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.