Lawsuit Could be a Catalyst for Small-Cap Name Document Security Services

The buying and selling of patents is big business on Wall Street, along with suing companies over alleged patent violations. In 2011, InterDigital IDCC shares soared on speculation that Apple AAPL and Google GOOG may get into a bidding war for the company in order to secure its valuable patents. Google instead bought Motorola Mobility for $40 per share, or $12.5 billion - a whopping 63 percent premium versus Motorola Mobility's prior day's closing stock price. The deal was done largely to acquire Motorola's patent portfolio. At the time, Google said that "Motorola's patent portfolio will help protect the Android ecosystem." While blockbuster acquisitions driven by competition for patents aren't an everyday occurrence, intellectual property lawsuits are. In fact, suing infringing companies has become a viable business model. Consider a company called Vringo VRNG. The stock is up almost 300 percent in 2012, largely driven by an article written by investor and entrepreneur James Altucher outlining a patent lawsuit brought by Vringo against Google. VirnetX VHC is another company in which the business model is to use its portfolio of patents to generate revenues, largely through lawsuits brought against some of the largest tech companies in the world. That stock has jumped 62 percent in 2012 and is up almost 800 percent over the last 5 years. Other companies have business models that are falling apart, but nevertheless could be acquisition targets because of a vast patent portfolio. An obvious example of this situation would be spiraling Blackberry-maker Research in Motion RIMM. So, what does all of this have to do with small-cap stock Document Security Services DSS? Well, The company has a lawsuit pending against Internet sensation Coupons.com, which could provide a very meaningful catalyst for the stock price. Specifically, in October 2011, Document Security Systems filed a lawsuit against Coupons.com alleging that it had misappropriated trade secrets and breached confidentiality agreements with the company. The first hearing in the suit has been moved up to August 16, 2012 in U.S. Federal Court. It had originally been scheduled for October 9, 2012. A company press release states that "the suit involves DSS's proprietary digital copy protection technology." Furthermore, "DSS contends that this technology has been utilized by Coupons.com on billions of internet generated coupons since 2006." Patrick White, CEO of Document Security Services, said "It is our contention that Coupons.com has utilized a copy protection technology which DSS provided to them for review under a strict non-disclosure agreement. Our research indicates that Coupons.com has printed this particular technology on billions of internet generated coupons since 2006." While there is not a dollar amount in damages currently attached to the lawsuit, the company told Benzinga that it estimates Coupons.com could owe as much as $40 to $45 million per year on a retroactive basis going back to 2006. If Document Security Services were to collect even half of what it thinks it is owed, it would receive a payday of well over $100 million. At the high end, it could be $250 million. This dwarfs the company's current market-cap of around $81 million. In January 2012, Document Security Services hired ipCapital Group, a leading intellectual property strategy consulting firm, "to define an expert strategy for the expansion and protection of DSS's IP portfolio." At that time, John Cronin, Managing Director and Chairman of ipCapital Group said that "our initial engagement with DSS will start with an analysis of their unique IP landscape. We will then use this intelligence to help define an IP protection strategy and expansion program that will allow DSS to drive success for its key business partners and significant revenues for the company.” On May 15, 2012 Document Security Systems released the results of ipCapital Group's assessment of the company's intellectual property. According to the, press release, the consulting firm valued the company's licensing market potential at approximately $245 million, after completing a "high-level assessment of DSS' technology and intellectual property portfolio." This valuation considered only the licensing opportunity associated with Document Security Systems' technology and patents and is separate from the lawsuit against Coupons.com. The consulting firm noted that there are a number of other value drivers that the assessment did not cover, including intellectual property lawsuits. Specifically, under the "Define market boundaries" section, ipCapital Group notes that, "a strong IP position can allow a company to effectively assert its property rights against other market players. IpCapital Group's current assessment does not include any analysis of the pending Coupons.com litigation or any infringement, misappropriation, damages, or any other legal analysis." In any event, if ipCapital Group's assessment of the licensing value of Document Security Systems' patents and technology is even 50 percent correct, that still adds up to more than $122 million, irrespective of the outcome of the Coupons.com lawsuit. Now, back to the lawsuit. This month, the Silicon Valley Business Journal noted that Coupons.com "has grown to be the world's dominant digital printable coupon company, hoarding 90 percent of the market share in an industry projected to grow from $6 billion last year to $46 billion by 2015 worldwide, according to analyst firm Juniper Research Ltd." Furthermore, the company has $230 million in funding from a host of investors. According to a company press release, Coupons.com issued "more than $1.2 billion in digital coupon savings in 2010." Coupons.com has created so much buzz that Goldman Sachs included it in a list of companies that it thinks will soon hit the public markets with a splashy IPO. Although this is pure speculation, an upcoming IPO could motivate the company to settle the lawsuit brought by Document Security Services. For its part, Document Security Services certainly could use a positive outcome to this lawsuit. In fact, much of the company's value appears to be related to its intellectual property. The company is a solid money loser, although the losses have been getting smaller in recent years. For example, in 2008, Document Security Services lost $8.29 million compared to a loss of just $3.22 million in 2011. Revenues have also been headed higher, but are hardly impressive. In 2008, DSS reported revenue of $6.64 million. By 2011, that figure had climbed to $13.38 million. While the company's operations appear to be headed in the right direction, they don't support its current valuation. If, however, Document Security Services can realize even a fraction of the potential value implied in the lawsuit against Coupons.com and the licensing of its technology and intellectual property, then this stock could soar. Already, Document Security Services shares have surged more than 52 percent in 2012 and traded as high as $5.00 in February. With the stock closing just below $4.00 on Friday, shares could be set to break out once again. The near-term chart pattern is also interesting, as shares of the company have been trading in a tight consolidation range since mid-June. A break-out from this base could send the stock back to the $5.00 level, or higher, as more investors become aware of the multiple potential catalysts outlined in this article.