Will Document Security Systems Lawsuit Damage These 3 Stocks?

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Recently a potentially devastating lawsuit was filed by Bascom Group LLC, a wholly owned subsidiary of Lexington Technology Group. On Tuesday, October 2, 2012, Lexington announced it had executed a buyout agreement with Document Security Systems (DSS). The defendants in the suit are Facebook (NASDAQ: FB), Linkedin (NYSE: LNKD) and Jive Software (NASDAQ: JIVE) along with privately held Broadvision and Norvell. The gist of the lawsuit is patent infringement, and damages are being sought along with injunctive relief. The suit was filed in Federal Court in the Eastern District of Virginia.

At issue are four core patents developed by Thomas Bascom, the founder of Bascom, the first of which were filed in 2001, at a time when Facebook was not on the map and the most advanced form of internet socialization was the now antiquated MySpace.

Specifically at issue are the following patents:

l U.S. Patent No. 7,111,232 ("the '232 Patent"), entitled Method and system for making document objects available to users of a network

l U.S. Patent No. 7,139,974 ("the '974 Patent"), entitled FRAMEWORK FOR MANAGING DOCUMENT OBJECTS STORED ON A NETWORK


l U.S. Patent No. 7,158,971 ("the '971 Patent"), entitled METHOD FOR SEARCHING DOCUMENT OBJECTS ON A NETWORK

The Eastern District of Virginia has a reputation as being one of the most rapidly paced courts in the Country, a fact surely known to Bascom before the suit, which actually is the consolidation of separate suits against the five companies, was filed.

Document Security System is still a small capitalization company, with a market cap of about $81 million. But the company has a lot to gain if successful in what is likely to be a multibillion dollar lawsuit. It has been trading in a narrow $0.50 cent range between about $3.70 and $4.20 since June, and news of the lawsuit did not affect the stock price in any appreciable way. It manufacturers plastic and paper products designed to be invisible to unauthorized scanning. Its customers are Fortune 500 companies, Universities, and State and Federal Governments. It also has a growing presence in internet “cloud” security. The company has not been profitable, and it may just have been that its acquisition of Lexington was for the purpose of taking advantage of this suit.

Facebook is no stranger to patent infringement suits. Perhaps this is a reason that Facebook management has not appeared to have their eyes on the ball of running their business to expectations. Facebook stock is trading at about half its initial public offering. Facebook has become such a part of pop culture; web sites even have parodied news stories about the company and its founder / chief executive, Mark Zuckerberg. Stories such as that, and there is no shortage of them, is as sure a sign as any that Facebook has “made it” and will be with us for the long run.

As for Linkedin, it is the big success story of the recent tech IPO's. Its stock opened in May, 2011 in the low 90's. It has recently been trading at about $120 per share. This success is not as a result of stellar earnings. The company is trading at a price to earnings ratio of nearly 1,000. But the pervasive attitude toward this company is that it is a professionally managed, corporate version of Facebook. Linkedin has recently announced revamping some 2 million of its corporate clients' web pages on the site, which if successful in increasing clients' businesses will make the Linkedin brand that more valuable. Analysts are already expecting the next several quarters to roughly double year ago figures. They have a five year growth rate of 57%. But still, the company is so expensive at this time, that I just cannot urge myself or readers to pull the trigger on it.

Jive Software markets social and business applications across its proprietary platform. It is a mid-cap company, with a current capitalization just under $1 billion. Its website makes use of numerous testimonials from well-known businesses such as Vodaphone (VOD), Nike (NKE), and Yum! Brands (YUM). But with Jive, we have another growth company with no real history of profitability. I think that $15 per share is a lot to pay for the promise of profits. I would rather invest in a tech company, like Apple (AAPL) that is fairly valued today with the promise of growth tomorrow, than one that may or may not make money sometime soon. Jive is not for me.

Facebook, along with its sibling Zynga (ZYGA) were two of the most disappointing IPO's in recent times. The biggest reason for these two companies to have performed so poorly relative to Linkedin is that the latter did not fail to meet expectations. Facebook and Zynga have consistently failed to meet revenue and profit targets. At the reduced prices these companies trade at relative to their IPO's, either of these companies can be considered for investment by those who can accept risk in their portfolios.

It is unlikely that even if successful, the lawsuit by Bascom will have material impacts upon the defendants. In addition to any liability insurance, Jive has about $180 million of cash on hand, and Facebook has about $10.2 billion. The risk of injunctive penalty is far more of a threat than the risk of damages, and there is no telling, if successful, what effects the lawsuit may have on the affected businesses themselves. Running a technology business requires becoming a litigation target, and just because claims are made does not indicate any lawsuit will be successful. Investors should keep an eye on this lawsuit going forward.

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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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