TASER International (NASDAQ:AXON) won a big victory last Wednesday in a legal tussle with archrival Digital Ally (NASDAQ:DGLY) over a patent for body cameras worn by police officers. The news sent shares of the victor soaring 6% in Wednesday trading -- and cost the loser 8% of its market cap. At least, that's how it looked at first.

Police body cams get their day in court. Image source: TASER International.

That win/loss ratio started to reverse itself as the week progressed and investors began to unravel both sides of the story. To help you with that, here's a quick rundown of what's going on.

TASER said...
Early Wednesday morning, TASER put out a press release announcing that the U.S. Patent and Trademark Office "has rejected all 20 claims" that Digital Ally made in its US8781292 patent filing with the U.S. PTO, which had been awarded last year. US8781292 had awarded Digital Ally a patent on a "Computer program, method, and system for managing multiple data recording devices."

In a series of 20 claims, Digital Ally had described its invention as wirelessly syncing video and audio delivered to a storage device from video recorders. Whether these recorders are to be mounted in a police cruiser or in a police body camera, the storage device would recognize them when in range, recognize that they have begun recording and transmitting data, instruct any other synced devices in range to begin recording, as well, and begin storing and time-stamping all this data for later retrieval.

TASER quickly asked the PTO to review its award of the patent, however. Now, TASER says PTO has ruled that Digital Ally's invention is "unpatentable" -- because TASER invented all this stuff first. Indeed, according to TASER, Digital Ally's tech is based on old TASER tech, and TASER has already improved on all that tech with its new Axon Signal communication platform, which also boots up whenever a TASER stungun is fired, or a police cruiser activates its emergency lights.

Digital Ally said...
So much for TASER's side of the story. Now here's what Digital Ally has to say, as related in a press release of its own that came out some hours after TASER's:

Digital Ally police cruiser dashboard cam. Image source: Digital Ally.

Essentially, Digital Ally takes issue with TASER characterizing its patent as "unpatentable." Says Digital Ally, PTO only made "an initial, non-final" decision. Its final decision on US8781292 is therefore still up in the air.

Digital Ally intends to "discuss the merits" of TASER's preexisting technology with the relevant patent officer -- one presumes not to compliment it -- to amend its own patent claims, if necessary, and to get its patent finally approved.

The company said, while it may lose a point or two, "Digital Ally is confident that material aspects of the technology disclosed in the '292 Patent will ultimately be found patentable."

What it means to you
TASER may have exaggerated the size of its victory this week, but by and large, it's right. This is a win for TASER, and a significant setback for Digital Ally on a patent, and a technology, that they thought was in the bag for this past year, and then some.

Legal troubles stemming from a final invalidation of the patent could be significant for Digital Ally, impeding sales and tripping up the company's monster revenue growth -- up 63% year over year last quarter -- which was in part fueled by President Barack Obama's promise to fund the buying of police body cameras last year. Given that Digital Ally has failed to earn a profit even with this federal government gift, things are not looking good for Digital Ally -- even if it hasn't exactly lost the battle just yet.

At the same time, the benefit for TASER seems less obvious. Yes, it's thrown a monkey wrench into a rival's plans. But TASER already pulls in nine times more revenue annually than does its upstart competitor. Even if all revenue streams currently belonging to Digital Ally instantly transfer over to TASER -- and no one else tries to horn in on the game of selling body cameras for police, which they will -- it's hard to see how this victory could translate into more than about a 10% boost to TASER's market cap.

TASER's already made nearly half that in the wake of its press release. I think this story is done. So move along, TASER investors, there's nothing to see here.

TASER's AXON Flex. Image source: TASER International.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.