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Is This the Lawsuit That Kills TASER International?

By Rich Smith - Jan 24, 2016 at 12:13PM

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Maybe not entirely, but a loss to Digital Ally could severely hamper TASER's growth prospects.

Police body cams will get their day in court. Let's hope TASER finds them a good lawyer. Image source: TASER International.

For more than two years, a legal dispute has been brewing between TASER International (AXON -2.00%) and its smaller rival, Digital Ally. Now, the dispute is finally coming to a head.

When Digital Ally first filed its patent application, dubbed "US 8781292 B1" by the U.S. Patent and Trademark Office (PTO) in September 2013, the company claimed it had developed a system for wirelessly syncing video and audio between a storage device and the video recorders that feed it. Whether these recorders were mounted in a police cruiser or incorporated into a police body camera, the storage device would recognize them when in range, recognize when they had begun recording and transmitting data, begin to automatically record that data -- and instruct any other synced devices in range to begin recording, too.

Round 1
At the time, TASER had a similar system on the market, though, and to its mind, the "VuLink" technology that Digital Ally was trying to patent infringed TASER's own work. TASER challenged its rival, asking the PTO to reconsider the " '292 Patent" patent grant to Digital Ally.

Last we heard, in September 2015, TASER was getting the better of that fight. It had convinced the PTO to make at least "an initial, non-final" decision to reject Digital Ally's patent claims. Things were going TASER's way -- but now they're not.

Round 2
Last week, Digital Ally announced that, after four months' consideration, the PTO concluded it got things right the first time. The '292 Patent for "auto-activation technology for law enforcement body cameras" is, in fact, valid -- and the technology it patents belongs to Digital Ally, not TASER.

That's good news for Digital Ally, but could be very bad news for TASER. With the final PTO decision in its pocket, Digital Ally is now filing a lawsuit against TASER for continuing "to offer for sale, sell, and market its Axon technology in total disregard of Digital Ally's federally protected patent rights." Digital Ally is seeking monetary damages for what it says is TASER's infringement. Even more worrying, Digital Ally is also demanding the court grant a permanent injunction forbidding TASER from selling products containing "Axon Signal technology."

TASER calls Digital Ally's lawsuit both "frivolous and egregious." According to TASER, Digital Ally's '292 Patent was only ultimately deemed valid after Digital Ally "significantly narrowed" its original patent claims. TASER says that Digital Ally's need to amend its claims is proof in and of itself "that TASER did not and does not infringe any claim of the '292 patent."

What it means to investors
If you're beginning to feel like we've seen all this before, and that this is just another game of "he said, she said" developing between TASER and its opponent -- well, join the club. Ultimately, this is a debate that will be decided in the courtroom, and depend largely on which company has the better legal team on its side. (Although in that vein, it's worth noting that, with $95 million in the bank and essentially no debt, TASER can afford to buy many more lawyers than Digital Ally, which has less than $8 million to its name).

TASER shareholders have a lot more to lose here than their counterparts at Digital Ally. From 2012 to 2015, TASER says its revenues from Axon on-body camera sales grew by about 2,500%, from $3.6 million to $90 million. Now consider that, according to S&P Capital IQ data, overall TASER revenues grew only $74 million, or 64%, during the same period -- from $115 million to about $189 million (at last report).

Conclusion: It's not too much of an exaggeration to say that Axon now accounts for essentially all of TASER's revenue growth. To the extent that Digital Ally's lawsuit challenges TASER's ability to grow the Axon business, it actually threatens TASER's ability to grow at all as a business.

This is a legal battle that TASER simply must win.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 245 out of more than 75,000 rated members.

The Motley Fool recommends Taser International. 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.

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