URS Settles Claims With SoundBite for $4.6 Million

It looks like there will be one less distraction for management at SoundBite Communications (NASDAQ: SDBT), a leading provider of on-demand customer contact solutions that include Automated Voice Messaging, Text Messaging, and other customer contact solutions.

After the market closed on June 25th, 2008, SoundBite announced that they reached a settlement agreement with Universal Recovery Systems, Inc. [URS], the owner of the Universal Systems Right Party Contact Solution, a patented approach to maximizing right party contacts.

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The Lead Up

URS Delays SoundBite IPO, Stirs Up the Pot

I won’t go into laborious detail as to how this all started and what went down.

• You can read my initial explanation of the two different litigation filings from SoundBite’s latest conference call here.

or

• Read my conversation with management and their explanation of the two lawsuits that were brought against them here.

At any rate, this is the short of it:

• Part 1: A few days before SoundBite was set to go public SoundBite received a letter from URS, that URS thought they (SoundBite) might infringe on an existing patent and the belief that they might also potentially infringe on an as-yet unapproved patent application.

URS never actually filed suit, they just sent a letter saying that SoundBite MIGHT infringe on the current patent and the potential patent that might be issued.

Within 3 days, URS caved, filed a statement of non-liability saying SoundBite does NOT infringe on the issued patent in question, and never sued SoundBite.

As a result of this claim and hoopla, SoundBite had to wait to file their IPO till November, about 2 weeks later, and had to lower their offering price to $8 per share, from the proposed $12-14.

SoundBite then sued URS for tortious interference, and unfair and deceptive practices.

• Part 2: In addition to this first suit, on May 1st, 2008, URS filed a complaint in federal court in Minnesota, looking to retract its statement of non-liability, from the aforementioned case.

In the new complaint, URS asserted a claim for material misrepresentation, alleging that it filed the original statement of non-liability after relying on what it characterizes as “false representations” from SoundBite concerning its non-infringement of URS’s issued patents.

URS has also asserted a claim that SoundBite’s on demand AVM products infringe on one of URS’s existing patents.

My Take: As you can see, this was starting to get messy and really added another distraction to SoundBite’s management team from their business endeavors.

I’m happy to see this resolved in an amicable, and expedient fashion, as I’ll explain more below.

The Resolution

Settlement Ends All Litigation on Both Sides

Thursday’s settlement announcement brings to a close the aforementioned litigation on both fronts: SoundBite vs. URS, and URS vs. SoundBite.

As part of the settlement, URS will pay SoundBite $4.6 million and grant SoundBite a worldwide, perpetual, non-exclusive license to the URS patents involved in the two lawsuits.

URS has also agreed to dismiss its claims of patent infringement and fraudulent inducement against SoundBite in the second lawsuit.

URS’s patents relate to determining whether the right party is on a call and was at the center of the second dispute brought about by URS.

As part of the settlement, the license granted to SoundBite is royalty-free and it appears that SoundBite will be off the hook for any future royalty payments or potential litigation for any perceived infringement.

However, in the press release, SoundBite does mention that the license is royalty-bearing with respect to systems that, at a first hierarchical level, use a human operator who determines whether a right party contact is available.

But, at present, SoundBite’s current systems do not employ such an operator, and SoundBite doesn’t expect to use such an operator in its automated voice messaging products in the future.

In return for the settlement amount, and granting of the special non-exclusive use of URS’s patents, SoundBite has agreed, under certain circumstances, to not contest the validity of URS’s issued patents to the extent that they apply to SoundBite’s business.

In addition, SoundBite also agreed to dismiss its business tort and unfair practices claims in the first lawsuit against URS and its CEO, Blake Rice.

My Take: It’s time to break out the candles, hold hands and start singing Kumbaya.

Seriously, it’s good to have this behind us, and settled once and for all.

Now SoundBite’s management team can focus on important stuff, you know like righting the ship after last quarter’s earnings disaster.

Still Profitable

SoundBite Comes Out Way Ahead

According the last analyst conference call, SoundBite’s management pegged the total cost of litigation against URS to be around $2.5 million by the end of 2008.

If we assume that these costs have already been incurred due to the settlement, SoundBite still came out on top by about $2.1 million.

Management always stated that they thought that this legal battle would be “profitable” for them, and it turns out they were right, even if we use the total cost outlay that they projected way before this settlement took place.

My Take: This is good news for us on two fronts: 1) SoundBite will add a little more cash to their coffers, and 2) with this legal stuff out of the way, they can now apply that capital to other resources that will improve their business, such as hiring more sales and marketing staff.

Bottom Line

SoundBite Still a Speculative Buy

I’m pleased with the end result of this litigation.

It’s one less thing for management to worry about, one less expense on the balance sheet, and even garnered SoundBite a little bit of cash to boot.

Needless to say, SoundBite still has a lot to prove to me, and has a lot of ground to make up from where it was originally recommended as a buy on multiple occasions.

Since SoundBite’s last earnings disaster, the stock has climbed nicely from about $2.70 to it’s current level of around $3.50.

I expect with the current settlement with URS that ends all past and future litigation by and against SoundBite, the stock will react somewhat positively tomorrow, and in the days ahead.

If you are a speculative investor, then SoundBite is right for you, as it is still within range of its cash value ($2.50 per share), and has already reflected the downside risk and pessimism on Wall Street.

Dip your toes into the water here, and start a small speculative position.

For those who already own shares, hold on to them, and we’ll give SoundBite one more quarter to see how the business trends are playing out and if the problems demonstrated last quarter were short term in nature.