DAC, MAC Settlement Welcomed

ANAHEIM, Calif. — Market participants are relieved that Digital Assurance Certification LLC and the Municipal Advisory Council of Texas have settled a patent dispute and that, under the agreement, the Texas MAC’s Central Post Office will retain its core functions. Though the settlement came as a surprise yesterday, sources said the Texas MAC walked away with favorable terms for the CPO, through which issuers send their secondary market disclosure documents to nationally recognized repositories.“The settlement makes only minor changes,” said one market participant who declined to be identified, citing the sensitivity of the dispute.Another market participant suggested that the suit, which DAC filed in January, should never have been filed in the first place. He said it boiled down the DAC’s ability to patent “viewing documents, lists of filers, as well as receipts and reminders for those filings.” He characterized a patent of these features as “nonsense.”“I think that people who have good ideas ought to be protected through copyrights and patents, but to patent something like this just shows that the patent system is broken and needs to be fixed,” said the source, who asked for anonymity because he did not wish to pick a fight with DAC. “This [settlement] harms the market through all these little inconveniences that add up.”Representatives for both DAC and the Texas MAC declined to comment on the settlement. Several sources said they were under a gag order not to discuss it with the media. Another source said it remains to be seen how the settlement will impact the CPO. He said he is puzzled at the terms of the settlement because it appeared DAC had won an earlier round of the case and that it was “counterintuitive” for Texas MAC to now reach a favorable settlement. “If the changes Texas MAC agreed to are just window dressing, what was all the sound and fury about?” he asked, noting though that he had not had time to fully review the settlement’s terms. Under the pact, which was announced late Monday, the Texas MAC will make four specific technical changes to the CPO’s operations. Neither party will make any payments.After July 11, the CPO will no longer allow issuers to download their disclosure documents more than 30 days after they are filed. But the index that the CPO maintains, which lists all of its filings, will not be altered, and issuers will still have access to it, sources said.Meanwhile, in a victory for groups who saw the CPO as a means of standardizing the secondary market disclosure document filing process, DAC agreed to begin sending filings made through its disclosure site to the CPO index within 18 months. Also among the changes specified in the settlement, the Texas MAC promised that within 30 days it will disable its feature that enables users of the CPO to create cover sheets to be used with annual disclosure filings. Previously, the CPO collected issuers’ documents, paired them with standardized cover sheets, and then sent them to all four nationally recognized municipal securities information repositories and three state information depositories. Sources said this change is relatively small because the information will go to the NRMSIRs, just not in a separate cover sheet. The Texas MAC also, within a year, must disable a feature that e-mails CPO customers alerting them to their filing deadlines. In addition, the settlement would make permanent a change the Texas MAC agreed to earlier, under which it will no longer e-mail muni issuers receipts showing their documents were received by the NRMSIRs and, if applicable, the SIDs. One source described the “receipt e-mails” as a bonus feature of the CPO designed to make issuers feel more comfortable, but said the filing system is essentially foolproof. The source noted that, even if issuers don’t receive receipts in the future, the CPO Web site, www.DisclosureUSA.com, will continue to list all of the daily filings on a public page.Meanwhile, the settlement gives the CPO until July 11 to modify its Web site and promotional materials to reflect the changes. In addition, third-parties who had received subpoenas in the case will no longer have to respond to them. In a statement, the Securities Industry and Financial Markets Association said it was pleased by the settlement, which it described as a “victory for the CPO and the entire municipal industry.”“The central post office continues to benefit all municipal market participants by providing a central location where issuers can file, for free, their secondary market disclosure documents and have them sent immediately to all four NRMISIRs and the relevant SIDs,” the statement said. DAC charges issuers for its disclosure services.DAC had filed its patent infringement suit against the Texas MAC in the U.S. District Court for the Middle District of Florida in Orlando. Specifically, the Orlando-based DAC said the CPO, which the Texas MAC set up in September 2004 and now operates for the Muni Council, violated a patent it obtained on Dec. 26, 2006, that extends back to April 25, 2002. The suit sought injunctive relief, triple damages, and recovery of attorneys’ fees. The Muni Council is made up of 18 municipal market groups working to improve secondary market disclosure.In February, DAC sought a preliminary injunction to immediately shut down the CPO. In its request for the injunction, DAC said the CPO irreparably harmed its ability to compete. Marking its first victory in the case, the court agreed to hold a hearing on the matter June 5 — and in doing so rejected the Texas MAC’s claim that DAC’s patent was invalid. Ultimately, the hearing was cancelled after the Texas MAC agreed to cease from e-mailing issuers receipts showing their documents were filed with the NRMSIRs and SIDs. Both sides had said that change to the CPO was “a first step in a multi-pronged effort to attempt to resolve the current litigation and all other differences between the parties,” over the dispute. Still, Judge Anne C. Conway, who sits on the court, scheduled a tentative date of Sept. 2, 2008, to begin a jury trial on the overall claims in the lawsuit. Last month, DAC sought to expand the suit to include federal and state law charges, claiming the Texas MAC was trying to seal its clients. The settlement was announced before Texas MAC could respond to those charges.