By Calvin Biesecker
A federal appeals court last week overturned a March 2007 district court judgment that had awarded $129 million in damages to OSI Systems [OSIS] in that company’s lawsuit against L-3 Communications [LLL] on claims of fraud and breach of fiduciary duty related to the acquisition of another company’s security detection business in 2002.
OSI won a jury verdict last year, which included $33 million in compensatory damages and $96 million in punitive damages, potentially creating a nice windfall for the company after pursuing its expensive legal claims against L-3 for several years. But in a ruling posted last Friday by the United States Court of Appeals for the Second Circuit, the court reversed in part and vacated in part the district court ruling in favor or OSI.
It’s possible that there could be a new trial on the fraud claims.
Despite the setback, OSI core businesses, particularly its Rapiscan Security division, has a solid outlook.
“However, we emphasize that the judgment was only a bonus cash windfall unrelated to the core value of the company [OSI],” Morgan Keegan security analyst Brian Ruttenbur, said in a note on Friday. “OSIS’s fundamentals remain strong, and we are optimistic about the growth prospects in front of the company as well as its restructuring efforts.”
Stephens Inc. security analyst Tim Quillin also likes OSI’s prospects. He also said that OSI’s investors may prefer that the company not pursue another trial in order to avoid potentially large legal expenses.
In late 2001 L-3 and OSI discussed jointly acquiring the security detection business lines of Perkin Elmer [PKI]. Ultimately, however, L-3 took the primary role in negotiating the deal and subsequent to the closing, disagreements between L-3 and OSI caused an intended split of Perkin Elmer’s security business between the two companies to unravel.