Unable to settle their differences quietly, two providers of up-and- coming security technologies are spoiling for a court fight.

Security Dynamics Technologies Inc., a major force in the data- encryption and user-authentication market, has filed a patent infringement suit against a smaller competitor, Vasco Data Security Inc.

The dispute is over two Vasco products, the Digipass 300 and 500, that have been gaining momentum as a means of verifying the identities of on- line banking customers, particularly in Europe.

Security Dynamics has a significant hold on the market for that type of system, called two-factor authentication, with an emphasis on corporate and wholesale uses such as bank money-transfer operations.

In two-factor authentication, the security of a user password is reinforced by a device or token, which in the case of Security Dynamics' SecurID generates a random, one-time code unique to a given transaction.

Patents in this area of technology are highly valued and at times hotly contested. Security Dynamics chairman, president, and chief executive officer Chuck Stuckey said the company "has always actively protected its intellectual property rights."

He said it went out of its way to reach an accommodation with Vasco but in the end decided it had to file the complaint in federal court in Boston regarding its patents numbered 4,270,860 and 4,856,062.

That happened Nov. 2, and Vasco was already sounding well prepared for what could easily be spun as a David-Goliath battle.

Both companies were formed in 1984. With $124 million of revenue in the first nine months of this year, Security Dynamics of Bedford, Mass., is on its way to breaking last year's record of $136 million. Nine-month net income was up 29%, to $16.8 million, though excluding extraordinary items it fell 4%, to $15.8 million.

Security Dynamics is the parent of RSA Data Security Inc., the de facto standards-setter in the data encryption market, and is taking aim at the multifaceted enterprise security market with the SecurSight framework now in market testing.

Vasco Data Security is the U.S. arm of Vasco Data Security International Inc., which has another, similarly named subsidiary in Brussels. The 60- employee company reported nine-month revenue of $10.4 million, up 11%, and a net loss of $2.3 million, a narrowing from $3.4 million.

Security Dynamics said it has 3.5 million users of SecureID and its ACE/Server in 3,000 organizations; Vasco claims 2.5 million users of Digipass and more than 115 financial companies as clients.

A Vasco corporate fact sheet lists such European bank customers as ABN Amro, Rabobank, and ING of the Netherlands; Credit Lyonnais and Paribas of France; and S-E Banken of Sweden. North American customers include the U.S. Coast Guard, Manpower Inc., Nextel, and Molson Breweries.

In September, Vasco publicized the decision of PBG Bank of Poland to introduce Digipass 300 and two-factor authentication in its retail business. With the third-quarter earnings announcement in early November, Vasco chairman and CEO T. Kendall Hunt said the company is "leveraging and replicating" its European successes in North America. "Our dedication to global synergy is having a real impact," he said.

Mr. Hunt contended that Security Dynamics sued because it was feeling threatened in its home market. "We do not infringe their patents and believe that it is their patents that are invalid," he said.

The brinksmanship was under way before the court filing. Security Dynamics filed a complaint in August but did not serve it. Vasco said that, between then and Nov. 2, Security Dynamics removed two patents it had originally cited. Mr. Hunt called the suit "frivolous," said Vasco patents predated those of Security Dynamics, and vowed a vigorous defense, though he said he prefers to "let the marketplace decide who has the better solution."

Security Dynamics delayed serving the papers "while we sought to work with Vasco to resolve the issue," Mr. Stuckey said. "When it became clear that a satisfactory solution could not be achieved, we had no choice but to proceed with the litigation."

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