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Tivo Patent Win Could Leave Echostar With Few Options

By | April 24, 2006

      Tivo Inc. looks to be riding high following it win of a patent claim against satellite TV provider Echostar, but the direct-to-home operator is not conceding defeat just yet.

      A Texas jury awarded Tivo more than $73 million April 13 in its digital video recorder (DVR) patent infringement suit against Echostar Communications Corp., driving Tivo’s stock price up nearly 22 percent in a single day to $9.80. Tivo Inc. now intends to seek a permanent injunction against Echostar over the use of DVR technology, Tivo said.

      The lawsuit victory came on the heels of Tivo signing a three-year extension with DirecTV Inc. to license DVR technology to Echostar’s rival for another three years. Specific financial terms of the agreement were not disclosed, but the recurring monthly economics of the agreement are similar to the economics for DirecTV receivers with Tivo service activated since 2003, Tivo said.

      While these clearly are good times for the once-embattled DVR maker, the lawsuit battle with Echostar may be just beginning.

      "We believe the decision will be reversed either through post-trial motions or on appeal," Echostar said in a statement following the jury verdict. Meanwhile, "Echostar looks forward to trial of its DVR patent case against Tivo in February 2007."

      Tivo filed its claims in U.S. District Court, Eastern District of Texas, and a jury awarded Tivo the money to cover lost profits and royalties.

      Echostar said that subscribers to its Dish Network can continue using their receivers and DVRs, and noted that Tivo dropped its claim that Echostar’s Dishplayer 7200 DVR infringed any patents.

      "Among other things, we believe the patent — as interpreted in this case — is overly broad given the technology in existence when Tivo filed its patent," Echostar said. "We believe the decision will be reversed either through post-trial motions or on appeal. Additionally, the Patent Office is in the process of re-examining Tivo’s patent, having determined there is a substantial question concerning the validity of the patent."

      Despite Echostar’s willingness to keep fighting – at least in public – Tivo remains just as confident that it ultimately will prevail in the battle. "This decision recognizes that our intellectual property is valuable and will ensure that moving forward Echostar and any others that want to use our patented technology will be required to provide us with compensation."

      Neither Echostar nor Tivo returned our calls seeking comment.

      But what does Tivo’s legal victory over Echostar actually mean; and what might it do to the competitive relationship between Echostar and DirecTV?

      First and foremost, "It makes Tivo the new gatekeeper for the DVR technology," said Jimmy Schaeffler, chairman and chief security officer of the Carmel Group, which helped Tivo prepare its damage claim against Echostar. The verdict means that other DVR manufacturers and the content providers who sell them must strike licensing deals with the verdict-validated Tivo or face litigation in a much tougher legal environment. Among these companies are Echostar and Time Warner, "who are going to have to decide what they want to do," Schaeffler told Satellite News. Given that "it only took the Tivo/Echostar jury about two hours to render their verdict, including a smoke break," Schaeffler advises such companies to call Tivo up and make a deal.

      "Speaking as a lawyer, appellate courts don’t like to overturn lower court decisions," Schaeffler said. "Add the fact that this Texas court is known for its expertise in patent matters – which is why Tivo filed suit here – and I don’t envy the chances for successfully appealing this verdict."

      Schaffler’s opinion is shared by other analysts who follow the satellite TV market.

      "It’s hard to say how all this will come out, but I suspect Echostar will have to make some sort of accommodation with Tivo eventually," said Telastra President Roger Rusch. "Tivo got into the DVR business long before other people, and it looks like they secured the proper patent protection. It’s difficult to get around broad patents that people put into place early."

      Max Engel, broadband & satellite industry analyst for Frost & Sullivan, said Echostar will have to make a decision on whether to make arrangements with Echostar to continue using the technology or make other DVR arrangements.

      "The real question is will this verdict force Echostar to buy Tivo boxes, or will they simply pay Tivo a bunch of money to get off the hook?" Engals aid. "The DVR is absolutely essential to any sort of satellite TV response to VoD (video-on-demand) offerings from terrestrial content providers. Personally, I think that pre-supplying a limited amount of content to DBS subscribers’ DVRs so that they can mimic VoD is a weak response, but without DVRs they have no immediate response at all."

      But hardly anyone believes Charlie Ergen, founder, chairman and CEO of Echostar, will back down. "Charlie is a pretty litigious guy," Rusch said. "He’s also pretty frugal. Remember, it has been reported that this is the guy who insists on sharing hotel rooms with his executives to save money." Considering that paying royalties to Tivo would boost the cost of Echostar’s [personal video recorders] – which would put it on a level playing field with Tivo-licensee DirecTV – Ergen’s got good reason to keep litigating."

      Still, facts are facts. In this case, "The speed of the jury’s verdict and the amount of damages they awarded – $74 million versus Tivo’s requested $87 million — suggest it might not be too wise for Echostar to proceed with its counterclaim," said Schaeffler. "After this verdict, they already know how the facts will be basically presented, and how the jury may rule on them in this jurisdiction. Now they’re going to roll the dice again and try to prevail? If I were their counsel, I would move very quickly toward some kind of negotiated settlement; not just of the past, but licensing for the future. That way you avoid an injunction that would force Echostar to stop selling DVRs."

      The battle may well come down to a war of legal attrition. Which begs the question: Does Tivo – which has lived through some tough economic times – have the resources to fight Echostar to the finish? "I don’t think Tivo will collapse," Rusch said. "With this verdict on the books, there will be people willing to carry on the fight on their behalf; even on a contingency basis."

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