Rental Property

On April 4, 2006, Netflix Inc. was granted U.S. Patent No. 7,024,381 B1 three years after "inventors" W. Reed Hastings, Marc B. Randolph and Neil Duncan Hunt filed their application with the U.S. Patent and Trademark Office. The patent, titled "Approach for Renting Item to Customers," is an elaborate and complex document loaded with dizzying diagrams and scientific jargon ("...a 'max out' approach allows up to a specified number of items to be rented simultaneously to customers...") that boil down to one...OK, three simple things: Netflix lets you rent a movie you want for as long as you want without charging you a late fee. Netflix will send you a new movie when you send the old one back. And Netflix lets you create and tinker with a list of personal preferences regarding the movies the California company sends you in the first place. Millions of Netflix customers understand that and have since 1999, when the company started renting DVDs on a subscription basis.

Dallas-based Blockbuster Video has been doing the same thing, more or less, for two years now, when it started its online mail-order service and stopped charging its customers late fees (which once made millions for Blockbuster, awwww). That's why, in a federal court in California in April, Netflix sued Blockbuster, claiming it violated its patent by replicating it (and another 2003 patent, for a "Method and Apparatus for Renting Items") down to the last diagram. Netflix claims it's suffering "irreparable injury" because of it.

To which Blockbuster says: Not so much. On June 13, Blockbuster not only denied the allegations but filed a counterclaim against Netflix, claiming it was violating antitrust laws. In court documents, Blockbuster's attorneys claim Netflix is "monopolizing and attempting to monopolize the DVD rental market through fraudulent patenting and sham litigation." Blockbuster insists the two Netflix patents are "invalid and unenforceable." Says the counterclaim:

"The patents asserted by Netflix fail to describe any technology that was not already widely known and in general use well before any purported inventions of Netflix. Instead, the patents merely describe use of existing technology to practice business methods for renting movies and other items to customers. The business of renting movies, as well as renting other items, was widely known long before any purported invention by Netflix."

In other words: Bring it on (which I believe you can rent through both Blockbuster and Netflix).

The case is only really now getting going and promises to be a good one; maybe they'll record the proceedings and let you rent the DVD later on (I will wait for the Criterion Collection edition myself). Allegedly, there was a meeting in January 2005 between Netflix CEO Reed Hastings and Blockbuster's then-Executive Vice President Edward Stead, during which Hastings "praised Blockbuster's competitive position in the online rental market and asked Stead when he had figured out that Netflix's...patent was a 'joke.'" That joke's gonna cost one company millions when all is said and done.

Netflix has been trying to get Blockbuster's antitrust counterclaims tossed out; nobody likes to sue and get sued back, after all. But just yesterday, U.S. District Judge William Alsup handed down a 14-page decision in which he refused to dismiss Blockbuster's counterclaims or split them from the initial patent infringement case brought by Netflix. What that means, kind of, is that there will be two suits going on at the same time: Netflix will try to prove Blockbuster swiped its patents, while Blockbuster tries to prove they were fraudulent all along. Wrote Alsup in his opinion: "As a result of Netflix's purported monopolistic conduct, Blockbuster may be forced out of the market, which would cede to Netflix virtually complete control of the online-DVD market." He also wrote that Blockbuster "sufficiently pled 'sham litigation' as an independent basis for its antitrust counterclaims." Said Alsup, letting these two cases proceed as one will save time and money--though "we are a long way from trial now." Next there will be a protracted discovery period, unless Netflix takes what Blockbuster says is Alsup's hint and lets the thing go. Yeah, that ain't gonna happen. --Robert Wilonsky

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