The day after Faultline made its case for what we think is an ideal merger of two technologies, timeshifting and placeshifting, into a single powerhouse IPR business, the proverbial smelly waste hit the fan, and TiVo’s share price once again, was in the basement.
Echostar owns placeshifting patents, bought when it acquired Sling Media in 2007, while TiVo owns almost 200 timeshifting patents.
But all the recent share gains at TiVo, some brought about by other issues, such as TiVo getting its first two overseas licenses at Virgin Media and Conax, were also wiped out initially, though we feel this TiVo business will continue to drive forwards through 2010.
The news, if you have not picked it up anywhere else this week, was that the Dish/EchoStar versus TiVo case was going to suffer from an ‘en banc’ review ‘ a rare US Appeals process, which takes a court case that ‘went wrong’ in some way, in the expert opinion of the Appeal Judges, and gets it re-tried, with an emphasis that this time one or two other points of law are likely to change. What this means is that there will be a hearing by all the judges of the circuit, and not just the smaller panel that heard the appeal which upheld a District court ruling that worked out so well for TiVo.
The key thing here is that no-one is saying that TiVo doesn’t have extremely valuable intellectual property, but they are saying that a US District Court really needed to come up with a better way of deciding if a ‘re-write’ of the software inside a Dish DVR, was acceptable, rather than having the court find Dish guilty of contempt of court and double its fine. In effect this should have been tried in a specialist IPR court, but having gone this far, the court needs the attention of a full sitting of its judges to ensure that the decision stands the test of precedent and time.
The District Court that tried that case added a charge of $103 million plus interest, on top of the initial patent damages of almost $105 million, which had already been paid to TiVo.
In our view two things are now likely ‘ the case will continue for some time, certainly months, but potentially well into next year, as the amount of evidence was large in the first place, but it will reach the same conclusion, that Dish infringed on TiVo intellectual property. But that also the original judgment will have to be reversed in some way, to make sure that the ‘en banc’ review was justified. The likely outcome will be a crushing of the contempt payment and a dramatic reduction of the royalty payments towards TiVo, perhaps to the point where Dish has to pay no more money. It is still likely to have to license the TiVo patents, but it could be at a dramatically reduced rate.
If this is the case, most investors are less interested in whether or not TiVo has a sound business model and more interested in whether or not it has $100 million more in the bank, and quite rightly this almost halved the TiVo share value. Until there is a solid outcome on this case, one that does not need to go to the Supreme Court, and which will stand up to future scrutiny, the share values of both Dish and TiVo, two key protagonists, and to a lesser extent EchoStar (which is party to the suit but which has a limited downside compared to Dish), will remain volatile on courtroom news. However the TiVo share price has recovered a little since the shock of the announcement.
Also there can be no coming together of these two key video technologies into a single home, as we have heartily advocated, until both TiVo and EchoStar share values are decided upon fundamentals, which can only happen when this suit has been finalized.
Part of the reason for the en banc review, in our opinion, was that TiVo is now chasing AT&T and Verizon in legal actions over the use of its core technology, the Timewarp timeshifting patent, and the legal arguments that sit on the precedent books around TiVo need to be trustworthy and tough to the point of impossibility to challenge, or we will have to go through the last five litigious years all over again every time TiVo tries to enforce a patent.
There are now almost 200 patents which TiVo holds in the area of storing video, showing advertising on DVRs, audience measurement on DVRs and running merged recommendation systems and EPG data, from multiple sources in the cloud.
However this whole area is dangerous ground. If this many patents were to be totally ignored by a US court, then the patent system would fall apart and need an overhaul tomorrow. But then again TiVo has yet to ask for money for its more advanced patents, because Dish doesn’t use them, and EchoStar won’t feel safe to implement these ideas until it has a license with TiVo.
The court is right to take another look at this case, but must come to much the same conclusion, albeit with different penalties, in order to preserve patent sanity in the US. It must also reach the same conclusion about the work around, since the patent that was infringed wasn’t a particular method for timewarping, but the actual process itself ‘ so there can’t be a work around as long as you are building a DVR, it makes no sense.
TiVo was quick to say that it was disappointed that it did not yet have finality in this case despite years of litigation, but it remains confident that the Federal Circuit’s ruling in its favor will be reaffirmed.
We don’t envy the Appeal Court judges here. They have one critical decision to make which is how do you go about dealing with a patent workaround. The original court chose a contempt hearing but it might require yet another legal action. The contempt hearing is perhaps the best way forward in terms of keeping down the legal workload and in the end it may end up recommending and repeating this. The first stage of this new case will take 42 days during which both defendants have to file a brief and then TiVo has 42 days to replay and then Dish gets another 28 days to counter with another brief, so that’s 4 months almost right there before the judges can begin reading it all and arguing among themselves. We can’t see a decision before 2011.