Last week's ruling by the US Court of Appeals for the Federal Circuit on the patent dispute between the satellite operator DISH Network and the DVR-pioneer TiVo gave both parties some cause for satisfaction but failed to end the long-running litigation. The ruling sent the case back to a lower court for further examination, upheld TiVo's sanctions award of $90m and ordered DISH Network to disable the DVR functionality in millions of deployed set-top boxes. Overall, the federal court's decision sets the ground for further legal action that may take another year to conclude.
Back in March 2010, DISH Network's outlook appeared rather bleak. The Federal Circuit had affirmed a lower court's contempt ruling against the operator, which not only awarded TiVo $110m in damages and $90m in sanctions but also found DISH's software workaround to be still infringing TiVo's patent putting the operator on the line for hundreds of millions of dollars in additional damages. The federal court also reactivated the permanent injunction issued by the lower court which required DISH Network to disable the DVR functionality in most of its deployed set-top boxes within 30 days or risk tripling the sanctions award. It looked as if DISH had run out of options at last and was ready to concede defeat. However, the company was able to secure a rare en banc hearing from the federal court in the last minute. The injunction was stayed in the meantime, removing the pressure on DISH to disable the DVRs immediately.
The Appeals Court's en banc decision was a mixed bag for the operator. While the ruling affirmed the lower court's award of $90m in sanctions to TiVo, DISH scored a partial victory when the federal judges vacated the $110m damages award. DISH is not entirely off the hook for the damages, though. The federal court ordered the lower court to reexamine the case according to a new set of guidelines to determine if DISH's DVR software workaround is substantially different from infringing software. If this turns out to be the case, DISH will be entitled to a new trial with the possibility of exonerating its software workaround. If not, the judge can re-award the vacated damages to TiVo and force the operator to disable all of its DVRs. Either way, DISH will have to defend its software workaround in the same court that has proven consistently sympathetic to TiVo's arguments.
More importantly, the en banc ruling affirmed the disablement provision of the lower court's injunction order, which requires DISH Network to disable the DVR functionality in infringing set-top boxes. The operator has vowed to challenge this part of the ruling with the Supreme Court. If this attempt fails, DISH has pledged to replace the infringing devices with 'current generation' DVRs that use non-infringing technology. While it may be difficult to give a current count of the set-top boxes in question, there may have been as many as six million of them in 2009 according to court filings. The operator claims to 'have upgraded many of these customers' since then. Assuming that 50 per cent of those boxes are still in the field, the operator may be looking at $500m in DVR replacement costs for Standard Definition boxes. However, if DISH had been aggressively preparing for this contingency since the March 2010 ruling, the replacement costs could be as low as $250m.
The en banc ruling proved to be a net positive for TiVo, but not a full victory. The $90m in sanctions from DISH will translate into real earnings for shareholders in this quarter. Also, depending on the outcome of the lower court's re-examination, TiVo may still get the $110m damages award. Furthermore, the company stands to score a lucrative licensing deal with DISH, if the operator's plea with the Supreme Court fails to reverse the disablement provision. DISH may be hard-pressed to license the software from TiVo at a pricetag of $90m-110m per year instead of the $250m-500m it would cost to replace the boxes.
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