Netflix Sues Blockbuster For No Late Fees Patent

By Davis Freeberg

Davis Freeberg is both a customer and shareholder of Netflix. This post should not be construed as financial advice

In a new development to Netflix’s heated rivalry with Blockbuster Video, Netflix sued Blockbuster earlier today for infringing upon two patents that Netflix currently holds. In June 2003, Netflix was granted a patent relating to it’s use of queues to manage subscriber’s movie choices. The abstract of the patent is pretty technical but describes it’s in greater detail.

“According to a computer-implemented approach for renting items to customers, customers specify what items to rent using item selection criteria separate from deciding when to receive the specified items. According to the approach, customers provide item selection criteria to a provider provides the items indicated by the item selection criteria to customer over a delivery channel. The provider may be either centralized or distributed depending upon the requirements of a particular application. A “Max Out” approach allows up to a specified number of items to be rented simultaneously to customers. A “Max Turns” approach allows up to a specified number of item exchanges to occur during a specified period of time. The “Max Out” and “Max Turns” approaches may be used together or separately with a variety of subscription methodologies.”

Without a queue it would be pretty hard to run an online rental service. Right now I have 480 movies that I really want to see in my queue and I would hate to have to dig through all 55,000 dvds everytime I sent something in. If this patent holds up for Netflix, it’s going to create a pretty interesting dilemna for Blockbuster.

Netflix is also claiming that Blockbuster is infringing upon a second patent issued to the company just this morning. According to the lawsuit, this patent “covers a method for subscription-based online rental that allows subscribers to keep the DVDs they rent for as long as they wish without incurring any late fees, to obtain new DVDs without incurring additional charges and to prioritize and reprioritize their own personal dynamic queue — of DVDs to be rented”

Interestingly enough, Netflix’s patent relating to their use of mailers to get DVDs back and forth wasn’t included in this lawsuit.

Netflix’s lawsuit against Blockbuster comes at a difficult time for the video store. After having a terrible year in 2005, Blockbuster was hoping to move forward in 2006. A patent lawsuit could end up being costly and time consuming and will undoubtly be a big distraction for the company. It also casts doubt for any other competitors who have been considering entering this market. In many ways the longer that it takes Netflix to resolve this issue, the better it may work as a deterent for future competitors. I think it’s interesting to note that unlike TiVo who filed their case in Marshall Texas, a known patent fast track court system, Netflix has opted to file their complaint in San Francisco instead.

While on the surface, Netflix’s case appears pretty straight forward, patent law is notoriously complex and it is worth noting that not everyone agrees with the merits of this lawsuit. In an interview earlier today, Wedbush Morgan analyst Michael Pachter expressed his thoughts;

“Wedbush Morgan analyst Michael Pachter, who also is an attorney, said it was unclear whether Netflix’s challenge to Blockbuster’s online service would be upheld by the federal court.

“It’s my opinion that it won’t be,” Pachter said. “Blockbuster detrimentally relied on their silence as consent. If in fact (Netflix) feels so damaged they should have sought injunctive relief before Blockbuster rolled out its service.”

Now I’m not an attorney and personally I don’t think that patents covering business models should ever be issued, but if Forgent can sue Microsoft for jpeg patent infringement or if the SCO can sue IBM for linux infringement, then I don’t see how Netflix waiting a year and a half will hurt their case. Considering that their second patent was only issued just this morning, I don’t see how Netflix’s “silence” will factor into this case at all. But like I said, I’m not an attorney.

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One Comment

  1. Jay Levitt says:

    What’s perplexing to me is that I feel like NetFlix has implemented some innovative processes that deserve patenting. For example, their use of automation to reduce the need for warehousing is nothing short of brilliant. Originally, they scanned returned DVDs, and returned them back to the “stacks”, like any rental outlet would. But since queues allow them to identify the next customer, they now print a new label for the DVD as soon as it comes back, and it goes straight from the inbox to the outbox. In one swoop, they eliminated two product movements and several days delay while turning the entire nation’s DVD player into their virtual warehouse. THAT’s innovation, and probably does warrant protection. And I imagine they have all sorts of predictive algorithms for “load-balancing” new releases around the country.

    DVD rentals by mail? Wait lists for popular items? Not so much. Yet neither had been done before, so how do we objectively determine which business-process patents are innovative and which are just translations of existing business processes to the online space?