TiVo win set aside by appeals court; shares drop

WASHINGTON/NEW YORK Fri May 14, 2010 4:26pm EDT

A screen shows Internet services available through an broadband-connected TiVo digital video recorder at the Consumer Electronics Show in Las Vegas, Nevada January 5, 2006. REUTERS/Steve Marcus

A screen shows Internet services available through an broadband-connected TiVo digital video recorder at the Consumer Electronics Show in Las Vegas, Nevada January 5, 2006.

Credit: Reuters/Steve Marcus

WASHINGTON/NEW YORK (Reuters) - Shares of TiVo fell as much as 42 percent on Friday after an appeals court set aside the company's win in a patent battle over digital video recorders with rivals Dish and EchoStar.

The U.S. Court of Appeals for the Federal Circuit said the entire court would reconsider its own March 4 decision made by three judges. The larger panel would likely be about 10 judges.

The Federal Circuit had affirmed a contempt finding against EchoStar and Dish in their long-running patent fight with TiVo, which makes digital video recorders.

The original case focused on TiVo's "Time Warp" software, which allowed users to record one television program while watching another.

The ruling further delays resolution of a case seen as critical to TiVo's plans to reap the financial benefits of its software patents.

Dish and EchoStar, its former parent until a spinoff in 2008, had changed their technology during the infringement fight, but TiVo said, and the court had agreed, that the devices still used TiVo technology.

TiVo's shares closed down 41.58 percent at $10.16 on Nasdaq. Dish closed up 4.28 percent at $22.90. EchoStar, whose liability in the case is limited to $5 million, closed down 0.1 percent at $20.45.

Friday's decline removes all of the premium the shares gained after the March 4 ruling: it closed at $10.21 on March 3. At its current price of $10.30, TiVo shares are up only about 2 percent so far this year.

"It is a stumbling block," Hudson Square Research analyst Dan Ernst said. "It does reduce the probability of TiVo receiving ongoing fees. If there is an agreement ever to be had, it is likely pushed out some time. "

TiVo also has lawsuits against AT&T Inc, Verizon Communications Inc and Microsoft Corp.

"We are disappointed that we do not yet have finality in this case despite years of litigation but we remain confident that the Federal Circuit's ruling in our favor will be reaffirmed," TiVo said in a statement.

Jeff Blum, a senior vice president at Dish, said that the company had made major changes in its DVRs.

"We spent a year designing around the patent," he said. "It took a year for us to test it, 8,000 total man hours, 15 engineers. It was in good faith."

Companies often change their products because of accusations of patent infringement, and patent-holders often say the workarounds are inadequate.

"The court will consider how to determine infringement of design-around products," said John Whealan, who teaches patent law at George Washington University Law School.

The two choices are a contempt hearing and a new lawsuit. "There are implications for sanctions and different sets of damages," he said.

The case was originally filed in the U.S. District Court for Eastern Texas. That court imposed contempt sanctions against sister companies Dish and EchoStar for violating a court-ordered permanent injunction to stop making and selling DVRs.

TiVo had sued EchoStar back in 2004, and a jury found that its DVR technology infringed TiVo patents. TiVo had also been awarded $300 million in damages and contempt sanctions as of July 1, 2009.

TiVo was a pioneer in DVRs, but its growth cooled as cable and satellite operators began offering generic DVRs for less than the cost of a TiVo box, and more programing became available on the Internet.

Lazard Capital Markets analyst Barton Crockett called the ruling "surprising" and downgraded the stock to "hold" from "buy", suggesting there was "a meaningful chance" that the full panel would overturn the decision that Dish was in contempt.

"This would put TiVo back to square one with trying to prove that Dish's workaround violates TiVo's patents," he said in a note to clients.

The case is TiVo Inc vs EchoStar Corporation, Case No. 2009-1374, United States Court of Appeals for the Federal Circuit.

(Editing by Richard Chang)

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