TiVo Stock Surges Over 50% on Patent Decision in EchoStar Case

TiVo, Inc. (NASDAQ: TIVO), owner of U.S. Patent 6,233,389, titled “Multimedia Time Warping System,” was a big winner today at the United States Court of Appeals for the Federal Circuit when the CAFC handed down its decision in Tivo, Inc. v. EchoStar Corp.  A majority of the 3 judge panel hearing the case agreed with the district court and ratified the contempt order against EchoStar (NASDAQ: SATS) and Dish Network (NASDAQ: DISH).  EchoStar’s business focuses on digital Set-Top Boxes and and Satellite Services, and was spun-off from DISH Network on January 1, 2008. The patented technology involved allows television users to simultaneously record and play television broadcasts using what is commonly known as a digital video recorder. On news of the Federal Circuit ruling TiVo stock immediately surged ahead well over $5, up over 50%. Within less than 1 hour TiVo stock when from trading just over $10 a share, trading at $10.31 at 11:06 am EST, to trading at $16.07 at 11:42 am EST, hitting an intra-day high at 1:18pm EST at $16.36, and establishing a trading range plus or minus $15.65, where it is at as of 2:46pm EST.

In 2004, TiVo sued EchoStar in the United States District Court for the Eastern District of Texas, alleging that its receivers infringe “hardware” claims (claims 1 and 32) and “software” claims (claims 31 and 61) of the ’389 patent. The jury found that both the 50X receivers and the Broadcom receivers infringed the asserted hardware as well as software claims and awarded TiVo approximately $74 million in lost profits and reasonable royalties. The district court entered judgment on the verdict and issued a permanent injunction against EchoStar. In granting the injunction, the district court ordered EchoStar (1) to stop making, using, offering to sell, and selling the receivers that had been found infringing by the jury (the “infringement” provision) and (2) to disable the DVR functionality in existing receivers, with the exception of select receivers that had already been placed with its subscribers (the “disablement” provision). Following the entry of final judgment by the district court, the Federal Circuit affirmed in part, reversed in part, and remanded the district court’s decision. At that time, EchoStar did not appeal the district court’s grant of a permanent injunction. The Federal Circuit noted that the district court’s injunction, which had been stayed during the course of the appeal, would take effect following our decision.

Following the decision on the appeal, TiVo moved the district court to find EchoStar in contempt of the court’s permanent injunction. After conducting a series of hearings on TiVo’s motion, the district court ruled that EchoStar was in contempt of its earlier order. The district court rejected EchoStar’s argument that it had redesigned its infringing products so that they were more than colorably different from the adjudged infringing devices. The district court evaluated two of EchoStar’s major modifications to the infringing DVR software and concluded that the modified software continued to infringe. The district court therefore found EchoStar to be in violation of the infringement provision of the injunction. Moreover, the district court found that even if EchoStar had achieved a noninfringing design-around, EchoStar would still be in contempt because it had failed to comply with the disablement provision in the district court’s order requiring it to disable DVR technology completely from the receivers.

The majority of a 3 judge panel of the Federal Circuit concluded on EchoStar’s appeal of the district court ruling that the district court decision was appropriate. The Federal Circuit, per Judge Lourie and with Judge Mayer joining in the decision, determined that given EchoStar’s refusal to disable the DVR functionality in its existing devices and the fact that its original attempts to design around TiVo’s patent were wholly unsuccessful, the district court had ample justification for its determination that court pre-approval of any new design-around effort was necessary to prevent future infringing activity.

Judge Rader, who these days finds himself frequently in the dissent, voiced a strong dissent, saying that the disputed claim shows little similarity between the former infringement proceedings and the issues now before this court. Rader found the accused structures to be different, the infringement theories to be different and the claim constructions to be different. Rader also believed that the modified method operates in a significantly different way from the old method. In fact Rader said “the only thing that is not different is the identity of the parties themselves.” Thus, Rader was extremely troubled that summary contempt proceedings were used to address a dispute that was, in his view, not the same as the underlying patent litigation. Furthermore, in Judge Rader’s view the injunction issued and approved by the majority of the panel was over-broad, saying: “The district court’s injunction applied only to infringing products. The court did not refer to any modified product or any other ‘DVR functionality’ for that matter. Yet, the injunction today applies to any DVR functionality regardless of infringement.”

Perhaps I am just bitter or upset with myself for not pulling the trigger on buying TiVo stock after they were awarded US Patent No. 7,665,111 on February 16, 2010, which seemingly grants them extremely broad patent protection over DVR scheduling. See Submarine Patents Alive and Well: Tivo Patents DVR Scheduling. I should have pulled the trigger, and I know it. I knew that the ‘111 patent was a good get, and now on news of this Federal Circuit decision spanking EchoStar and giving TiVo a big win TiVo stock is up over $5 on the day and well over 50%. It doesn’t matter that this bounce had nothing to do with the ‘111 patent, although there likely should have been a bounce on that patent being granted. I need to focus and pay attention to my gut more! Of course, with so much on the line and a forceful dissent by Judge Rader I suspect EchoStar will certainly request a rehearing and even an en banc hearing. The rehearing will, of course, be denied, but what of an en banc hearing? The Federal Circuit seems to be granting those with some increased frequency lately, and if Rader is really right (which I think he is) this would seem to be the exact type of case others might want to weigh in on. A summary contempt proceeding seems wholly inappropriate here, and maybe others on the CAFC will agree. Then there is always the Supreme Court, who takes at least a few patent cases a year for the purpose of overruling the Federal Circuit. This case has the Supreme Court written all over it because it is a patent case and the patent issues are relatively secondary to the use of summary contempt proceedings where, as Rader says, there was a good-faith work around effort.

Obviously, Judges Lourie and Mayer did not buy the good-faith work around, and neither did the district court. In the patent world though I put great trust in the way Judge Rader sees things, and in Judge Newman as well, particularly when they are in dissent. Both have a knack for both recognizing and pointing out that the emperor is not wearing any clothes, which is why I admire them both so much. In any event, it seems I missed a TiVo buying opportunity. Hopefully my blogging on the importance of the ‘111 patent motivated some to buy, and if it did good for you! But I would keep my eye on this one closely, because I have a feeling we have not heard the last of this dispute, not by a long shot.


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2 comments so far.

  • [Avatar for Gene Quinn]
    Gene Quinn
    July 15, 2010 06:16 pm

    I am not buying any stock at the moment. I am investing in IPWatchdog at the moment.

    Having said that, with the CAFC rehearing you gave to wonder whether they will adopt the Rader view, which would not be good for TiVo stock. So if your view is short term I would likely be cautious. If TiVo stock does take a hit I would likely jump in and buy with a long term view.

    Sent from iPhone

  • [Avatar for Bill Baird]
    Bill Baird
    July 14, 2010 03:15 pm

    I’m wondering if you are buying TIVO stock now.