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Dish's DVR Dealt A Blow

Charlie Ergen lost a $103 million hand in his game of Texas Hold 'Em against TiVo last week, and he'll likely pay even more before all is said and done.

A federal judge found Dish Network in contempt for violating a court order to stop using TiVo's “Time Warp” digital video recording patent and awarded the DVR company an additional $103 million plus interest.

Dish immediately appealed the decision and the U.S. Court of Appeals for the Federal Circuit last Wednesday granted its request to temporarily stay the district court ruling, which would have required the satellite-TV operator to disable some 4 million DVRs within 30 days.

In a statement, Dish said: “We are pleased that the federal appeals court in Washington temporarily stayed the district court's order in the TiVo litigation. Dish Network customers can continue using their DVRs. We believe that we have strong grounds for appeal.”

TiVo's “Multimedia Time Warping System” patent, U.S. Patent No. 6,233,389, describes a DVR system that allows for simultaneous storage and playback of TV programming from a cable or satellite source.

On June 2, Judge David Folsom of the U.S District Court for the Eastern District of Texas ruled that Dish's workaround DVR technology, which the satellite operator said required 8,000 man-hours at a cost of $700,000, was not substantially different from the previous DVRs that infringed TiVo's intellectual property.

“By not disabling DVR functionality in adjudged receivers that had been placed with end users, EchoStar failed to comply with the plain language of the court's order,” Folsom wrote. EchoStar Communications formally changed its name to Dish Network last year.

In a statement, TiVo said: “EchoStar may attempt to further delay this case but we are very pleased the court has made it clear that there are major ramifications for continued infringement.”

TiVo investors saw the Texas ruling as a huge victory: Its shares shot up 53% last Wednesday, hitting a five-year high to close at $10.70 on June 3. The stock edged up further the next day, to close at $10.90.

Janney Montgomery Scott analyst Tony Wible wrote in a research note that the ruling “should reinforce the value” in TiVo's intellectual property and predicted the ruling against Dish will lead to new deals for TiVo with cable operators under more favorable licensing terms.

In addition, Wible wrote, “The ruling makes TiVo much more appealing as an M&A [mergers and acquisitions] target, as players may jockey to buy TiVo to control the DVR patent out of fear or greed.”

Sanford Bernstein senior analyst Craig Moffett, in a research note, said the court's ruling against Dish “was indistinguishable from a worst-case scenario.” He noted that additional punitive damages could put the amount Dish is ordered to pay TiVo even higher, and “could potentially even include the disgorgement of profits earned during the period of April 2008 to the present.”

Moffett and other analysts concluded that Dish will be forced to reach a licensing agreement with TiVo on the patent in question.

“Dish Network would now appear to have little choice but to settle,” Moffett wrote. “But at what rate? TiVo would now appear to hold all the cards. A settlement would likely be far above the licensing rates agreed to by DirecTV and Comcast a few years ago, leaving Dish Network at a decided competitive disadvantage.”

The Texas court had previously ruled that EchoStar infringed TiVo's “Time Warp” patent for DVR controls, and awarded TiVo $104.6 million in damages, including the initial $74 million in jury-awarded damages, supplemental damages accrued through Sept. 8, 2006, and interest. EchoStar paid the damages last October after the U.S. Supreme Court declined to review the case.

In the original 2006 decision that found EchoStar infringed on the TiVo patent, the jury awarded TiVo a royalty rate of $1.25 per EchoStar DVR subscriber per month. That was the rate Folsom settled on in his ruling last week to yield the $103 million figure, surmising that the two companies would have settled on the $1.25 figure for the 20-month period the ruling was stayed.

Doing the 'Time Warp'

Janney's Wible wrote that he expects TiVo to be able to extract $1.75 per DVR subscriber fee from Dish because “TiVo now has considerable leverage over Dish.”