Blockbuster lawsuit: Netflix sues rival

/ Source: The Associated Press

Online DVD rental service Netflix Inc. on Tuesday accused Blockbuster Inc. of illegally copying its ideas in a patent infringement lawsuit challenging the video store chain’s recent Internet expansion.

The complaint, filed in U.S. District Court in San Francisco, focuses largely on the online wish lists that prioritize the DVD desires of about 5.4 million people who subscribe to either Netflix or Blockbuster’s Internet service.

Netflix also believes its patents cover perhaps its most popular feature — the option of renting a DVD for an unlimited time without incurring late fees.

That change, introduced by Netflix seven years ago, became so popular that Blockbuster last year stopped charging late fees for tardy rental returns to its video stores. Dallas-based Blockbuster once pocketed hundreds of millions of dollars annually from those late fees.

Both Netflix and Blockbuster’s online service charge $17.99 per month to rent up to three DVDs at a time. When subscribers return a DVD in a postage-paid envelope, the rental services automatically send the next available movie on their wish lists.

Blockbuster initially denigrated the flat-fee concept, but then reversed course and launched its Internet service in 2004 after scores of customers defected to Netflix, based in Los Gatos, Calif.

“Blockbuster has been willfully and deliberately copying Netflix’s business methods,” Netflix spokesman Steve Swasey said.

Blockbuster spokesman Randy Hargrove declined to comment Tuesday because the company hadn’t yet seen the suit.

Netflix contends it first patented the process for managing DVD wish lists — known as queues — in June 2003.

A second patent issued Tuesday to Netflix apparently triggered the lawsuit. Netflix believes the additional patent covers an even wider range of automated interaction with its customers.

Netflix hopes to obtain a court order that would force Blockbuster to change the way its online rental service operates or require the company to pay patent royalties — a potentially huge bill, based on other recent patent disputes.

For instance, the maker of the popular Blackberry e-mail device last month agreed to pay $612.5 million to settle a long-running patent infringement case.

Because patent cases often delve into highly technical issues, they can take several years to wind through the legal system.

If Netflix prevails, it could thwart its biggest competitor in the steadily growing field of online DVD rentals.

Netflix began the year with about 4.2 million subscribers. Blockbuster has signed up about 1.2 million online customers so far. Netflix’s success already has hurt Blockbuster, which lost $588 million last year and expects to continue to close stores as more DVD renters turn to the Internet.

In contrast, Netflix earned $42 million last year. But its service has been recently fending off a backlash triggered by a class-action lawsuit that focused attention on a scoring system that penalizes its most frequent renters. Netflix is awaiting court approval of a proposed settlement that would give free DVDs for a month to millions of former and current subscribers.