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Blockbuster retaliates against Netflix

Blockbuster Inc. Tuesday sued rival Netflix Inc on fraud and anti-trust claims after refusing to pay the online DVD rental company royalties for what Netflix said are patent violations.
/ Source: The Associated Press

Escalating a bitter legal battle, Blockbuster Inc. on Tuesday accused Netflix Inc. of manipulating the U.S. patent system in a devious effort to monopolize the booming market for online DVD rentals.

The antitrust allegations represent Blockbuster’s counterpunch to patent infringement claims Netflix filed two months ago.

The wrangling eventually could affect the rapidly growing audience that’s migrating to the Internet to rent DVDs through the mail.

About 6.2 million people currently subscribe to the online services of Netflix and Blockbuster, which both charge a flat monthly fee to rent DVDs for an unlimited time. Most subscribers pay $17.99 per month to check out up to three DVDs at a time.

Los Gatos, Calif.-based Netflix pioneered the concept in 1999 and ended March as the industry leader with 4.9 million subscribers.

Blockbuster launched its own online service in 2004 after losing hordes of customers who formerly rented movies in traditional stores. The Dallas-based company began the spring with about 1.3 million online subscribers.

Netflix obtained the first patent on its service in 2003, but didn’t seek a court order to enforce its claims against Blockbuster until it received an even broader patent in April.

In its countersuit filed in U.S. District Court in San Francisco, Blockbuster framed Netflix’s patent claims as a “sham” aimed at locking out competitors that will help protect consumers from price gouging.

The suit alleges that Netflix CEO Reed Hastings even described its first patent as a joke in a January 2005 meeting with Blockbuster’s chief lawyer at the time, Edward Stead.

“Netflix is trying to monopolize this space on the Internet and restrain competition to the detriment of Blockbuster and the public,” said Marshall Grossman, a Los Angeles attorney representing Blockbuster.

Netflix spokesman Steve Swasey declined to address Blockbuster’s allegations. “We believe Blockbuster infringed on our patented business model and we are going to vigorously defend our patent,” Swasey said.

Blockbuster’s entrance in the market prompted Netflix to lower the price of its most popular service by $4 per month.

Tuesday’s countersuit also alleges Netflix deceived the government by withholding information about earlier innovations that may have prevented the company from obtaining its patents in the first place.

NCR Corp. asserted its patent rights before Netflix received its first patent in 2003, Blockbuster’s suit said. Blockbuster alleges Netflix never notified the U.S. Patent Office about NCR’s claims.

Netflix sued NCR in March, seeking to invalidate those patent claims.