April 28, 2006, 12:00 AM

A new courtroom drama starring Netflix and Blockbuster

Internet Retailer

The rivalry between Netflix Inc. and Blockbuster Inc. for the online DVD rental market has moved to the court room. Netflix early last month filed a patent infringement suit against Blockbuster, asking a federal court to shut down Blockbuster’s 19-month-old online rental service. Netflix also seeks unspecified damages.

Blockbuster says claims in the suit are without merit and that it will “defend itself vigorously.”

In the lawsuit, filed in U.S. District Court in Northern California, Netflix alleges that Blockbuster Online violates two patents held by Netflix. The first patent, granted in 2003, covers the Netflix business method of allowing consumers paying a monthly fee to select and rent DVDs from the company’s web site and maintain a list of titles telling Netflix in which order to ship the DVDs.

The second patent covers the Netflix policy allowing subscribers to keep the DVDs for as long as they want without incurring late fees. That policy also allows subscribers to obtain new DVDs without incurring additional charges and to set or re-set the order in which they receive the DVDs.

Blockbuster views the lawsuit as an attempt to stifle competition, says Shane Evangelist, senior vice president and general manager at Blockbuster Online. “The timing of this lawsuit appears to confirm that Blockbuster Online has emerged as a competitive force in the online rental industry,” he says.

Revenue from Blockbuster’s online business grew 17-fold in 2005 from 2004 to $146.7 million. Netflix reported revenue of $688 million in 2005, up 36% from 2004.

A leading patent attorney says Netflix has a strong case against Blockbuster. Bruce D. Sunstein of Bromberg and Sunstein, a Boston-based intellectual property laws firm, says Netflix’s claims in the technology are short and broadly written, a factor that typically runs in favor of the patent holder.

In addition Netflix listed several pages of U.S. and foreign patent documents and other references it reviewed before submitting its patents, decreasing chances that a similar system exists, he says.

“Netflix has clearly been the innovator,” Sunstein says. “After a while, some of these companies found that Netflix was eating their lunch, so they started trying to do the same thing that Netflix does.”

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