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California and the West Is Sued by Netflix

The online movie-rental pioneer, citing patent infringement, asks a court to shut its newer rival and order damages.

April 05, 2006|Claire Hoffman | Times Staff Writer

The largest mail-order movie-rental service sued the world's largest video-rental chain Tuesday saying, in essence, that when it comes to no late fees, imitation isn't flattering.

Netflix Inc. accused Blockbuster Inc. of patent infringement, alleging that its online site illegally copied Netflix's method of allowing customers to order videos over the Internet.

Netflix asked a federal judge in San Francisco to shut down the 20-month-old It also seeks unspecified damages.

Among the Netflix innovations that Blockbuster allegedly copied: no late fees on movie rentals, allowing customers to get a new DVD as soon as they return one, and the online dynamic queue -- a wish list for movies that subscribers can use to prioritize which films they want when.

"It seems obvious because Netflix has made it obvious," said Steve Swasey, a spokesman for Netflix, which was founded in 1999. "We've filed suit to protect our invention. Netflix has built a better mousetrap and Blockbuster copied it."

A spokesman for Blockbuster said the company had not yet been served with court papers so it could not comment.

Based in Los Gatos, Calif., Netflix has steadily increased the number of its customers, reaching 4.2 million by the end of 2005. Subscribers pay a monthly service fee for unlimited movie rentals, choosing from about 55,000 titles including Hollywood action flicks and foreign-made cult films.

Sending out 7 million movies a month, the company is one of the U.S. Postal Service's highest volume customers.

Netflix holds two U.S. patents for its business method. The first, granted in 2003, covers the way Netflix customers select and receive several movies at a time, and then return them for more titles.

The second, issued Tuesday, "covers a method for subscription-based online rental that allows subscribers to keep the DVDs they rent for as long as they wish without incurring any late fees, to obtain new DVDs without incurring additional charges and to prioritize and reprioritize their own personal dynamic queue," the lawsuit said.

Blockbuster began its online rental service in August 2004. Like Netflix, its most popular plan is $17.99 a month, for three movies at a time. By the end of 2005, the Dallas-based company said it had about 1.2 million subscribers.

Blockbuster said last month that it hoped to increase its online customers to 2 million by the end of this year. At the same time it plans to close between 100 and 150 of its stores. Blockbuster posted a net loss of $588.1 million for 2005.

Netflix reported $41.9 million net income for 2005.

One expert in patent infringement said the case was similar to other suits in recent years that have dealt with unique ideas created for doing business online.

"With business method patents, we once again see how the courts and the laws struggle with emerging technology," said Pamela Banner Krupka, whose private Los Angeles-based practice specializes in patent work.

Shares for Blockbuster fell 8 cents, or 2.1%, to $3.80. Netflix shares closed down 72 cents to $27.41.

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