Netflix sues Blockbuster

APRIL 4 | Netflix filed a patent-infringement lawsuit against Blockbuster Tuesday, asking a Northern California federal court to shut down its rival’s online DVD rental service and award Netflix damages.

The two-count suit accuses Blockbuster of copying Netflix’s method for allowing users to maintain an online list of movies they wish to rent and prioritize and manage their rentals.

The other count covers the basic subscription rental model itself, which Netflix introduced in 1999.

Netflix was granted a patent on managing an online queue of movies in 2003 but held off seeking to enforce it even after Blockbuster launched a similar service late that year (VB, 6-24-2003).

The suit was finally triggered Tuesday, after Netflix was granted a broader patent covering the entire online subscription rental business model.

“From top to bottom, Blockbuster has deliberately and willfully copied Netflix’s business model,” Netflix spokesman Steve Swasey said.

Swasey declined to comment on whether the company had warned Blockbuster about its patent before filing suit. He also declined to say whether Netflix planned to sue any of the handful of other smaller online rental services in operation.

The lawsuit claims Blockbuster launched its competing service despite being aware that Netflix had a patent on its service and was seeking a second one. The suit also claims that Blockbuster has caused Netflix “irreparable injuries” and induced others to infringe on its patent.

A Blockbuster spokesman said the company hasn’t yet been served with the lawsuit and could not comment.

The lawsuit came on a day when Blockbuster’s stock was already down after published reports said financier Carl Icahn would not attempt to take control of Blockbuster’s board of directors at the company’s annual meeting next month.

Those reports dampened investors’ hopes that the struggling rental chain might be put up for sale in the near term.

Icahn controls three seats on Blockbuster’s eight-member board. Two seats are up for election at this year’s annual meeting, with one seat vacant.

Netflix has 4.2 million users versus the roughly 1 million Blockbuster Online claims.

Until now, Netflix had given little indication publicly that it planned to enforce or exploit its first patent, with execs initially saying they were studying their options.

Swasey said it was inappropriate for the company to file suit until it received the second patent on its business, which the company applied for in May 2003.

However, investors took the suit as a sign that Blockbuster’s competing service might be undercutting the market for Netflix and sent shares of Netflix down 72¢ on the day.

The shares continued to slip in after hours trading.

Blockbuster shares closed down 8¢.