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With latest ruling, TiVo-EchoStar battle slogs on

TiVo has lost an important battle with EchoStar. The U.S. Patent and Trademark Office has rejected two of the claims in TiVo's DVR patent.

The United States Patent and Trademark Office (PTO) issued an "office action" Monday rejecting two claims in TiVo's Multimedia Timewarping System (better known as the DVR) patent, the centerpiece of its legal battle with EchoStar.

That DVR is causing some trouble again. TiVo

According to the PTO, its preliminary finding rejects TiVo's patent Claims 31 and 61.

Claim 31 describes "a process for the simultaneous storage and play back of multimedia data." The claim discusses how TiVo's DVR captures video from a broadcast source, stores it in its hard drive, and allows users to play it back at their convenience.

Claim 61 is similar to Claim 31. It describes "an apparatus for the simultaneous storage and play back of multimedia data." The claim discusses how the TiVo handles stored shows and gives users the ability to control them on the device.

The patent itself, which features more than 60 claims, is a blueprint for how TiVo's DVR works. It discusses an "invention (that) allows the user to store selected television broadcast programs while the user is simultaneously watching or reviewing another program. A preferred embodiment of the invention accepts television (TV) input streams in a multitude of forms, for example, National Television Standards Committee (NTSC) or PAL broadcast, and digital forms such as Digital Satellite System (DSS), Digital Broadcast Services (DBS), or Advanced Television Standards Committee (ATSC)."

The patent goes on to explain how TiVo streams content through MPEG video. It gives users the option to put the video into "reverse, fast forward, play, pause, index, fast/slow reverse play, and fast/slow play."

The PTO's preliminary finding is important for EchoStar. It gives it some breathing room as it moves forward after a series of missteps.

A long battle
The legal battle between TiVo and EchoStar started back in 2004 when the former alleged that EchoStar infringed several claims made in TiVo's DVR patent. In March of 2006, a jury found that TiVo's claims were valid and awarded TiVo approximately $74 million in damages.

EchoStar appealed the Texas District Court's injunction with the Federal Circuit court. It was granted. It wasn't until April 2008 that the Eastern District Court's injunction was reinstated. Between the federal court's stay on the injunction and its reinstatement, EchoStar used those 20 months to employ a workaround designed to provide a DVR-like service that, it believed, wouldn't infringe upon TiVo's patent. The Texas court decided on June 2, 2009 that the workaround did just that.

After claiming that EchoStar had continued to infringe upon the patent and thus, commit contempt, the court awarded TiVo $1.25 per DVR subscriber per month. The court found that EchoStar owed TiVo an additional $103 million in damages.

"This Court finds by clear and convincing evidence that a court order, which required certain conduct by EchoStar, was in effect as of April 18, 2008, and that EchoStar failed to comply with that order," the presiding judge, David Folsom, wrote in a court order in June. "EchoStar is in contempt of the Disablement Provision, which ordered EchoStar to 'disable the DVR functionality (i.e. disable all storage to and playback from a hard disk drive of television data) in all but 192,708 units of the infringing products that have been placed with an end user or subscriber.'"

Less than 24 hours later, the Federal Appeals Court granted EchoStar a stay on the ruling. It gave the company an opportunity to keep offering DVRs.

Since then, both TiVo and EchoStar have been posturing, leading to the PTO's preliminary decision to reject TiVo's patent claims.

It's an important victory for EchoStar. The rejection provides it with a precedent to use in its appeal arguments. If the company can win its appeal, it would be able to keep DVRs in operation. It also wouldn't be required to pay TiVo for damages over the 20-month period. But if it loses, some analysts who have been following the case claim EchoStar could face even higher damages.

"If (EchoStar) loses a current round of contempt litigation related to their alleged 'work around,' then the costs of disabling DVRs, settling with TiVo, or--worst of all--potentially engaging in a bidding war for the right to continue offering DVRs at all, could be in a worst case scenario in the billions...far higher than currently contemplated," wrote Craig Moffett, a Sanford Bernstein financial analyst.

So, it's a scary proposition for EchoStar. Should it keep fighting TiVo to keep DVRs in the homes of subscribers and possibly face billions of dollars in damages? Or should it cut its losses and pay up?

For its part, TiVo isn't worried that its patent claims were rejected by the PTO. The company claims it's all part of the process.

"The (PTO) action is a preliminary finding, entered in the normal course before TiVo has had any opportunity to present its views," TiVo wrote in a statement. "This is an initial step in the lengthy process known as 'reexamination,' and it is not unusual for the PTO to provide a preliminary finding of invalidity and to then later find that the claims are valid after hearing an explanation from the patent owner."

In other words, get ready for more litigation in this long, DVR battle.

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