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A pending patent dispute between DVD rental rivals Netflix Inc. and Blockbuster Inc. does more than pit two big-name competitors against each other. It also highlights the ongoing debate over Internet business-method patents. For years, Congress and legal scholars have argued over what sort of innovation qualifies for legal protection and whether patents should be issued for online business processes. Critics contend that most online processes currently winning patents are neither novel nor innovative. Worse, they argue, some of these patents are so broad that anyone is liable to end up infringing. Several sizable judgments in high-profile litigation � including the $35 million award to patent holding company MercExchange from eBay over a patent involving auction technology and fixed-price trading � have created a corporate and public backlash against Internet patents. Against this backdrop, San Francisco’s Keker & Van Nest, representing Netflix, filed a lawsuit against Blockbuster, the brick-and-mortar video giant. Netflix launched its online mail-order DVD rental service in 1999. Four million subscribers later, it doesn’t want Blockbuster horning in on its fast-growing market. The suit, filed in San Francisco federal court, accuses Blockbuster of duplicating key features of Netflix’ patented Internet service, including the company’s method of sending out movies based on a customer’s movie queue and its practice of allowing customers to keep their movies as long as they wish without incurring any late fees. Blockbuster, in a press release, claims the lawsuit is without merit. The two companies have been fiercely competing for customers ever since Blockbuster launched its own online operation in 2004. The video-rental chain came late to the online rental service but has steadily gained market share, signing up 1.2 million subscribers by 2005. It is also significantly shifting its business online, closing stores as movie renters increasingly turn to the Internet. Netflix’s case, according to some patent attorneys, should give pause to critics of online patents. Key to the company’s success is its patented business model, and if the company is unsuccessful in enforcing its patent against a competitor in the same market, it would raise questions about the value of these patents. “Business-method patents have been vilified because in many cases you’re seeing individuals who don’t practice their invention sue other businesses,” says Neil Smith, a partner at Sheppard, Mullin, Richter & Hampton. “But in Netflix’s case, if their patent is strong, they should be able to use it against their competitors.” Netflix spokesman Steve Swasey says the company’s online service may look obvious to a lot of people now, but seven years ago the only way anyone could rent a movie was to go to a video rental store. “It’s 2006 now, and our patented service is now being used by 4.2 million subscribers,” says Swasey. “Of course, it now looks obvious.” He says the litigation against Blockbuster is as much about protecting innovation as it is about remaining competitive. “The patent laws were written to protect innovative inventors, and that’s what we’re doing,” he says. “We like competition and we know it’s good, but when someone infringes on our patents, we mean to defend it. From top to bottom, Blockbuster has copied our business method and we intend to enforce our patent.” Robert Yoches, a partner at patent firm Finnegan, Henderson, Farabow, Garrett & Dunner, says Internet-related patents already have to go through more rigorous and stricter scrutiny at the patent office. As a result, only a fraction of the thousands of patent applications covering business methods are issued each year. In 2004, for example, only 282 patents were issued out of 6,200 applications. “Getting patents in areas where you don’t expect them, like video rental or auction, has struck both lawmakers and judges in a strange way, and the patent office has responded by giving them extra scrutiny,” says Yoches. “The patent office insists that they are applying the same examination standards to business-method patents, but the fact is, they only allow 16 percent of applications in this area, compared to 50 percent in other categories.” In addition, the agency almost routinely invalidates Internet patents during re-examination when other parties bring evidence of prior art. “Filing a re-examination procedure has become really popular now and many people are now attacking business-method patents at the patent office,” says Yoches. Still, even with the higher scrutiny at the patent office and the potential public relations fracas that a company may face when they enforce such patents, some attorneys are predicting a wave of e-patent litigation in the coming years. “There is a tremendous backlog in the patent office and many of these patents are just now issuing,” says Yoches. “A lot of these patents are just now coming into the forefront and are now being litigated.”

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