As Core Business Fades, TiVo is Turning to IP Licensing

People love their DVRs.  More specifically, they love their TiVo DVRs.  TiVo was one of the first DVR providers (RIP Replay TV and one-click commercial skipping) and holds broad pioneer patents.  It’s a practicing plaintiff, not a naked patent troll.  And despite some gripes, its products have consistently won accolades for usability, especially compared to competitors’ DVRs.

TiVo was the first company to deliver on the promise of easy-to-use time-shifted television.  But TiVo has been a victim of the success of its own technology.  It has languished for the last decade as cable and satellite companies deployed their own (usually mediocre, occasionally execrable) set-top box DVR recorders to a captive customer base.  TiVo’s subscriber base is way off its highs.  Its third quarter 2009 revenues were an anemic $56.9 million.  And TiVo’s share price has been flat for a decade, hovering around $1 billion market cap.

But while TiVo’s own products and services founder, its IP posture is increasingly puissant.  TiVo has partnerships with DirecTV, Comcast, Cox, and Virgin Media, and has patent licensing agreements with Pioneer, Sony, and Toshiba.  In its second incarnation as an IP holding company, TiVo wants to get patent licensing rents from all of the players in the DVR/set-top box market.  However, those revenue streams aren’t as profitable as having a larger base of customers: TiVo averages 93¢ a month from licensed subscribers and $7.65 from its own customers.  To survive, it needs to bend the DVR market to its will and get all of the major players to join its harem of captive patent licensees.

TiVo Does Patent Trolling Right

TiVo is in a uniquely sympathetic position as a practicing pioneer facing seemingly undeserved losses at the hands of patent infringers.  As a result, TiVo has been spectacularly successful in a grueling six-year patent fight with EchoStar and Dish Network.

TiVo’s legal Death Star is U.S Patent No. 6,233,389 (“Multimedia time warping system”), issued on May 15, 2001.  The ‘389 patent covers fundamental DVR technologies for recording video from TV.  TiVo scored an initial $73.9 million win and permanent injunction against EchoStar for infringement of the ‘389 patent by EchoStar’s Dish Network DVR.  On appeal at the Federal Circuit, the case was argued by appellate heavyweights Seth Waxman and Donald Dunner, and the lower court verdict was upheld.  Then, TiVo got $200 million more in damages, contempt sanctions, and attorney fees for violation of the injunction when EchoStar unsuccessfully attempted to design around the patent.  TiVo pegs the total litigation revenues from EchoStar at $400 million plus attorney fees.

The ‘389 patent has also been upheld on ex parte re-examination by the PTO, and is now on its second re-examination.  Although the PTO has preliminarily rejected two important claims in an office action, TiVo characterizes the rejection as simply a procedural matter pending full re-examination; indeed, in the prior reexamination, claims were initially held invalid and then ultimately upheld.

If TiVo comes out of the second reexamination with the ‘389 patent mostly intact, it will have a gold-plated patent that has been repeatedly validated in District Court, the Federal Circuit, and the PTO.  The patent will be a license for TiVo to print money, and will form the keystone of TiVo’s strategy to extract licensing revenues from the entire DVR industry.

A Challenger Appears

Perhaps sensing blood, TiVo opened a new litigation front by suing AT&T and Verizon in the Eastern District of Texas on August 26, 2009, alleging that AT&T’s U-verse service infringed on TiVo’s DVR patents.  This dragged Microsoft into the DVR wars: AT&T uses Microsoft’s Mediaroom system in its U-Verse TV service.  If TiVo were able to crush AT&T like it whelmed EchoStar, the U-Verse venture could be in jeopardy – a permanent injunction is still a normal remedy in patent litigation for practicing plaintiffs, even post-eBay v. MercExchange.

Microsoft intervened in the case and separately sued TiVo on January 19, 2010, for infringing a different set of DVR patents.  Microsoft’s complaint alleges infringement of U.S. Patents No. 6,008,803 (“System for displaying programming information”) and 6,055,314 (“System and method for secure purchase and delivery of video content programs”).  Microsoft admits it is asserting these two patents to force a settlement with a cross-licensing agreement: “We remain open to resolving this situation through an intellectual property licensing agreement, and we have initiated discussions to engage TiVo in negotiations”.

Should TiVo be concerned about Microsoft’s patents?  Are they enough to force TiVo to the table?

From an admittedly cursory look, they are about as threatening as a limp noodle.  Neither of the patents has been tested in court.  The PTO patent application system is ex parte; patents issue without being tested adversarially.  Although there is a presumption of patent validity once issued, the presumption may be overcome in court in a variety of ways.

The ’803 Patent

The ‘803 patent (“System for displaying programming information”) was filed on August 7, 1998 and issued December 28, 1999.

It immediately loses brownie points for mentioning the “information superhighway” in a non-ironic manner in the specification.  It also misspells “information” “informaton” in Claim 1.  We’re not off to a very good start!

Claims 1-21, 23, and 25-32 cover sundry variations on two- or three-pane information displays, all clearly anticipated in the prior art by myriad computer displays dating from the dawn of windowing systems (or even from text displays).

Claims 22 and 24 are where the meat is.  Claim 22 claims a “system” with an “information display” and a “category display.”    Claim 24 claims “[t]he system recited in claim 22, wherein each of the information tiles comprises at least a program name, program date and start time, and program channel.”  Claim 24 is the only claim mentioning TV programming data.  As there are innumerable prior art information displays with generic data in a format that would anticipate the other claims, Claim 24 is the only claim that could realistically be asserted against TiVo.

Even if there is no prior art with TV programming data displayed in a format like Claim 24 (doubtful), the ‘803 patent faces other enforcement obstacles.  An exact prior art reference will invalidate a patent for lack of novelty.  But even if there is no exact single prior art reference that practices the claim, two or more prior art references may be combined to void a patent for obviousness.  Here, a prior art reference teaching the compilation and organization of TV programming data (e.g. TV Guide magazine) can be combined with the prior art screen data formats to show that Claim 24 was obvious and therefore not patentable.

Even if the ‘803 patent survives what will surely be a searching obviousness inquiry, it may encounter an issue of patentable subject matter under the currently-valid (pending a Supreme Court decision expected in Spring 2010) machine-or-transformation test articulated by the Federal Circuit in In re Bilski.

§ 101 of the Patent Act enumerates four types of statutory (that is, eligible) subject matter: processes, machines, manufactures, and compositions of matter.  Claims are supposed to indicate in their preamble what category they fall under.  Generally, “system” is susceptible to interpretation as a machine or as a process.  If the claimed system doesn’t clearly describe a machine or apparatus, then it may be interpreted as a process claim.  A process must be implemented with a particular machine or transform an article from one thing or state to another.  Clearly, there is no transformation happening in Claim 24.  Is there a particular machine?  The claim language may be too vague – there is no context for “category display” or “information display.”  Furthermore, reference to a generic computer or set-top box may be insufficient.

The ‘314 Patent

The ‘314 patent (“System and method for secure purchase and delivery of video content programs”) was filed on March 22, 1996, and issued April 25, 2000.

On its face, the ‘314 patent appears to be on much more solid ground than the ‘803 patent.  It’s bigger: 74 claims.  It actually appears to deal with technology!  There are method, device, and several varieties of system claims: “video content delivery system,” “interactive entertainment network system,” “system for purchasing video content programs,” etc.  Overall, the patent covers video decryption technologies for set-top boxes.  It has a bit tacked on at the end concerning the use of the encrypted network to purchase video-on-demand.  Without having more technical knowledge of TiVo’s encryption setup it’s hard to get a feel for how well the claims map to TiVo’s devices.  The analysis is on shakier ground here due to the increased complexity of the ‘314 patent.  However, a few issues do stand out.

Claims 27-33, covering an “integrated circuit card for use in decryption of video content programs” or “a video decryption device” arguably cover the now-standard cable TV decryption standard CableCARD.  The CableCARD decryption approach for digital cable was a product of the Telecommunications Act of 1996, and has been blessed by the FCC.  TiVo DVRs use it.  To the extent that TiVo infringes because it implements support for CableCARD, it may have a claim that the CableCARD system pre-empts the ‘314 patent – not because CableCARD is prior art, but because it is a specific technological industry mandate from a regulatory agency and should therefore not become a vector for a patent infringement suit.

Claims 34-41 are method (process) claims.  Claim 34 is the only independent claim.  The rest are dependent on 34.  Unfortunately for Microsoft, Claim 34 (“method for delivering video content programs”) appears to violate the rule of BMC v. Paymentech: a single entity must directly or vicariously (i.e. by ordering a minion) carry out all of the steps of a process claim in order to infringe.  Claim 34 describes a series of operations involving encrypted video streams, including 1) encrypting and decrypting a program key, 2) encrypting and decrypting the video stream, and 3) transmission of an encrypted video stream.  But TiVo doesn’t transmit video from the cable company: the cable company does.  And consumers typically lease their CableCARD from the cable company; any decryption that the card performed couldn’t be attributed to TiVo.  On the other hand, if TiVo stores data encrypted on hard disk and uses a non-CableCARD means of decrypting it prior to viewing, it may arguably infringe.

Claims 43-53, covering the purchase of  video streams, again run into the Paymentech issue because the claim steps purport to cover both the actions of the video purchaser (i.e. the viewer) and the “video merchant” (e.g. Amazon, Netflix, etc.).

A few, more broadly written claims (e.g. Claim 42 and 54-58) appear to recognize this limitation.  These claims only cover decryption of a video data stream.  However, their extremely wide claim scope may run into prior art novelty anticipation from other TV decryption technologies – of which there are many.

Is Microsoft’s Suit Credible?

The ‘803 patent is clearly a non-starter, but it’s much harder to evaluate the ‘314 patent.  Neither patent has been tested in court, so they’ll initially have discounted bargaining weight compared to the battle-tested, blood-spattered ‘389 patent.  If the ‘314 patent proves valid, it may be enough to parry TiVo’s attack on U-Verse, which, with barely 2 million subscribers, is nowhere near the mother lode that EchoStar was.  This wouldn’t affect TiVo’s ability to take on other targets (Time Warner may be especially tempting), but it may blunt the strong momentum that TiVo has built up with its string of EchoStar victories.

The FCC’s set-top box “integration ban” requires cable operators to deploy set-top boxes that meet certain criteria standards, separating proprietary encryption from basic decoding functions. More specifically, this regulation effectively forces cable operators to support CableCARD, a technology incorporated into digital TVs and DVRs (e.g., TiVo Series3) that makes such devices compatible with the cable operator’s encryption scheme without a set-top box.

By separating decryption from other functions, the ‘integration ban’ facilitates the introduction of third-party devices that compete with and can eliminate the need for the set-top boxes leased or provided by the cable companies. As a practical matter, however, relatively few consumers have availed themselves of the CableCARD option (see ACA Comments, CSR-7012-Z, CS Docket No. 97-80). This may be due to the fact that cable companies require consumers to take special steps to acquire a CableCARD (and also because the technology is not yet incorporated into many consumer devices). The FCC, therefore, has promulgated C.F.R. 76.1204(a)(1), requiring cable operators to implement CableCARD technology into their set-top boxes, so that every box has a CableCARD slot and will need a CableCARD to operate. This eliminates the need for consumers to take any special action to obtain a CableCARD. As it should be!

Requests from cable operators to waive C.F.R. 76.1204(a)(1)

Verizon recently (late August, 2006) filed a request for the FCC to temporarily waive 47 C.F.R. 76.1204(a)(1) until an “interoperable, open downloadable conditional access (“DCAS”) solution is developed and deployed,” arguing that waiver is necessary to facilitate the introduction of Verizon’s own FiOS TV service. Verizon argues that this DCAS solution would render CableCARDs obsolete, and making their current set-top boxes compatible with the CableCARDs would be a waste of money. By waiving the CableCARD requirement and speeding Verizon’s implementation of its cable service, Verizon argues, the FCC will increase competition in the cable TV market, ultimately helping consumers. The FCC then sought comment on Verizon’s request (FCC reference).

Verizon’s request follows similar requests from Comcast and the National Cable & Telecommunications Association (“NCTA” is the cable companies’ lobbying group), in early August, to exempt certain set-top boxes from the ban. One common argument amongst the cable companies is that the FCC should delay the July 1, 2007 commencement of the integration ban because of the changing nature of the technology. Many cable companies argue that if given more time to work on the security technology, costs will be avoided which would otherwise be passed along to consumers.

TiVo’s opposition to waiver requests by cable oOperators

In the October 12 letter filed by TiVo’s counsel with the FCC, TiVo reiterates its position opposing the waivers petitions filed by the various cable companies mentioned above. For the producers of CableCARD-ready equipment, such as TV manufacturers and TiVo, the need for proprietary set-top cable boxes to decode cable signals hinders the sales and marketing of their products. Thus, TiVo here urges the FCC “not to undermine the effectiveness of its rule establishing the integration ban or further delay its implementation. TiVo also urged the Commission [the FCC] to examine closely the CableCARD cost figures being cited by the cable industry, since the figures appear high and are not adequately explained in the record.” What, the cable industry industry using skewed figures to undermine open standards? Perish the thought.

This latest response by TiVo is concerned, in part, with the definition of “low-end” in referring to set-top boxes. TiVo’s concern is that the cable companies wish to define “low-end” so expansively as to encompass a wide variety of boxes with seemingly high-end DVR functionality that would compete with TiVo’s product. Without knowing what set-top models the cable companies wish to consider “low-end” and what percentage of households with digital cable use such models, it is difficult to say what the practical implications of this question are. TiVo argues that the cable companies’ definition of low-end set-top boxes encompasses so many boxes that a low-end exemption would make the integration ban into a nullity.

STLR legal commentary

Congress passed an act requiring cable companies to adopt CableCARD technology more than ten years ago. It’s intent was to provide consumers with a competitive market for cable decoders. The cable companies have tried to invalidate the law in court, but have been unsuccessful (Charter Communs., Inc. v. FCC, 460 F.3d 31; General Instrument Corp. v. FCC, 341 U.S. App. D.C. 367). Since the act’s passage, the FCC has extended the deadline multiple times at the request of cable operators to give the companies more time to implement the technology and develop potentially lower cost solutions.

Verizon is not asking for a general extension of the deadline for everybody (the FCC seems to be done with such requests), but rather it is asking for a specific temporary waiver of the deadline for itself. According to the act, the FCC can grant these waivers if “necessary to assist the development or introduction of a new or improved multichannel video programming.” (47 C.F.R. 76.1207). So Verizon wisely has linked their waiver request to the rollout of FiOS. Verizon argues that providing a CableCARD compatible system that is able to support FiOS by the July 1, 2007 deadline is too much to ask (FCC reference). The problem, Verizon claims, is that the interactive services offered over FiOS are not compatible with current CableCARD implementations and, even if they were, developing CableCARD compatibility would take away from their development of other services. Verizon also argues that its status as a “new entrant” into the market means that it has not had the same ten years that other cable providers have had to develop CableCARD technology, and that its relatively small customer base means that the waiver will not affect many consumers. If Verizon can convince the FCC that FiOS services will be impacted if the deadline is enforced, their waiver request may be granted.

Charter Communications is also seeking a waiver, but for a different reason. Charter claims that it offers low-end cable decoder boxes that are cheaper than can ever be built using CableCARD technology. Requiring the transition to CableCARD would increase the cost to the low-end consumer “just to reduce by a few cents the $1.50 lease cost of CableCARDs that plug into high-end HDTVs” (FCC reference). This argument has met opposition from decoder box makers, like TiVo, who claim that Charter’s definition of “low-end” is too expansive and would undermine the intent of the law (FCC reference). One issue with Charter’s argument is that the company seems to be asking for a permanent waiver, and the FCC only has the authority to grant waivers for a limited time under 47 C.F.R. 76.1207. Also, Charter’s desire to protect the low-end consumer does not fall within the statute’s requirement that waivers be granted only to allow for development of “new and improved” programming.

It will be interesting to see how the courts handle these waiver requests in light of the opposing arguments promulgated by TiVo and others.

Legal analysis courtesy of Matt Dobbins, Zachary Sharpe, and Trevor Adler. Reprinted from Engadget.