[opendtv] What Earthlink is telling shareholders about litigation (in part)
- From: John Willkie <johnwillkie@xxxxxxxxxxxxx>
- To: opendtv@xxxxxxxxxxxxx
- Date: Wed, 6 Sep 2006 18:34:33 -0700 (GMT-07:00)
Here's what Echostar Communications Corporation is telling the SEC (and
shareholders) about the Distant Network Signals litigation. I don't think
that the sentence that includes the phrase 'interpreted the statute in
question' as being full disclosure on their part, but it's quite sobering.
"TV networks oppose our strategy of delivering distant network signals, and we
could be prohibited from selling distant network channels.
We are party to a lawsuit in which the FOX Broadcasting Company (â??FOXâ??)
network and the independent affiliate groups associated with each of the four
major broadcast networks have, among other things, attempted to enjoin us from
selling distant network programming.
We suffered a setback in this lawsuit during May 2006, when the Court of
Appeals interpreted the statute in question to prohibit us from providing
distant network channels to any consumers. While we plan to request that the
Supreme Court review and overturn the Court of Appealsâ?? decision, the
likelihood we will be successful is very small.
In the event the Court of Appealsâ?? decision is upheld, and if we are unable
to settle with the remaining plaintiffs, we will attempt to assist subscribers
in arranging alternative means to receive network channels, including migration
to local channels by satellite where available, and free off air antenna offers
in other markets. While the broadcasters have agreed to delay issuance of the
injunction until September 11, 2006, we are likely to commence (but not
complete) shut offs of distant network channels during the third quarter of
2006. Those shut offs could have a material impact on our results for the
quarter. However, we cannot predict with any degree of certainty how many of
our distant network subscribers would cancel their primary DISH Network
programming as a result of termination of their distant network channels. Our
revenue from distant network channels is less than $5 per distant network
subscriber per month. While less than one million of our subscribers purchase
distant network channels from us, termination of distant network programming to
those subscribers would result, among other things, in a reduction in average
monthly revenue per subscriber and free cash flow, and a temporary increase in
subscriber churn. We would also be at a competitive disadvantage in the future,
since the injunction would prohibit us from offering distant network channels
that will be available to certain consumers through our competitors.
Please see our more detailed discussion of this lawsuit under â??Distant
Network Litigationâ?? in Item 1. â??Legal Proceedingsâ?? above."
That section is thus:
"Until July 1998, we obtained feeds of distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida in Miami entered a nationwide permanent injunction requiring PrimeTime
24 to shut off distant network channels to many of its customers, and
henceforth to sell those channels to consumers in accordance with the
injunction.
In October 1998, we filed a declaratory judgment action against ABC, NBC, CBS
and FOX in the United States District Court for the District of Colorado. We
asked the Court to find that our method of providing distant network
programming did not violate the Satellite Home Viewer Improvement Act
(â??SHVIAâ??) and hence did not infringe the networksâ?? copyrights. In
November 1998, the networks and their affiliate association groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The Court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami Federal Court.
In 1999, the networks filed a Motion for Injunction and Contempt against
DirecTV, Inc. related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled that lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels during 1999. We do not know if they adhered to this schedule.
During 2002, we reached private settlement agreements with ABC and NBC. During
2004, we reached a private settlement with CBS, another of the plaintiffs in
the litigation. Over the eight year history of the litigation we have also
reached settlements with many independent stations and station groups. We were
unable to reach a settlement with five of the original plaintiffs â?? FOX and
the independent affiliate groups associated with each of the four networks.
Following an April 2003 trial, the Federal Court found that with one exception
the distant network qualification procedures we utilized comply with the law.
We promptly revised our procedures to comply with the District Courtâ??s Order
and have continued to use those procedures since that time. Although the
broadcasters asked the District Court to enter an injunction precluding us from
selling any local or distant network programming, the District Court refused.
The District Court did issue an injunction which would require us, among other
things, to use a computer model to re-qualify all of our subscribers who
receive ABC, NBC, CBS or FOX programming from a market other than the city in
which the subscriber lives, and who are not subject to a prior settlement
agreement. We do not believe compliance with that injunction would have a
material impact on our business. The District Courtâ??s decision was appealed.
The Court of Appeals stayed our compliance with the injunction during the
appeal process.
In May 2006, the Court of Appeals granted the broadcastersâ?? appeal,
overruling the District Court and concluding the statute requires a much
broader injunction prohibiting us from providing distant network channels to
any consumers. While we plan to request that the Supreme Court review and
overturn the Court of Appealsâ?? decision, the likelihood we will be successful
is very small.
The broadcasters did not claim monetary damages and none were awarded. The
broadcasters were awarded approximately $4.8 million in attorneysâ?? fees in
2004. The amount of attorney fees for which we may be liable may be increased
to include amounts expended by the plaintiffs subsequent to the trial, but
would not be material to our business. However, the broadcasters are currently
demanding that we pay them hundreds of millions of dollars as a condition to
settlement of the litigation. The broadcasters are also demanding settlement
conditions which would require the shut off of distant network channels to
hundreds of thousands of consumers legally entitled to receive those services
(absent the Court of Appeals decision), and which would likely cause widespread
consumer anger. It is not possible to make an assessment of the probable
outcome of any settlement negotiations.
In the event the Court of Appealsâ?? decision is upheld, and if we are unable
to settle with the remaining plaintiffs, we will attempt to assist subscribers
in arranging alternative means to receive network channels, including migration
to local channels by satellite where available, and free off air antenna offers
in other markets. While the broadcasters have agreed to delay issuance of the
injunction until September 11, 2006, we are likely to commence (but not
complete) shut offs of distant network channels during the third quarter of
2006. Those shut offs could have a material impact on our results for the
quarter. However, we cannot predict with any degree of certainty how many of
our distant network subscribers would cancel their primary DISH Network
programming as a result of termination of their distant network channels. Our
revenue from distant network channels is less than $5 per distant network
subscriber per month. While less than one million of our subscribers purchase
distant network channels from us, termination of distant network programming to
those subscribers would result, among other things, in a reduction in average
monthly revenue per subscriber and free cash flow, and a temporary increase in
subscriber churn. We would also be at a competitive disadvantage in the future,
since the injunction would prohibit us from offering distant network channels
that will be available to certain consumers through our competitors."
If that isn't sobering enough, try this paragraph on the Tivo litigation:
"Tivo, Inc.
During 2004, Tivo Inc. (â??Tivoâ??) filed a lawsuit against us in the United
States District Court for the Eastern District of Texas alleging that our
satellite receivers equipped with digital video recorder technology infringe
Tivoâ??s United States Patent No. 6,233,389 (the â??389 patent). During April
2006, a jury concluded most of our digital video recorders infringe the â??389
patent, that our infringement was willful, and awarded Tivo approximately $74.0
million in damages, plus interest for past infringement. Consequently, the
judge will be required to make a determination whether to increase the damage
award to as much as approximately $230.0 million and whether to award attorney
fees and interest.
As a result of our objection to Tivoâ??s demand to review certain privileged
documents, the trial court judge prohibited us from mentioning during trial the
non-infringement opinions we had obtained from outside counsel, and, allowed
Tivo to tell the jury we never obtained such an opinion. On May 2, 2006, the
Court of Appeals concluded that the District Court abused its discretion in
requiring us to provide the privileged documents to Tivo.
On July 5, 2006, the Court of Appeals denied Tivoâ??s petition for rehearing of
that decision. While we believe this is a significant development, the extent
to which this ruling will affect the jury verdict or the remainder of the case
is not yet clear.
During July 2006, the trial judge heard additional testimony regarding, among
other things: i) proposed â??supplemental damagesâ?? for continued infringement
from the date of the jury award through our appeal of the verdict (which could
substantially exceed damages awarded to date); ii) Tivoâ??s request that we be
required to disable the functionality of our digital video recorders in
consumer homes; iii) Tivoâ??s request that we be prohibited from offering
infringing digital video recorders to consumers in the future; and iv) our
defenses of laches, estoppel and inequitable conduct. On July 24, 2006, we
filed our request that the jury verdict be set aside by the judge and that a
new trial be granted. It is not possible to predict when the matters to be
determined by the judge will be resolved or the outcome of those issues. If the
judge confirms the jury verdict, an injunction prohibiting future distribution
of infringing DVRs by us is likely. In that event, we have requested that the
trial judge stay the injunction pending our appeal, and we will make the same
request to the Court of Appeals if the trial judge does not grant our request.
We intend to continue our vigorous defense of this case and believe that, for a
number of reasons, the verdict should be reversed either through post-trial
motions or on appeal. However, there can be no assurance that a stay will be
issued or that we will ultimately be successful in overturning the verdict.
While we are working on modifications to our DVRs intended to avoid future
infringement, there can be no assurance we will be successful. Absent such
modifications, we may need to materially modify or eliminate certain
user-friendly features that we currently offer to consumers and we could be
forced to discontinue offering DVRs to our customers. In that event we would be
at a disadvantage to our competitors and, while we would attempt to provide
that functionality through other manufacturers, the adverse affect on our
business could be material.
In accordance with Statement of Financial Accounting Standards No. 5:
â??Accounting for Contingenciesâ?? (â??SFAS 5â??), during the six months ended
June 30, 2006, we recorded a total reserve of $88.2 million in â??Tivo
litigation expenseâ?? on our Condensed Consolidated Statements of Operations to
reflect the jury verdict and estimated supplemental damages that may be awarded
by the judge through June 30, 2006. The reserve does not include any amount for
attorney fees and interest which might be awarded, for increased damages based
on the finding of willfulness, or for supplemental damages subsequent to June
30, 2006 and consequently may increase substantially in future periods.
On April 29, 2005, we filed a lawsuit in the United States District Court for
the Eastern District of Texas against Tivo and Humax USA, Inc. alleging
infringement of U.S. Patent Nos. 5,774,186 (the â??186 patent), 6,529,685 (the
â??685 patent), 6,208,804 (the â??804 patent) and 6,173,112 (the â??112
patent). These patents relate to digital video recorder (â??DVRâ??) technology.
Tivo filed requests for reexamination of the patents during May 2006. During
July 2006 the case was stayed pending the reexamination process, which could
take many years."
-------
Note: just because the original network signals case didn't ask for damages
doesn't prevent them from later claiming damages under the DMCA.
One of these days, I'll retrieve what Echostar said about these litigation
items (just a few of those pending against them) shortly after they were filed.
I doubt that EchoStar will be able to buy Tivo, since the award in that case is
likely to be trebled (I thought it already had been) and they are unlkely to
afford the asking price, i they get that far.
John Willkie
----------------------------------------------------------------------
You can UNSUBSCRIBE from the OpenDTV list in two ways:
- Using the UNSUBSCRIBE command in your user configuration settings at
FreeLists.org
- By sending a message to: opendtv-request@xxxxxxxxxxxxx with the word
unsubscribe in the subject line.
Other related posts:
- » [opendtv] What Earthlink is telling shareholders about litigation (in part)