SFA Litigation
July 5, 1999
A battle for TV's eyes and dollars
Evelina Shmukler Staff Writer
Scientific-Atlanta Inc. is fighting for control of the eyes and dollars of future television watchers.
The Norcross-based manufacturer of cable set-top converters (NYSE: SFA) is one of the litigants in a complex court battle here over who controls the software behind electronic program guides, who has the right to license the software, and who can sell advertising on program guides.
Interactive guides may be the pivotal sites for cable and broadband programming of the future -- the place where huge amounts of television programming information is organized and distributed.
It also is the site TV viewers may see most often, making it prime real estate for advertisers.
Also involved in the litigation are cable equipment-makers General Instrument Inc. and Pioneer Electronics Corp.; and a California company, Gemstar International Group Ltd., which claims to control more than 60 patents related to audiovisual technologies.
"These program guides are vital. They are the road map to the mega-channel environment," said Gary Arlen, head of Arlen Communications, a Bethesda, Md., research company specializing in interactive media services.
In June, three cases related to this court battle were transferred to the U.S. District Court for the Northern District of Georgia in Atlanta, consolidating five separate lawsuits in the courtroom of Judge Willis B. Hunt.
An attorney representing Gemstar said this move is expected to speed up the proceedings considerably.
Most of the suits were filed seven months ago, when Gemstar sued Scientific-Atlanta, General Instrument and Pioneer for patent infringement. The two other suits were filed by Scientific-Atlanta, which sued Gemstar for antitrust violations in December of last year and for patent infringement in April of this year.
Scientific-Atlanta and Gemstar, through its local counsel, both declined to comment on the pending litigation.
Little impact
The lawsuits haven't had much of an impact on the perception of Scientific-Atlanta on Wall Street.
"This has been an ongoing minor issue," said Greg Mesniaeff, an analyst with The Robinson-Humphrey Co. "It's not a very significant issue for the overall tone of business at the company."
But the courtroom battles are a result of far-reaching trends in the cable industry. As cable companies are slowly moving toward interactive and Internet-oriented technologies, electronic program guides promise to become more important.
They will allow viewers to look up, sort and select shows for watching and recording, using a remote control. Viewers already can choose from hundreds of channels and thousands of TV shows; as choices grow, these guides will become indispensable, Arlen said.
Also, as the technology becomes smarter, customized advertising will become more common, and the program guides -- now used to pitch pay-per-view movies and other broadcast events -- will become important to advertisers, Arlen said.
Patent controversy
Gemstar is one of the leading developers and licensers of the software that makes electronic program guides possible. The company is best known for its creation of the VCR Plus+ technology, a programming system that lets TV viewers record television shows by entering a number associated with the show.
Gemstar, based in Pasadena, Calif., has become a dominant player in the arena of interactive program guides by developing and acquiring numerous patents, including ones gained through the purchase of Video Guide Inc. and StarSight Telecast Inc. in late 1996 and early 1997.
The roots of the lawsuits stretch back seven years, according to court documents.
Scientific-Atlanta has had a licensing agreement with StarSight since October 1992, before StarSight was acquired by Gemstar. In 1995, StarSight and Scientific-Atlanta began an arbitration hearing, after StarSight said that Scientific-Atlanta improperly used its proprietary technology in developing competing software. Scientific-Atlanta sued StarSight for patent infringement a year later, but to settle both the suit and the arbitration -- which was decided in StarSight's favor -- the two companies entered into a licensing agreement through which Scientific-Atlanta could use StarSight patents for three years.
That contract is set to expire on July 22.
In December 1997, Scientific-Atlanta and Gemstar began negotiating a new licensing agreement to replace the agreement between Scientific-Atlanta and StarSight, now a wholly-owned subsidiary of Gemstar.
According to court documents, Steve Havey, Scientific-Atlanta's vice president and general manager of advanced subscriber networks, met Gemstar's president, Henry Yuen, at a tradeshow to discuss the contract.
Harvey said that Yuen outlined to him Gemstar's philosophy of "acquiring and licensing an extensive patent portfolio" and said that "although Scientific-Atlanta's Program Guide technology might not be covered by all the patents Gemstar owned, it would be impossible in manufacturing and selling program guides to 'get around' all of the patents owned by Gemstar."
Later, Havey said in his statement, Gemstar told Scientific-Atlanta the details of the license agreement it wished to reach, which included a $12 per-unit fee for past shipments using Gemstar-owned technology. This would have amounted to a $48 million payment for past units.
Demand for $20 million
A year later, on Dec. 2, Havey, another executive from Scientific-Atlanta and executives from Gemstar met, and Gemstar asked for an upfront nonrefundable payment of $20 million to Gemstar as a royalty for set-top boxes previously sold, according to court documents. A few days earlier, on Nov. 30 and Dec. 1, 1998, Gemstar had filed suit against General Instruments and Pioneer Electronics in California federal courts over patent issues.
Gemstar's vice president of intellectual property, Jonathan Orlick, said that Gemstar CEO Yuen was "at his wit's end" and wanted Scientific-Atlanta to commit to the $20 million to prove it was serious about paying past royalties, according to Havey's statement. "Henry is serious," Orlick said. "He's a serious person." Havey agreed to a meeting with Yuen on Dec. 4 to continue negotiations.
But before they met, on Dec. 3, Scientific-Atlanta filed an antitrust suit in U.S. District Court in Atlanta against Gemstar, alleging that Gemstar was attempting to create a monopoly through the acquisition of patents, and has attempted to extend its monopoly to the market for advertising in the program guides.
Scientific-Atlanta claimed that Gemstar offered Scientific-Atlanta a lower licensing rate if Scientific-Atlanta used Gemstar-supplied advertising information in its program guides and agreed to pay Gemstar 70 percent of any advertising revenue. If Scientific-Atlanta refused these conditions, it could pay a higher "noncompetitive" rate on equipment without advertising capability or Gemstar-supplied advertising.
On Dec. 4, Gemstar filed a patent infringement lawsuit against Scientific-Atlanta in federal court in California.
Proceedings' pace
Since then, proceedings in these four cases have been mostly stalled, as Gemstar attempted to convince the courts that the suits should be consolidated in one California court. On April 26, a multidistrict litigation panel decided that these four cases, and a patent infringement suit filed by Scientific-Atlanta against Gemstar on April 23, would be consolidated, but in the district court in Atlanta, for two reasons. First, the panel said, the actions in the Atlanta court were the broadest in scope; and second, the Atlanta court was less burdened with multidistrict dockets than the California districts.
In May, the litigation began again in full force, as Gemstar filed a motion to dismiss the antitrust claims filed by Scientific-Atlanta. |
