TiVo: Waiting for Echostar Saga to Settle

by: Nuke John

What’s happening with TiVo (NASDAQ:TIVO) in the ongoing court saga against Echostar (NASDAQ:DISH)? Why did the stock go up twenty cents and trade 70% of its daily volume in the last hour of trading yesterday?

Before I attempt to answer these questions, let’s review what’s happened since TiVo won a major victory over Dish/Echostar on June 2nd, which included Hon. Judge Folsom finding Echostar guilty of contempt.

When TiVo won their recent case in the Eastern District of Texas, the stock jumped from $6.98 close on June 2nd to a close of $10.70 on June 3rd.

From there it proceeded to rise to a high of $11.62 on June 11th, but as the markets began to fall back in late June, and facing the possibility of an appeal being granted, TiVo’s stock price dropped back and fluctuated between 10 and 11 during late June.

On July 1st in afterhours, the Court of Appeals of the Federal Circuit (CAFC) granted the stay of the injunction requested by Echostar/Dish while they appeal the EDTX ruling. This was a major win for Echostar/Dish because it meant they didn’t have to immediately comply with the injunction and shut down the DVRs that violated TiVo’s IP.

When the CAFC granted the stay on July 1st, TiVo’s stock dropped to $9.09 and continued dropping to a low of $8.50 on July 8th. Many TiVo retail longs were thoroughly disgusted, as the acceptance of this appeal gave Dish/Echostar another temporary reprieve. The CAFC set a briefing schedule that stretched into September and they tentatively scheduled the oral arguments in November.

This is an expedited schedule for the CAFC, as typically these appeals last 14-18 months, and sometimes even longer.

But, while this stay was granted, the Eastern District of Texas Court was still plowing ahead. Hon. Judge David Folsom had ordered that the post verdict damages and sanctions for Echostar would be briefed and a hearing would be held on July 28th.

Many TiVo investors thought that this sanctions hearing was stayed along with the rest of the case while the appeal proceeded at the CAFC. It was my belief that this sanctions briefing cycle and hearing would go on as scheduled in Texas on July 28th.

Why does it really matter? It matters because the potential damages of this phase are another billion dollars on top of over 200 million that TiVo has been awarded. This really increases the stakes for Dish/Echostar, because if they don’t feel sure they can win the appeal, they could risk losing a fortune during the appeal process.

TiVo had already received $73 million plus interest from the verdict in 2006, and Judge Folsom awarded another $103 million for damages between September 8,2006 and April 18, 2008. This ruling can be found in docket # 931 on Mainer’s Law Library site.

But no one was sure how much the additional post verdict damages might be for the continued infringement and for the contempt citation. My estimate was that TiVo might be asking somewhere between 700 Million and 1.5 Billion for the post April 2008 damages and for contempt sanctions.

Craig Moffett, a Sanford Bernstein analyst who has followed this case was quoted in this article as saying,

If Dish loses a current round of contempt litigation related to their alleged ‘work around,’ then the costs to Dish 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.

Moffet was quoted in another article saying the court's ruling against Dish “was indistinguishable from a worst-case scenario.”

He noted that additional punitive damages could put the amount Dish is ordered to pay TiVo even higher, and “could potentially even include the disgorgement of profits earned during the period of April 2008 to the present.”

The opening TiVo brief on the sanctions damages was sealed, so we don’t know the specifics of the damages TiVo has requested in the July 28th sanctions hearing. However, we do now know that indeed they have asked for damages of approximately 1 billion dollars in contempt sanctions alone.

This huge amount of potential damages changes the settlement dynamics. While Dish was certainly willing to pay 100 million here, or 100 million there in order to keep the case going and keep the appeals process in motion, now we are talking about an amount of over 1 billion dollars.

Furthermore, the damages may continue to accumulate at a huge rate during the appeals process, and should Dish lose, the total could be staggering.

How do we know this? Echostar themselves let this tidbit of information out in a recent brief (entry # 963) on Mainer’s Law Library .

When you add post verdict damages for continued infringement (which will likely be deemed “willful infringement”) the total damages at stake in the July 28th hearing could be over 1.3 billion dollars.

Judge Folsom seems intent on keeping this sanctions hearing on track, and the approach he used almost assures us that the CAFC won’t try to stop him (if asked). Judge Folsom issued his ruling today on PACER (Public Access to Court Electronic Records) and investors discovered this shortly before 3:00 PM Eastern time yesterday. The ruling reveals that he plans to proceed as scheduled and finish his sanctions hearing, but that he will stay the result pending review by the CAFC.

This allows the CAFC to have a full and complete record, and in my opinion, virtually eliminates any possibility that the CAFC will stay this sanctions hearing (if asked to do so by Dish). The CAFC would like to have everything in front of them (for judicial economy) when they decide the case.

It’s worth reviewing what Standard and Poor’s ratings services said about Dish’s credit rating on June 10th (bold highlights are mine):

Standard & Poor's Ratings Services said there's no immediate effect on its rating of Dish Network following the satellite-TV company's most recent loss in court to TiVo over DVR technology patents (CD June 4 p6). With nearly $1.2 billion in cash and marketable securities and very moderate leverage for the current 'BB-' rating, Dish could easily fund the $103 million of new judgments and penalties without a ratings impact, it said. However, the longer term effect on the company's credit profile would depend on the strategic path Dish takes to resolve the DVR issues, S&P said. If Dish were to enter into a licensing arrangement with TiVo, which S&P said was the most likely scenario, there would be no effect on Dish's BB- corporate credit rating, it said.

Although Dish has resisted all settlement opportunities up until this time, it appears that things could get much worse for Dish if they don’t settle before the July 28th sanctions hearing.

From the way Judge Folsom worded his order, it appears that he intends to issue his sanction ruling very soon after the hearing on July 28th so the CAFC will have everything they need to handle the case.

TiVo is now profitable on a cash flow basis and they have $200 million in the bank. A settlement with Dish should be worth somewhere between $500 and $800 million in damages (my estimate), plus it should provide a nice steady on-going royalty stream.

Once Dish settles, the TiVo patents will be valid and infringed and TiVo can pursue royalties from other cable companies that infringe. It remains to be seen what the final settlement rates might be, but 2.00/mo per DVR seems to be a very conservative estimate.

In case you are wondering how many DVRs there are installed in the world and the US, this web site seems to have the best data I have come across. Although DirecTV and Comcast already have “preferred rate” deals with TiVo, those contracts will expire some day.

But the other cable companies, such as Adelphia (ADELQ), Cablevision (NYSE:CVC), Charter Communications (OTC:CHTRQ), Mediacom (NASDAQ:MCCC), Cox (CXR), and Time Warner (TWC) will all soon be faced with licensing TiVo for their DVRs.

Disclosure: Long TIVO