Blockbuster Makes Gains in Patent Case

A federal judge ruled Tuesday that Blockbuster Inc. could pursue allegations that Netflix Inc. fraudulently obtained patents for online video rentals and was trying to monopolize Web-based movie rentals.

Netflix’s bid to have the antitrust allegations dismissed or at least split from the company’s patent-infringement claims against Blockbuster was rejected by U.S. District Judge William Alsup in San Francisco.

The ruling came in a lawsuit in which Netflix, the largest mail-order movie rental service, accused Blockbuster, the largest retail video rental chain, of copying its method of letting customers order videos over the Internet.

The ruling means Netflix may have to go to trial to defend against Blockbuster’s claims that Netflix, when obtaining its patents, failed to disclose to Patent and Trademark Office officials that another company had invented similar technologies. Alsup didn’t rule on the merits of the case; Blockbuster would still have to prove its claims at trial.

“We’re going to continue to move forward and defend our patented business methods,” said Steve Swasey, a Netflix spokesman.

Netflix and Blockbuster are battling for market share in the dwindling video rental industry, hurt by competition from video-on-demand services and discounters such as Wal-Mart Stores Inc. The companies also face threats from companies such as Amazon.com Inc., which may soon introduce a service to allow customers to download movies over the Internet.

Blockbuster plans to close about 250 stores in the U.S. this year and had shuttered numerous locations in the previous two years.

Alsup also refused to dismiss Dallas-based Blockbuster’s claims that Netflix was violating antitrust laws and had filed suit against Blockbuster to protect its monopoly. Blockbuster said Los Gatos, Calif.-based Netflix controlled 65% of the online movie rental market.

The judge also refused to throw out Blockbuster’s allegations that Netflix shouldn’t be allowed to enforce its patents because it withheld key information from the patent office during the application process and then tried to use the patents in “sham litigation” to drive its competitor out of the market.

“We are pleased with today’s ruling and we remain intent on aggressively pursuing our antitrust counterclaims,” Blockbuster spokesman Randy Hargrove said.

Netflix shares fell 78 cents to $18.74. Blockbuster shares rose 17 cents to $3.95.