Why is Netflix suing Blockbuster?

How many times have you walked into a video rental store, looked at the wall of current releases, and completely forgotten what you wanted to see? Or do you have the large plastic box somewhere in your house filled with all the late movies you never returned, racking up late fees?

Netflix built a business around the idea that you could rent movies without either of these hassles. The company found their business plan so new, so inventive that they patented it. But now, these patents have become the source of a lawsuit between Netflix and one-time rival, Blockbuster.

The Netflix Business Model

Netflix operates like this: customers set up individual online accounts, choose their favorite movies, a payment plan, and delivery options. Instead of heading to the video rental store, DVDs are sent through the mail in a postage-paid return envelope. Millions have signed up.

The Back Story

There has been bad blood between Blockbuster and Netflix almost since the first crimson Netflix envelope went out in the mail. Once Netflix started offering its service without late fees, Blockbuster began to lose money. Late fees alone generated millions of dollars in revenue for the video rental corporation. In order to compete, Blockbuster started offering its own monthly plan with unlimited rentals and no late fees. Next, it began offering DVD rentals online, with free shipping each way, just like Netflix.

The Netflix Patent Claim

Netflix filed a patent infringement lawsuit against the video store chain, challenging its Internet expansion. The online service claims that Blockbuster is violating two of its patents. The first patent patent, issued in 1999, covers how customers can pick, receive and return a number of videos. The second patent, issued this year, allows online subscribers to keep DVDs indefinitely without incurring late fees. Netflix says that since it had the forethought to patent its ideas, Blockbuster has no right to use them.

The Blockbuster Argument

Blockbuster says Netflix is trying to force it into the red. In other words, Blockbuster maintains that the lawsuit is an attempt to stifle competition. The company says Netflix is now seeing its profits dwindle as Blockbuster Online becomes competitive.

Patenting a Business Method

The lawsuit begs the question: Can a company patent a business method? The courts have proven that if the method is unique enough, a company can obtain a patent, particularly in high-tech areas. In 1999, Coolsavings.com and SuperMarktetsOnline.com got into a dispute similar to the Netflix-Blockbuster controversy. Both are services that offer grocery coupons online. At each site, costumers can go online, choose coupons, print and use them at local retailers. Coolsavings.com thought the idea was so great, it got a patent. When SuperMarketsOnline.com set up shop, Coolsavings sued. The federal district court upheld Coolsavings' right to patent its business method.

The Dilemma

There are those who would argue that allowing companies to patent business methods is unfair. How do you decide which ideas are so unique that they deserve a patent? If one company is allowed to do it, then any company could, resulting in numerous patent infringement lawsuits and fines. On the other hand, allowing patents on business methods rewards innovation. It could encourage new, possibly more efficient types of businesses.

It is a difficult dilemma for the court deciding the Netflix v. Blockbuster case. However, its ramifications will be felt far beyond the courtroom. Some of the newest and greatest ideas just might end up in court.