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UPDATE: Netflix Wins Patent for Online Rental Engine

24 Jun, 2003 By: Holly J. Wagner

Online subscription rental service Netflix has won a U.S. patent on its subscription rental model that, if it survives likely legal challenges, could become a barrier to others in the online rental market.The U.S. Patent & Trademark Office issued Netflix U.S. Patent No. 6,584,450 covering the company's subscription rental service and several “extensions” to the patent that cover various aspects of how Netflix does business.

“Its breadth is defined in its simplicity. The claims appear to be carefully drawn to define only a minimal set of requirements for an online rental business. It's even broader to define a computer-implemented rental process,” said Erik Cherdak, a patent attorney with the firm Steptoe & Johnson. He added that if the patent survives any potential challenges, “what they have here is creating a barrier to entry. It could be used to, loosely described, own a marketplace.”

The patent could increase Netflix's leg up in the online rental market. Competitors, notably Wal-Mart and Blockbuster Video, have imitated the model to launch their own online rental businesses in recent months.

“The patent was just issued. It's going to take some time to review it,” said Walmart.com spokeswoman Cynthia Lin. “We are not in a position to comment yet.”

Blockbuster is taking the same tack, spokesman Randy Hargrove said, adding “We don't believe there is a patent out there that will keep us from serving our customers in a way that we think is best for them.”

The Netflix patent, titled “method and apparatus for renting items,” is both broad and quite specific. It's broad because it applies to “a method for renting items to customers” and “computer-implemented steps” — either of which could extend to online rental of nonentertainment items. The more narrowly tailored claims cover Netflix's online prioritizing and request-queuing systems, the automated systems that limit the number of items a renter can have out at any given time — the “max out” claim — and the ceiling on the number of transactions a customer can make in a period of time — the “max turns” claim in the document.

“Assuming that this patent is valid and enforceable and the elements as claimed, the claimed invention, represents a minimal set of critical components of an online rental business, it could be used to maintain or gain market share,” Cherdak said. “This patent could ultimately become a valuable tool in the online video rental business as well in other online rental segments where the commercial transaction is a rental transaction.”

As a general matter, patent challenges follow two avenues. First, competitors are likely to compare their businesses to the unique elements laid out in the patent, in this case unique elements of an online rental business. Second, any competitor disputing a patent holder's claim of infringement in court would most likely try to show that the patent was improperly issued because the supporting documentation demonstrating uniqueness either intentionally or accidentally overlooked a process that was already active in the market.

Netflix, like its competitors, is keeping mum on the next steps.

“We can't say what the next steps are, because we have not had a chance to look at our patent compared to the competitive landscape,” said Netflix communications director Lynn Brinton.

“Our team has focused their efforts on innovation to better serve our customers and on enhancing our intellectual property. We're gratified that the Patent Office has recognized what a leap forward the Netflix subscription service is,” said David Hyman, Netflix general counsel. “However, we know that great companies are built by providing an outstanding consumer experience, and that is our primary focus.”

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