Re: TiVo Inc. v. EchoStar, et al.. Case No. 2-Q4CV-01 Dear Judge Folsom: Pursuant to the Court's April 23, 2008 Order (Docket No. 822), plaintiff TiVo submits two topics of discussion for the status conference on May 30, 2008: (1) Enforcement of the Court's Permanent Injunction, and (2) Determination of the damages TiVo sustained during the stay of the injunction. The issues relating to each topic are set forth in Section B of this letter. To provide prompt resolution of these issues, TiVo requests: • A hearing at the earliest possible date to determine whether EchoStar should be held in contempt for its failure to disable the DVR functionality in the Infringing Products and for its placement of new infringing DVRs (and new EchoStar products that are only colorably different); and • Permission to serve limited discovery to obtain additional information before determining the damages TiVo sustained during the stay of the injunction, and, if necessary, bringing a motion for an order to show cause why EchoStar is not in contempt for the continuing use of the Infringing Products, changed only by downloading modified, but still infringing, software (and new EchoStar products that are only colorably different). TiVo is also prepared to address any questions that the Court may have about the pending Bill of Costs that TiVo submitted on September 22, 2006, which is awaiting resolution. TiVo's requested costs total $333,600.03. A. BACKGROUND On September 8, 2006, this Court entered a Final Judgment and Permanent Injunction against all defendants (collectively “EchoStar”) for willful infringement of U.S. Patent No. 6,233,389 (the “Barton Patent”). The amount of the judgment was $93,969,159.00, which included the jury verdict of $73,991,964.00, supplemental damages of $13,819,160.00, and prejudgment interest of $6,158,035.00. (Amended Final Judgment and Permanent Injunction, Docket No. 806 (attached as Exhibit A), and Order Re Supplemental Damages and Prejudgment Interest for the Period of August 1, 2006 to September 8, 2006, Docket No. 819). The Permanent Injunction required EchoStar to do, among other things, the following: (a) cease “making, using, offering to sell, selling, or importing into the United States,” the infringing models of EchoStar DVR receivers (DP-501, DP-508, DP-510, DP-522, DP-625, DP-721, DP-921 and DP-942, the “Infringing Products”) “and all other products that are only colorably different therefrom in the context of the Infringed Claims”; and (b) “disable the DVR functionality (i.e., disable all storage to and playback from a hard disk drive of television data) in all but 192,708 units of the Infringing Products that have been placed with an end user or subscriber. The DVR functionality . . . shall not be enabled in any new placements of the Infringing Products.” (Amended Final Judgment and Permanent Injunction, Ex. A, at 2). The injunction’s exception for 192,708 units represents the then-existing units on which the jury had awarded TiVo lost profits damages. (Verdict Form, Docket No. 690). TiVo did not seek an injunction on these specific units. Lost profits have not been awarded for any units placed after the jury verdict, so the injunction’s “lost profits” exception could not logically apply to any units placed after the jury verdict. This Court denied EchoStar's request for a stay of injunction but, on October 3, 2006, the Federal Circuit granted a stay pending appeal. In persuading the Federal Circuit to enter a stay, EchoStar argued that if it were unable to offer DVRs, it faced “a high risk of losing a significant portion of its existing and potential subscribers” and “if the injunction were to cause just half of EchoStar's current customers with DVRs to leave EchoStar for another provider, EchoStar's revenues would fall by nearly $90 million per month.” (EchoStar's Emergency Motion to Stay The District Court's Injunction, at 18 (citing Martin Decl. ¶ 8) (emphasis in original)). On November 28, 2007, in connection with the reexamination proceedings initiated by EchoStar, the United States Patent and Trademark Office confirmed the validity of all of the claims of the Barton Patent. On January 31, 2008, the Federal Circuit affirmed the jury's finding that EchoStar infringed claims 31 and 61 (the “software claims”) of the Barton Patent. TiVo Inc. v. EchoStar Commc’ns Corp., 516 F.3d 1290, 1310 (Fed. Cir. 2008). The Federal Circuit reversed the jury's finding of literal infringement of claims 1 and 32 (the “hardware claims”), and declined to rule on whether there was nevertheless sufficient evidence of infringement under the doctrine of equivalents, “leav[ing] that issue for the district court to resolve in the event that, on remand, TiVo decides to continue to pursue the hardware claims in light of this decision.” Id. at 1305. The Federal Circuit stated that the stay pending appeal would dissolve when the appeal became final, and “[a]t that time, the district court can make a determination as to the additional damages, if any, that TiVo has sustained while the stay of the permanent injunction has been in effect.” Id. at 1312. EchoStar requested rehearing of this decision by both the panel and the Circuit en banc but this motion was denied on April 11, 2008. The mandate of the Federal Circuit issued April 18, 2008. On this date, pursuant to the January 31, 2008 Order, the stay dissolved and the Permanent Injunction took effect.1 B. TOPICS OF DISCUSSION 1. Enforcement of the Permanent Injunction Although the injunction required EchoStar to “disable the DVR functionality,” with respect to the Infringing Products, EchoStar has refused to do so. Despite the plain language of the injunction, EchoStar argues that it need not disable the DVR functionality because it has modified its software so that it supposedly no longer infringes TiVo’s patent. On May 12, 2008, EchoStar made its modified source code available for review by TiVo. EchoStar also waived privilege and produced to TiVo three opinions of counsel relating to EchoStar’s modified software. After review of the software that EchoStar provided and the opinion letters, TiVo does not believe that the modifications avoid infringement. In fact, TiVo believes that EchoStar is violating the Court’s injunction in at least three different ways. 1 As security for payment of the judgment, the parties agreed to the deposit of monies in an escrow account. The amount in escrow totals $104,241,309 through April 30, 2008. EchoStar has announced that it intends to file a petition for writ of certiorari to the U.S. Supreme Court, thereby delaying payment of the escrowed funds to TiVo. First, TiVo believes that EchoStar is in violation of the injunction by failing to “disable the DVR functionality,” and by selling new DVRs, regardless of any changes to the software. In fact, what EchoStar is doing now is what it proposed to the Court in 2006, and which the Court rejected. Specifically, EchoStar’s 2006 proposal was that the Court enjoin only “the provision of infringing DVR software upon activation.” (EchoStar’s (1) Opposition to TiVo’s Motion for Entry of Judgment and (2) Cross-Motion to Stay any Injunction Pending Appeal, Docket No. 737, at 16). In opposing EchoStar's language, TiVo warned that EchoStar’s formulation would be a recipe for abuse: This clever formulation is an invitation for EchoStar to engage in mischief. Such an injunction would only result in EchoStar providing what it deemed as “non-infringing” DVR software to its already-found-to-be-infringing DVRs, creating the opportunity for interminable disputes to determine what exactly is “infringing DVR software.” (TiVo's (1) Reply Re Motion for Entry of Judgment and Permanent Injunction and (2) Opposition to EchoStar's Cross-Motion to Stay Injunction, Docket No. 747, at 11). This Court rejected EchoStar’s proposal and adopted, instead, the straightforward “disable the DVR functionality” provision that appears in the Permanent Injunction. If EchoStar believed that the “disable the DVR functionality” provision of the injunction was inappropriate, EchoStar could have challenged it, but — despite multiple opportunities before both this Court and the Federal Circuit — it chose not to do so. EchoStar cannot simply ignore the Court’s unambiguous Order, even if EchoStar were to contend, which it has not previously done, that the injunction as written is inappropriate. W. Water Mgmt., Inc. v. Brown, 40 F.3d 105, 108 (5th Cir. 1994) (prohibiting defendants from arguing in a contempt proceeding that injunction was overbroad because “collateral attack on an injunction during contempt proceedings is prohibited if earlier review of the injunction was available” (citing United States v. Ryan, 402 U.S. 530, 532 n.4 (1971))). Nevertheless, EchoStar has proceeded as if its proposed injunction language had been accepted, not rejected, and has refused to disable the DVR functionality. EchoStar announced to the public that it had modified its software and instructed its distributors that this modified software obviates the effect of the Court's injunction in this case. EchoStar's notice to its distributors, and another notice clarifying the first, are attached as Exhibit B to this letter. Second, EchoStar is misusing the Court's language that requires EchoStar to “disable the DVR functionality (i.e., disable all storage to and playback from a hard disk drive of television data) in all but 192,708 units of the Infringing Products that have been placed with an end user or subscriber.” (Amended Final Judgment and Permanent Injunction, Ex. A, at 2 (emphasis added)). In particular, EchoStar is taking the position that it can place new infringing DVRs on an ongoing basis, as long as the total number of infringing DVRs does not exceed 192,708. The Court's language, however, is clear: the 192,708 number applies to existing DVRs that had already been placed with customers. The injunction prohibited EchoStar from delivering any new infringing DVRs. Third, even if EchoStar’s injunction language were adopted, EchoStar would still be violating it. All EchoStar has done to the infringing products is download a modified version of its software to its otherwise unmodified set top boxes. TiVo was given access to some of EchoStar’s modified software this week and is in the process of reviewing it. The changes described in the opinion letters produced by EchoStar do not render the products noninfringing, and TiVo has seen nothing so far in its review of source code that changes this. However, to avoid any doubt, TiVo will complete its analysis of the allegedly new software and, with the Court’s permission, will request written discovery on both the Infringing Products and those believed to be only colorably different (attached as Exhibit C) and possibly two depositions, depending on the content of EchoStar’s discovery responses and documents. EchoStar's violations of the injunction constitute contempt of court. The standard as set forth by the Fifth Circuit is that “[a] party commits contempt when he violates a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts with knowledge of the court’s order.” SEC v. First Fin. Group, 659 F.2d 660, 669 (5th Cir. 1981). Regarding the modified software, the court need only compare it to the original infringing product. Unless there is “more than a colorable difference” between the two, a contempt proceeding is appropriate. KSM Fastening Sys., Inc. v. H.A. Jones Co., 776 F.2d 1522, 1532 (Fed. Cir. 1985). Then, so long as the modified software “falls within the . . . adjudicated scope of the [patent] claims,” EchoStar is in contempt of court. KSM Fastening, 776 F.2d at 1530. Until EchoStar is held in contempt, it will continue to conduct its business as if the injunction were never issued. TiVo is prepared to make a motion now for an Order To Show Cause Regarding Contempt with respect to EchoStar’s failure to disable the DVR functionality and its placement of new infringing DVRs (grounds one and two above). With respect to EchoStar's modified software, TiVo requests permission to serve limited discovery to obtain additional technical information before bringing a motion on ground number three.2 While TiVo believes that EchoStar is in contempt on all three grounds, the2 Although EchoStar voluntarily provided some information about the modified software, it refused to provide other information that TiVo requested. For example, EchoStar provided TiVo access to the relevant source code but refused to allow TiVo to analyze the code using the same software used by EchoStar to develop the code, which is necessary for the efficient analysis of the code. EchoStar also refused to produce any documents relating to the first two grounds appear to be primarily legal issues. TiVo can present these right away. To provide timely relief from EchoStar's continuing infringement and violation of the Court's injunction, TiVo requests a hearing on EchoStar's failure to disable the DVR functionality and its placement of new infringing DVRs at the earliest available time. 2. Determination of Damages During the Stay of the Injunction The Federal Circuit remanded the case with instructions that the District Court determine the damages that TiVo incurred during the period that the injunction was stayed. TiVo, 516 F.3d at 1312. The Federal Circuit's recent decision mAmado v. Microsoft Corp., 517 F.3d 1353, 1361-62 (Fed. Cir. 2008), makes clear that damages for infringement taking place after the injunction should be at a royalty rate higher than what the jury found to be an appropriate pre-verdict reasonable royalty. Id. at!362n.2. hi assessing post-verdict damages, the trial court must consider financial and economic information related to the change in the parties' bargaining positions and economic circumstances as a result of the determination of liability, as well as the evidence and arguments presented in connection with the granting of the injunction and the stay. Id. at 1362. To that end, TiVo asked EchoStar to provide certain information related to the assessment of damages during the stay period, e.g., the number of infringing units and financial information related to EchoStar's nationwide "Better Than TiVo" advertising campaign undertaken during the stay period to attract new customers at TiVo's expense. EchoStar refused to provide informally most of the damages information that TiVo has requested. Accordingly, TiVo requests permission for limited formal discovery relating to the damages issues. Once TiVo has obtained the information from EchoStar, TiVo will promptly file a motion requesting those damages.