Dish, Echostar Settle Long-Running Patent Dispute With $500 Million To TiVo

Following yet one more judicial strike against their case, sister companies Dish Network (NSDQ: DISH) and Echostar (NSDQ: SATS) finally have admitted the need to get licenses for use of DVR technology patented by Tivo. The satellite distributor and technology companies will pay TiVo (NSDQ: TIVO) $500 million over the next six years and all three will drop legal claims. The settlement, filed with the SEC and announced early this morning, marks the end of a legal dispute that either company could ill afford to lose.

The decision by Dish and EchoStar to settle comes after an appellate court affirmed an earlier ruling that Dish and EchoStar were in contempt of a permanent injunction against using technology patented by TiVo in the DVRs they produced or distributed.

Struggling TiVo won repeated victories in court but had to borrow $150 million in March to cover legal costs for this and other patent litigation. Dish Network faced crippling penalties, including a court-ordered shutdown of all of its DVRs and a cost that could be as high as $1 billion. As Bernstein Research analyst Craig Moffett pointed out the day of the last ruling:

“Faced with an imminent shut-down of millions of DVRs (the precise number has never been disclosed), we believe Dish will be faced with a gun-to-the-head settlement requirement.”

The need to settle was compounded by Dish CEO Charlie Ergen’s plans for expansion beyond satellite distribution. Only last month, Dish acquired bankrupt Blockbuster at auction for $315 million, announcing plans to keep the retail video chain open while expanding its digital programming, The TiVo settlement includes a mention of Blockbuster (NYSE: BBI) as an example of how TiVo and Dish can collaborate, in this case with TiVo playing “a role” in promoting and developing the Blockbuster digital video service.

The first $300 million payment is due today; the remaining $200 million is to be paid out $33.3 million at a time in six equal payments starting next year and ending in 2017. SEC filing; joint press release.

In the end, it is not a lot of money. As Moffett says, the amount was “for far less” than expected. From his client note, which also picked up on Dish’s positive earnings report this morning:

“It finally eliminates, after nearly five years, a significant overhang that in a worst case scenario could have meant disablement of potentially millions of DVRs, triggering a consequent exodus of DVR subscribers.

The modest price tag on the settlement suggests that the number of boxes covered by the original disablement injunction was likely at the low end of estimates. In the absence of a settlement, the en banc court order to revisit the infringement of subsequent software workarounds would have meant yet another long and uncertain process of litigation.

More to come.