Lawsuit Threatens Napster, Annoys Giants

Another day, another patent-infringement lawsuit. Intertainer, a long-deceased video-on-demand (VOD) pioneer, is accusing Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), and Napster (Nasdaq: NAPS) of violating the business-model patent Intertainer was granted in 2005. Might as well go for the big payday, right?

The patent in question covers "an open business platform that provides an end-to-end solution for managing, distributing, and/or retailing digital media assets from various content suppliers." The definition is so broad that Intertainer's legal team thinks it applies to Google Video and Apple's iTunes Store alike, not to mention Napster's music-downloading applications -- though it's unclear whether we're talking about the old Napster of questionable legal status, or the new, legal subscription service.

Intertainer is using every trick in the book, too. Rather than using a court near any of the defendants' headquarters, or even Intertainer's own Santa Barbara, Calif., backyard, the company filed suit in the Eastern District of Texas. The sleepy town of Madison, Texas, the Pottery Capital of the World and home of the annual Terminix (NYSE: SVM) Fire Ant Festival, has become a major center for patent lawsuits for a couple of reasons.

First, local rules ensure that these cases will rocket through the system and get handled in short order. Quick resolution is often in the best interest of patent plaintiffs, whether they're looking for plain cash or an injunction (Intertainer wants both). Second, The New York Times says that plaintiffs win 78% of the cases that go to trial in Madison, versus a national average of 59%. That's obviously a positive for the plaintiff, and makes defendants more likely to settle out of court.

That's what happened to Intertainer's last major lawsuit, where it took Time Warner (NYSE: TWX), Sony (NYSE: SNE), and Vivendi (NYSE: VIV) to task for anticompetitive practices. The VOD specialist claimed that the studios were pricing Intertainer out of business in order to boost competing movie download service Movielink, a competitor jointly owned by the studios. Intertainer shut down operations at the same time as it launched that lawsuit back in 2002.

Intertainer may have had a compelling platform way back when, but all that remains today is a shell operation that's armed with a patent and not afraid to use it. Patent trolling is a highly suspect business model, especially when based on a patent that by all rights should have been denied in the first place.

But rules are rules, and now the three defendants have to deal with them. For Google and Apple, this will be an annoyance at worst -- each company has more than $10 billion in cash at hand to pay off even the worst-case settlement or judgment scenario. Napster isn't so lucky. It's losing an average of about $10 million per quarter, and has only $60 million in net current assets today. Any substantial payment to Intertainer could sink Napster for good, as could an injunction that stops the firm's only product in its tracks. That's why this money grab is pretty much a non-event for two of the defendants, but potential Armageddon for the third.

Patently Foolish follow-ups:

• They Should Have Failed
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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is a better read than any legal filing.