Tickers in this Article: TIVO, DISH, DTV, CMCSA, VZ, T
Do not count your chickens (or lawsuit settlements) before they are hatched. That would seem to be the lesson to TiVo (Nasdaq:TIVO) shareholders from a surprising court decision on Friday, May 11. Due to a federal appellate court's decision to re-review the company's case against Dish Network (Nasdaq:DISH), the stock lost almost half of its value in a single day.

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What a Long Strange Trip It Has Been
TiVo is largely credited for the development of digital video recorders (DVR), one of the more popular add-ons for most dedicated TV-watchers. While TiVo sells its services directly, they also partner with companies like DIRECTV (NYSE:DTV) and Comcast (Nasdaq:CMSCA) to sell these services.

Realizing their popularity and their importance in attracting and keeping customers, satellite TV provider Dish Network opted to offer DVRs to their customers. In doing so they may have violated TiVo's intellectual property rights. TiVo filed suit back in 2004, and secured a favorable jury verdict back in April of 2006, but Dish Network has continued to file appeals. As recently as March of 2010, though, Dish Network lost its case in front of the federal Court of Appeals.

And The Trip Just got a Bit Longer
The latest development, on Friday May 11, was the decision by the U.S. Court of Appeals to grant Dish Network's petition for an en banc review of the case. What this means is that a full panel of judges (likely 10-16 judges) will review this case instead of the three judges that handed down the decision in March. This is relatively rare, as less than 10% of cases receive this full review, and it is usually seen as a sign that there are significant legal issues involved.

Although the decision to have the full court hear the case will likely tack on another year to these proceedings, it would be surprising to see the results ultimately overturned. It appears that the appeals court is most interested in certain procedural details, including examining whether the district court was correct in handling this matter as a contempt case.

Should the appeals court remand this back down to district court, it is likely fair to assume that the court will make the same findings as before, but will simply use different reasoning. Ultimately, then, it seems that Dish Network will be forced to either pay up or attempt to get the Supreme Court to review this matter. Unfortunately for them, the Supreme Court hears only a small percentage of cases put to it and rarely hears patent cases. (For more, see Patents Are Assets, So Learn How To Value Them.)

A Lot on The Line For TiVo
When it is all said and done, it appears as though TiVo will get upwards of $400 million in damages from Dish Network, an amount equaling about one-third of today's market capitalization. Beyond that, Dish Network will be faced with a choice of either shutting down the majority of its customers' DVRs or reaching a licensing agreement with TiVo. Given that TiVo has been charging somewhere in the range of $2.25 to $3.00 per box per month, that could mean an incremental $175 million to $200 million in high-margin license revenue to TiVo.

Above and beyond this, TiVo has cases underway against both Verizon (NYSE:VZ) and AT&T (NYSE:T). The specifics of each case are not readily available, but it is likely that these two companies will be following the appeals process carefully and may look to reach a mutually satisfactory settlement with TiVo should they ultimately prevail against Dish Network.

Even though we have a very nervous and risk-averse market right now, Friday's reaction seems nutty. If a bad-case scenario calls for a two-year wait (for the appeals court to rule and then for further proceedings at the district level), that $900 million sell-off on Friday seems ridiculous. What the Street is essentially saying is that the cost of waiting up to two years for over $400 million is at least $900 million. Does that make sense to anybody?

The Bottom Line
I will not pretend that I have a long-standing interest in TiVo shares. The company has never made any money on a consistent operating basis, and it competes in a fierce and difficult marketplace. However, I cannot see why Friday's news should have wiped out all of the gains the company saw from its legal victory back in March. Accordingly, patiently opportunistic investors may find that it is worth tuning into this name as the legal dramas play out.

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