END IN SIGHT: A lawsuit between Southern Stores Video Inc., the franchise group that runs Blockbuster’s local stores, and the Blockbuster rental chain will go to mediation in August, putting it on track for a possible settlement. -- PHOTO COURTESY OF BLOCKBUSTER INC.

A Hollywood ending may be in store for a nearly two-year-old federal lawsuit filed in Memphis that deals with issues surrounding the growth of Blockbuster’s video rental empire.

The breach of contract lawsuit filed against Blockbuster Inc. by Southern Stores Video Inc. – the franchise ownership group for Blockbuster stores in Shelby County – is headed toward mediation, according to the court docket in the case. The suit was filed in September 2006 in U.S. District Court for the Western District of Tennessee, according to The Daily News Online, www.memphisdailynews.com.

The case will go to mediation in August. U.S. District Judge Bernice Donald has ordered both sides to provide a status report to the court by Aug. 1.

The local Blockbuster franchise group still has to set the damage amount it will claim in the case before mediation occurs. That amount will depend largely on the arguments it has made from the beginning of the court action.

Changing landscape

From one perspective, the lawsuit is about new technology supplanting an old, well-established legal agreement.

Southern Stores pays Blockbuster $2 million a year under the terms of an exclusive license agreement, according to court documents. That agreement lets the Southern Stores company operate Blockbuster movie rental stores in Shelby County as well as Middle Tennessee’s Davidson County.

The agreement became official in 1986, long before Southern Stores executives such as Fred Montesi III probably envisioned the day when Blockbuster would have the ability to pipe video directly into its customers’ homes. In effect, that means the day has now arrived when getting in the car and driving to the video store – such as those run by Southern Stores – might be considered unnecessary by some.

Blockbuster started selling and renting videos from the company’s Web site, www.blockbuster.com, in 2004. In 2006, Blockbuster rolled out a new Internet-based program called “Blockbuster Total Access,” whereby online customers can exchange movies for free rentals at brick-and-mortar stores.

Southern Stores looked at those innovations and saw both a threat to its business and a breach of its contract with Blockbuster. Then, in August, long after the breach of contract lawsuit was filed, Southern Stores felt threatened even more with Blockbuster’s acquisition of the movie downloading service Movielink LLC.

Discussing a plan

Thomas Lang Wiseman, an attorney with Wiseman Biggs Bray PLLC representing Blockbuster Inc. in the case, directed inquiries about the matter to Michael Raiff, an attorney with the law firm of Vinson & Elkins LLP in Dallas. Raiff directed inquiries to Blockbuster corporate spokesman Randy Hargrove, who declined to discuss the Memphis suit.

“With it being pending litigation, I just can’t get into any details,” Hargrove said.

Robert Craddock, an attorney with Wyatt, Tarrant & Combs LLP who is representing the local Blockbuster franchise group, said the next steps in the case will come next month.

“We’re filing our expert reports probably by the first of August, and that will set our damage amount,” he said. “And the court has requested that after we’ve set out our damage amount that we have a mediation, and that will be conducted sometime in August.”

As of Jan. 6, Blockbuster operated 42 video rental stores in Tennessee, and Blockbuster franchisees operated an additional 55.

One thing Southern Stores will try to prove is that a reduced level of sales in its brick-and-mortar stores over the past few years is directly attributable to Blockbuster’s online program and its marketing efforts in support of that program.

In a conference call with analysts in May, Blockbuster chairman and CEO Jim Keyes said that of the company’s online rental plans, the most popular is a $19.99 plan that includes unlimited by-mail rentals and five free in-store exchanges each month.

Part of Southern Stores’ legal strategy will be to show it has seen sales decline as a result of Blockbuster’s new offerings.