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VOL. 125 | NO. 17 | Wednesday, January 27, 2010

Blocked and Tackled

Lawsuit dies between Blockbuster, local franchise group

By Andy Meek

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A customer passes the Blockbuster entrance at 1556 Union Ave., in Midtown Memphis. The store is run by Southern Stores Video Inc. -- Photo: Lance Murphey

The credits have rolled on a four-year-old legal drama between Dallas-based movie rental chain Blockbuster Inc. and the franchise group that runs Blockbuster stores in Shelby and Davidson counties.

Both sides have agreed to settle the federal lawsuit Southern Stores Video Inc. filed against Blockbuster in 2006 over the high-tech and still-evolving menu of rental options Blockbuster offers its customers. Terms of the settlement were not disclosed.

A trial had been scheduled for September, according to the most recent docket information about the suit. It would have been the culmination of months of depositions, court hearings and on-again, off-again settlement talks.

“The case has been resolved to the satisfaction of both sides,” said Memphis attorney Lang Wiseman, one of the attorneys representing Blockbuster Inc.

Terms of the settlement agreement would not allow him to elaborate.

Brave new world

The stakes were high and potentially millions of dollars were at play for both sides in the flap, which was driven in part by the Netflix-inspired future of the movie and video game rental business.

Paying Blockbuster $2 million a year gave Southern Stores an exclusive area licensing agreement, which the franchise group believed Blockbuster was potentially cannibalizing with new nationwide customer services. Among other things, Blockbuster had started giving customers the option to rent movies and games online.

That included the option to exchange products rented online with movies and games from brick-and-mortar stores.

Attorneys for Southern Stores tried a few months ago to get U.S. District Judge Bernice Donald to grant a preliminary injunction that would stop Blockbuster from selling or renting videos over the Internet in Southern Stores’ markets. Representatives of Blockbuster countered in a court hearing in the fall that the rental giant stood to lose tens of millions of dollars if that happened.

In the end, Donald declined to allow it.

Blockbuster feared its balance sheet might get a lot bloodier if the suit derailed its online offerings. By the same token, the affidavit of one Southern Stores official included with the lawsuit shows the franchise group feared a similarly bad result.

“As the Blockbuster Total Access campaign proceeds, a number of the ‘brick and mortar’ Southern Stores may be forced to close and employees may be laid off,” the affidavit reads.

Donald noted in her denial of the injunction that an expert witness for Southern Stores influenced her. Among other things, that testimony revealed if Blockbuster could not successfully pursue Internet services, the rental chain and Southern stores eventually might be forced to shut down.

Mutual understanding

Both sides have met at the bargaining table before in an attempt to settle the lawsuit, which was filed in September 2006 in U.S. District Court in Memphis.

While settlement talks were under way early last year, attorneys for Blockbuster at one point told the court they intended to present the language of a proposed settlement to the company’s board of directors at the board’s May meeting.

Those talks fizzled, but over the past few weeks a deal was finalized.

“All parties request this court to dismiss this case with prejudice and to dismiss with prejudice all claims that plaintiff has asserted in this case against defendant Blockbuster Inc. and all claims that defendant Blockbuster has asserted against plaintiff,” reads a joint motion of dismissal signed by attorneys for the opposing sides, which Donald approved.

“All parties in this action agree to the dismissal of this lawsuit with prejudice. The parties agree that each side will bear its own court costs and attorneys’ fees.”

‘A going concern’

The deal removes one headache from Blockbuster’s plate after a dismal year in which the company continued to get pounded by more nimble rivals such as Netflix. The holiday shopping season also proved disappointing for Blockbuster, with the company recently conceding its performance was “well below expectations.”

One analyst recently wrote in a research note it’s time to start questioning “how long the company can continue as a going concern given its rapidly deteriorating performance.”

Much of that has to do with technology. The same way Amazon’s Kindle e-reader has helped dramatically reshape the landscape of the book industry, a similar thing is happening with movie rentals.

As the Southern Stores suit shows, retail chains are offering customers options such as online rentals that can be watched on a computer. It offers immediate convenience minus the chore of driving to a store.

An Associated Press tabulation found that Blockbuster lost more than $4 billion from 2002-2005. To reverse that trend, the company’s stores look far different today than they used to even a few years ago.

In addition to movies, many of the Memphis-area stores are stocked with candy, movie posters, bottles of soda, video games, magazines and more.

Blockbuster’s most recent annual report spells out the strategy that raised Southern Stores’ ire and led it to assert a breach of contract claim.

“As for our by-mail rental service, in 2008 we improved its profitability, enhanced our Web site, and made our extensive library of digital content available on blockbuster.com,” the report reads.

Blockbuster’s stock price closed Monday at $0.41. One year ago, it was trading at $1.38.

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 0 291 21,272
MORTGAGES 0 160 16,194
FORECLOSURE NOTICES 0 23 1,487
BUILDING PERMITS 258 692 41,920
BANKRUPTCIES 1 117 6,579
BUSINESS LICENSES 0 23 3,097
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0