By James Hyder Cinemark USA and Imax Corporation have filed lawsuits against each other over Cinemark’s XD digital theaters. Cinemark the third largest theater chain in the U.S. filed a suit on November 4 seeking to invalidate two patents Imax holds on “Conversion of a Cinema Theater to a Super Cinema Theater.” Imax countered on November 12 with a complaint that alleges fraud breach of contract misappropriation of trade secrets and tortious interference and seeks an injunction to prevent Cinemark from “producing using and selling its XD system.” Cinemark’s case filed in the U.S. District Court for the Eastern District of Texas was sparked by an October 26 telephone conversation and subsequent e-mail exchange between Rob Lister and Mike Cavalier general counsels for Imax and Cinemark respectively on the subject of Cinemark’s new premium digital theaters. Barely a week after Cinemark’s case was filed Imax initiated its own action in the Supreme Court of the State of New York county of New York. Imax’s suit does not allege patent infringement but calls Cinemark “an inveterate tortfeasor and a faithless contract party ” and claims that the exhibitor used its relationship with Imax to “create an unauthorized reproduction of the trademarked Imax Experience.” It alleges that Cinemark approached Hollywood studios to promote its XD theaters “referring disparagingly to Imax as among other things the ‘middleman’ that needs to be ‘eliminated.’” Imax also claims that in 2008 Cinemark asked for a list of possible locations for additional Imax theaters and was given a list of twelve such sites. Imax states that it “held back from leasing Imax theaters in certain of those markets to other customers ” only to find that this year Cinemark has made plans to install XD theaters “at eight of the very locations identified by Imax.” In addition to the injunction against further XD theaters Imax seeks punitive and compensatory damages “in an amount to be determined at trial.” Last April Cinemark launched a premium digital cinema brand known as XD (formerly XD3) featuring theaters with screens up to 38 by 70 feet (12 by 21 meters) custom JBL sound systems and high-output 3D-capable Barco digital cinema projectors. The chain has opened ten XD houses to date with four more to be rolled out by the end of the year and as many as 100 expected over the next few years. As is the case at most multiplex Imax theaters Cinemark charges a three-dollar premium for XD over its standard ticket price. Unlike Imax the XD system allows the exhibitor to show virtually any movie it chooses not only those that Imax Corp. has converted with its DMR process. And of course Cinemark keeps its full share of the box office receipts unlike Imax’s joint-venture theater partners. Eric Wold an analyst for Merriman Curhan Ford who has long followed Imax thought Cinemark XD posed enough potential competition to Imax that he downgraded Imax shares from buy to neutral on September 18. The two Imax patents at issue are both entitled “Conversion of a Cinema Theater to a Super Cinema Theater.” The first US 7 106 411 was issued on September 12 2006 and the second US 7 595 860 was issued on September 29 2009. The first claims methods for enlarging and moving a theater’s projection screen and improving the “fidelity” of the projected image over the previous system. The second specifies enhancements to the theater sound system. For more details on the first patent see What is ‘Immersive'?. The basic requirements for a U.S. patent are 1) that the invention not have been in public use or publicly described at the time of invention or for more than one year before the application was submitted (the novelty condition) 2) that it not be obvious to “a person having ordinary skill in the art” in question (non-obviousness) and 3) that the description of it in the patent application be precise enough to enable it to be made and used by anyone skilled in the art (specification). Cinemark’s complaint alleges that the Imax patents fail on all of these conditions. Alleged patent infringers can ask the U.S. Patent and Trademark Office to re-examine patents and declare them invalid. Alternatively a civil suit that is decided in favor of the alleged infringer has the effect of invalidating the patent in question. In both situations the patent holder can appeal and usually does. As the middle of November Cinemark had not filed for re-examination of Imax’s patents. The Eastern District of Texas where Cinemark is located and where it filed its suit is a favored venue (a “rocket docket”) for patent infringement cases because judges there have shown a preference for them and because its juries tend to make large awards according to Sean J. O’Hara an attorney at Snell & Wilmer in Phoenix Arizona. Imax’s filing complains that the district is “a forum in which the parties had agreed not to litigate ” adding that its claims are based on “common law causes of action…and arise from Agreements that contain New York State choice of law and forum selection provisions.” The vast majority of infringement suits — 85 percent or more — are settled out of court in less than a year. Cases that go to court are more time consuming and expensive. In a 2007 study Paul Janicke of the University of Houston Law Center found that the median cost for cases involving more than $25 million was $4.5 million for each party. With annual revenues of $1.8 billion Cinemark would appear much more capable of bearing legal expenses than Imax whose annual gross revenue has averaged $135 million over the past ten years. James Hyder is the editor and publisher of the LF Examiner. This article was first published in the November 2009 issue of LF Examiner. (C) 2009 by Cinergetics LLC. All rights reserved. The article is used by permission.