A federal appeals court delivered a blow today to TiVo's (TIVO) long-standing patent-infringement lawsuit against EchoStar (SATS), sending TiVo's shares spiraling downward Friday. The appeals court granted EchoStar the right to a full-court review by all the judges on the federal circuit.

TiVo, which specializes in digital video recording hardware, software, and service, filed its lawsuit in 2004, alleging that EchoStar and its sister company, Dish Network (DISH) infringed on its patents relating to the storage and retrieval of content. In March, TiVo was riding high after a federal appeals court ruled in its favor by reaffirming a lower court's decision in its EchoStar patent infringement case by a two-one decision. That decision set the stage for TiVo to potentially collect about $300 million in damages and contempt sanctions against EchoStar.

The most recent decision by the federal appeals court does not come as a complete surprise, as EchoStar indicated in March that it would seek a review of the case. In its most recent quarterly report filed with the Securities and Exchange Commission, EchoStar said: "If we are unsuccessful in overturning the District Court's ruling on Tivo's motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be prohibited from offering DVR functionality that would in turn place us at a significant disadvantage to our competitors and significantly decrease sales of digital set-top boxes to DISH Network and others."

When the court ruled in TiVo's favor in March, it helped TiVo's shares spike 62% higher. But, in the wake of this latest news, TiVo shares have plummeted 38.6% to $6.71 per share in midday trading.

"We are disappointed that we do not yet have finality in this case despite years of litigation but we remain confident that the Federal Circuit's ruling in our favor will be reaffirmed after all of the judges on the Federal Circuit have had the opportunity to review the merits of this case," TiVo said in a statement.

In response to the appeals court decision, EchoStar issued a statement: "DISH Network and EchoStar are pleased that the full Federal Circuit Court of Appeals has granted their petition for rehearing en banc. We believe the issues that will be considered by the full court on rehearing will have a profound impact on innovation in the United States for years to come."

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