Yangaroo claims victory over Destiny in online music patent battle; lawsuits continue

By Cristina Howorun

Created 01/12/2009 - 3:42pm

Toronto-based Yangaroo Inc. has won a critical U.S. patent battle for its digital music distribution technology, but its legal woes are far from over. Four multi-million dollar lawsuits over patent infringement and defamation with a Vancouver competitor could ultimately decide which company - and which made-in-Canada technology - will get a crack at the lucrative U.S. market.

Yangaroo and Destiny Media Technologies Inc. have been duking it out since 2006 over encryption technology that enables music labels to distribute their music online to radio stations - foregoing the need for CDs and costly courier fees. Both companies claim they were first with the technology.

But Yangaroo says it scored a major victory last week when it was granted a U.S. patent allowance for its content distribution system and method. "This is a watershed decision for Yangaroo," says John Heaven, president and CEO. "It adds significant value to the company and also creates a significant barrier to entry for our competitors. This is actually very, very bad news for our main competitor Destiny Media."

Yangaroo has filed a $15-million infringement damage claim against Destiny for its Canadian patent, Content Distribution System and Method (CDSM). It was this same patent that was approved last week in the U.S., which both companies view as the single biggest market for their services. Yangaroo has also filed a $25-million defamation claim against Destiny.

"Our view is that they infringe, in the U.S. and in Canada, and once we get the formal letters patent document in our hands we will be deciding how to proceed as to how to protect our intellectual patent rights," says Heaven.

Destiny Media lobbed its first lawsuit against Yangaroo (then Musicrypt) in March 2006 with the Federal Court of Canada. That action aims to invalidate Yangaroo's Canadian patent. Just over a year later, Destiny filed another lawsuit - this one for $25 million with the Ontario Superior Court - for defamation and injurious falsehood. And Destiny's CEO doesn't appear to be backing down, despite Yangaroo's success in securing a U.S. patent.

"We have our own patent," explains Steve Vestergaard, from Destiny's Vancouver office. "We developed our system in 1999 and it pre-dates Yangaroo's patent and three major labels have gotten outside council to compare our system to Yangaroo's patent. And all three have found there's no chance of infringement."

Heaven says he doubts Destiny's legal challenges will be successful. "The fact that now the U.S. patent system has also allowed our patent means that their invalidity claim is greatly weakened, if it ever had any strength."

The legal wrangling between the two companies underscores the magnitude of what's at stake. Record labels, like most other organizations, are looking for ways to conduct business more efficiently. In the past, labels sent artists' promotional singles and materials to radio stations directly, resulting in costly production and courier fees. Now most are looking for, or using, secure digital deliveries.

"We're part of this mega trend to help businesses convert from physical media workflows like promotional CDs to digital. Digital workflows make a lot of sense from a cost point of view, but also from an environmental view," says Heaven. "We spoke to an environmental engineering firm who estimates we saved .7 pounds of fossil fuel per delivery (versus shipping and production of CDs)."

Yangaroo's CDSM is used by over 3,000 radio stations in North America and the U.K., and includes exclusivity deals with such Canadian heavyweights as Corus Entertainment Inc. and Rogers Communications Inc. And the company is experiencing considerable growth.

"In the US, in the first nine months of 2008 our deliveries went up 56% and in Canada they grew 74% and our third quarter revenue is up 31%," says Heaven. "In all of 2007, we had 1.3 million deliveries in the U.S. In the first nine months of 2008 we had over 1.3 million, so in the first nine months of 2008 we've already exceeded all of 2007."

Most of Yangaroo's revenue is garnered from their Canadian business, but the patent allowance in the U.S. may enable Yangaroo to make greater inroads in what is, by all accounts, a tough market to crack. Investors however, are becoming inpatient. Yangaroo shares have fallen from a high of $1.40 in mid-2003 to approximately 10.5 cents. Destiny isn't faring much better, closing Jan. 9 at just 30 cents.

Heaven, however, remains confident. "We talk about business slowing down because of the economic environment, but we expect our business to accelerate. People are looking for more efficient ways to do things."

Destiny is also looking at some brighter horizons. In December the company reported record revenue growth to over $1.5 million, versus over $875,000 in 2007. Destiny, which continues to operate in a loss situation, also announced approval of a U.S. patent for its digital media distribution system last month.

Heaven doesn't appear threatened by the news. "Their claim deals with sending an encryption key to a receiver of the file through another route. It's very narrow and has no bearings on us," he starts. In comparison, Yangaroo's system incorporates biometrics, encryption and watermarking.

"Another way to look at it is, we patented apples... they got a patent on oranges, and they and us sell apples. For all we're concerned, they could've patented tricycles."