Video rental chain Blockbuster Incl said on Wednesday it had settled a patent dispute with rival Netflix Inc. that had challenged Blockbuster's entry into the online DVD rental business.

Although terms of the deal were not disclosed, shares in Netflix jumped more than 5 percent to $20.56 in early trading while Blockbuster slipped 1 percent to $4.18.

Netflix sued Blockbuster last year for refusing to pay the online DVD rental company royalties. Blockbuster countersued Netflix on fraud and antitrust claims and said Netflix's patents were so broad as to be unenforceable.

Terms of the settlement were confidential, Blockbuster said in a regulatory filing on Wednesday. The company gave no further details, but said the settlement would have not material effect on its future earnings.

Legal experts had said that if Netflix had prevailed in litigation, it could have forced Blockbuster and any other competitor in the fast-growing online rental industry to pay licensing fees or build an entirely new model.

Netflix has two patents that protect is business model, under which subscribers pay monthly fees to select and rent DVDs from its Web site, and have them shipped according to an order they select online.

Blockbuster has poured millions of dollars into building and promoting its online service.