2K Sports 2009 Annual Report Download - page 30

Item 3. Legal Proceedings
Various lawsuits, claims, proceedings and investigations are pending involving us and certain of our
subsidiaries as described below in this section. Depending on the amount and the timing, an unfavorable
resolution of some or all of these matters could materially affect our business, financial condition, results
of operations or cash flows. We have appropriately accrued amounts related to certain legal and other
proceedings discussed below. While there is a possibility that a loss may be incurred in excess of the
amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would
not be material. In addition to the matters described herein, we are, or may become, involved in routine
litigation in the ordinary course of business which we do not believe to be material to our business,
financial condition, results of operations or cash flows.
Consumer Class Action and City of Los Angeles Litigation—Grand Theft Auto: San Andreas. In July 2005,
we received four complaints for purported class actions, which were consolidated in the United States
District Court for the Southern District of New York (the ‘‘SDNY Court’’). The plaintiffs, alleged
purchasers of our Grand Theft Auto: San Andreas game, assert that we engaged in consumer deception
and false advertising, breached an implied warranty of merchantability and were unjustly enriched as a
result of our alleged failure to disclose that Grand Theft Auto: San Andreas contained ‘‘hidden’’ content.
The complaints seek unspecified damages, declarations of various violations of law and litigation costs. In
January 2006, the City Attorney for the City of Los Angeles filed a complaint in the Superior Court of
California, alleging violations of California law on substantially the same basis as the consumer class
action; we removed the LA City Attorney lawsuit to federal court, and it was consolidated with the
consumer class action. In December 2007, the SDNY Court preliminarily approved a settlement of the
consumer class action. In July 2008, however, the SDNY Court refused to certify the proposed settlement
class on the basis that, under controlling case law issued after the parties negotiated the settlement, the
plaintiffs could no longer meet their burden of showing that the case could proceed on the proposed class
basis, regardless of whether the purpose of certification was for litigation or settlement. The plaintiffs
subsequently applied for, and on April 15, 2009 the U.S. Court of Appeals for the Second Circuit granted,
permission to file an interlocutory appeal. The appeal is now pending. The Court of Appeals may dismiss
the appeal, reverse the lower court’s ruling and direct the lower court to reconsider approving the
settlement, or take some other action. We express no opinion as to the outcome of any such appeal. Should
the consumer class action or the related LA City Attorney action return to an active litigation posture, we
will continue to defend these cases vigorously.
Securities Class Action—Grand Theft Auto: San Andreas and Option Backdating. In February and March
2006, four purported class action complaints were filed against us and certain of our then current and
former officers and directors in the SDNY Court. The actions were consolidated, and in April 2007 the
lead plaintiffs filed a consolidated second amended complaint which contained allegations related to
purported ‘‘hidden content’’ contained in Grand Theft Auto: San Andreas and the backdating of stock
options, including the investigation thereof conducted by the Special Litigation Committee of the Board of
Directors and the restatement of our financial statements relating thereto. This complaint was filed against
us, our former Chief Executive Officer, our former Chief Financial Officer, our former Chairman of the
Board, our Rockstar Games subsidiary, and one officer and one former officer of our Rockstar Games
subsidiary. The lead plaintiffs sought unspecified compensatory damages and costs including attorneys’
fees and expenses. In April 2008, the Court dismissed, with leave to amend, all claims as to all defendants
relating to Grand Theft Auto: San Andreas and certain claims as to our former CEO, CFO and certain
director defendants relating to the backdating of stock options. In September 2008, the lead plaintiff filed a
third amended consolidated complaint seeking to reinstate these claims which we opposed. On August 31,
2009, we entered into a memorandum of understanding with the lead plaintiffs to comprehensively settle
all claims asserted by them against us, our Rockstar Games subsidiary and all of the current and former
officers and directors named in the actions. Under the terms of the proposed settlement, we will pay
approximately $20.1 million into a settlement fund for the benefit of class members, approximately
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