Callaway 2004 Annual Report Download - page 95

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
these actions may, among other things, contest the validity and/or the enforceability of some of the
Company's patents and/or trademarks. Others may assert counterclaims against the Company. Historically,
these matters individually and in the aggregate have not had a material adverse eÅect upon the Ñnancial
position or results of operations of the Company. It is possible, however, that in the future one or more
defenses or claims asserted by defendants in one or more of those actions may succeed, resulting in the loss of
all or part of the rights under one or more patents, loss of a trademark, a monetary award against the Company
or some other material loss to the Company. One or more of these results could adversely aÅect the
Company's overall ability to protect its product designs and ultimately limit its future success in the
marketplace.
In addition, the Company from time to time receives information claiming that products sold by the
Company infringe or may infringe patent or other intellectual property rights of third parties. It is possible that
one or more claims of potential infringement could lead to litigation, the need to obtain licenses, the need to
alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the
Company.
In the fall of 1999 the Company adopted a unilateral sales policy called the ""New Product Introduction
Policy'' (""NPIP''). The NPIP sets forth the terms on which the Company chooses to do business with its
customers with respect to the introduction of new products. The NPIP has been the subject of several legal
challenges. Currently pending cases, described below, include Lundsford v. Callaway Golf, Case No. 2001-24-
IV, pending in Tennessee state court (""Lundsford I''); Foulston v. Callaway Golf, Case No. 02C3607,
pending in Kansas state court; Murray v. Callaway Golf Sales Company, Case No. 3:04CV274-H, pending in
the United States District Court for the Western District of North Carolina; and Lundsford v. Callaway Golf,
Civil Action No. 3:04-cv-442, pending in the United States District Court for the Eastern District of
Tennessee (""Lundsford II''). An adverse resolution of the NPIP cases could have a signiÑcant adverse eÅect
upon the Company's results of operations, cash Öows and Ñnancial position.
Lundsford I was Ñled on April 6, 2001, and seeks to assert a punitive class action by plaintiÅ on behalf of
himself and on behalf of consumers in Tennessee and Kansas who purchased select Callaway Golf products
covered by the NPIP on or after March 30, 2000. PlaintiÅ asserts violations of Tennessee and Kansas antitrust
and consumer protection laws and is seeking damages, restitution and punitive damages. The court has not
made any determination that the case may proceed in the form of a class action. In light of the Lundsford II
case subsequently Ñled in the United States District Court, described below, the parties have agreed to stay
Lundsford I, and to dismiss it without prejudice once the federal court proceedings are underway.
In Foulston, Ñled on November 4, 2002, plaintiÅ seeks to assert an alleged class action on behalf of
Kansas consumers who purchased Callaway Golf products covered by the NPIP and seeks damages and
restitution for the alleged class under Kansas law. The trial court in Foulston stayed the case in light of
Lundsford I. The Foulston court has not made any determination that the case may proceed in the form of a
class action.
The complaint in Murray was Ñled on May 14, 2004, alleging that a retail golf business was damaged by
the alleged refusal of Callaway Golf Sales Company to sell certain products after the store violated the NPIP,
and by the failure to permit plaintiÅ to sell Callaway Golf products on the internet. The proprietor seeks
compensatory and punitive damages associated with the failure of his retail operation. Callaway Golf removed
the case to the United States District Court for the Western District of North Carolina, and has answered the
complaint denying liability. The parties are currently engaged in discovery, and a trial date in December 2005
has been set by the court.
Lundsford II was Ñled on September 28, 2004 in the United States District Court for the Eastern District
of Tennessee. The complaint in Lundsford II asserts that the NPIP constitutes an unlawful resale price
agreement and an attempt to monopolize golf club sales prohibited by federal antitrust law. The complaint
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