Canon 2006 Annual Report Download - page 89

87
Legal proceedings
In February 2003, a lawsuit was filed by St. Clair Intellectual
Property Consultants, Inc. (“St. Clair”) against the Company
and one of its subsidiaries in the United States District Court of
Delaware, which accused the Company of infringement of
patents related to certain technology. In connection with this
case, in October 2004, a jury preliminarily found damages
against the Company of approximately ¥4,000 million
($33,613 thousand) based on a percentage of certain product
sales in the United States through 2003. Subsequent to this jury
finding, St. Clair also made a motion to the court for damages
relating to certain 2004 sales, using the same royalty rate
awarded by the jury. In March 2006, the Company and St. Clair
entered into a settlement agreement, pursuant to which the
lawsuit was withdrawn in July 2006.
In October 2003, a lawsuit was filed by a former employee
against the Company at the Tokyo District Court in Japan.
The lawsuit alleges that the former employee is entitled to
¥45,872 million ($385,479 thousand) as compensation for an
invention related to certain technology used by the Company,
and the former employee has sued for a partial payment of
¥1,000 million ($8,403 thousand) and interest thereon. On Jan-
uary 30, 2007, the Tokyo District Court in Japan ordered the
Company to pay the former employee approximately ¥33.5
million ($282 thousand) and interest thereon. On the same
day, the Company appealed the decision.
In Germany, Verwertungsgesellschaft Wort (“VG Wort”),
acollecting agency representing certain copyright holders, has
filed a series of lawsuits seeking to impose copyright levies
upon digital products such as PCs and printers, that allegedly
enable the reproduction of copyrighted materials, against the
companies importing and distributing these digital products. In
May 2004, VG Wort filed a civil lawsuit against Hewlett-Packard
GmbH seeking levies on multi-function printers. This is an
industry test case under which Hewlett-Packard GmbH represents
other companies sharing common interests, and Canon has
undertaken to be bound by the final decision of this court case.
The court of first instance and the court of appeals held that
the multi-function printers were subject to a levy. In particular,
the court of appeals ordered Hewlett-Packard GmbH to pay
the amount equivalent to the levies imposed on photocopiers
(EUR 38.35 to EUR 613.56 per unit, depending on printing
speed and color printing capability). This lawsuit is currently
under appeal before the German Federal Supreme Court. With
regard to single-function printers, VG Wort filed a separate
lawsuit in January 2006 against Canon seeking payment of
copyright levies, and the court of first instance in Düsseldorf
ruled in favor of the claim by VG Wort in November 2006.
Canon lodged an appeal against such decision in December
2006. In a similar court case, which does not include Canon,
seeking copyright levies on single-function printers of Epson
Deutschland GmbH, Xerox GmbH and Kyocera Mita Deutsch-
land GmbH, the court of appeals in Düsseldorf rejected such
alleged levies on January 23, 2007. Canon, other companies
and the industry associations have expressed opposition to
such extension of the levy scope and the final conclusion of
these court cases including the amount of levies to be imposed,
remains uncertain.
In April 2005, a lawsuit was filed by Nano-Proprietary Inc.
(“NPI”) against the Company and Canon U.S.A. Inc. in the
United States District Court of Texas alleging that SED Inc., a
joint venture company established by the Company and
Toshiba Corporation, is not regarded as a “Subsidiary” under
the Patent License Agreement between the Company and NPI
(the “Agreement”) and that the extension of the license to SED
Inc. constitutes a breach of the Agreement. NPI also alleges
that there was fraudulent conduct by the Company in execut-
ing the Agreement, and requests rescission of the Agreement
and compensatory damages. This case is still pending and the
final outcome, including any liability to the Company, is not yet
determined, but in November 2006, the Court denied the
Company’s Motion for a summary judgment that SED Inc. is a
Subsidiary of the Company. In January 2007, the Company
purchased all the shares of SED Inc. owned by Toshiba Corpo-
ration, making SED Inc. a 100% owned subsidiary of the Com-
pany. However, on February 22, 2007, the court issued a
summary judgment stating that SED Inc. (before the above
stock purchase) was not a Subsidiary of the Company, and that
the Agreement has been terminated due to a material breach
of the Agreement by the Company. The remaining pending
issues at the district court are whether the Company was
engaged in fraudulent conduct and whether compensatory
damages should be granted. The Company will appeal to the
appellate court immediately after the current proceeding at the
district court has been concluded regardless of any judgments
rendered by the district court.
Canon is involved in various claims and legal actions,
including those noted above, arising in the ordinary course of
business. In accordance with SFAS No. 5, “Accounting for
Contingencies,” Canon has recorded provisions for liabilities
when it is probable that liabilities have been incurred and the
amount of loss can be reasonably estimated. Canon reviews
these provisions at least quarterly and adjusts these provisions
to reflect the impact of the negotiations, settlements, rulings,
advice of legal counsel and other information and events
pertaining to a particular case. Based on its experience, Canon
believes that any damage amounts claimed in the specific
matters discussed above are not a meaningful indicator of
Canon’s potential liability. In the opinion of management, the
ultimate disposition of the above mentioned matters will not
have a material adverse effect on Canon’s consolidated financial
position, results of operations, or cash flows. However, litigation
is inherently unpredictable. While Canon believes that it has
valid defenses with respect to legal matters pending against it,
it is possible that Canon’s consolidated financial position,
results of operations, or cash flows could be materially affected
in any particular period by the unfavorable resolution of one or
more of these matters.