DIRECTV 2006 Annual Report Download - page 118

THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS —(continued)
Finisar Corporation. On April 4, 2005, Finisar Corporation filed a patent infringement action in
the United States District Court for the Eastern District of Texas (Beaumont) alleging that The
DIRECTV Group, DIRECTV Holdings, DIRECTV Enterprises, LLC, DIRECTV Operations, LLC,
DIRECTV, Inc., and DTV Network Systems, Inc. infringed U.S. Patent No. 5,404,505. On June 23,
2006, the jury determined that we willfully infringed this patent and awarded approximately
$78.9 million in damages. On July 7, 2006, the Court entered its final written judgment which denied
Finisar’s request for an injunction and instead granted us a compulsory license. Under the license we
would be obligated to pay Finisar $1.60 per new set-top box manufactured for use with the DIRECTV
system beginning June 17, 2006 and continuing until the patent expires in 2012 or is otherwise found to
be invalid. The Court also increased the damages award by $25.0 million because of the jury finding of
willful infringement and awarded pre-judgment interest of $13.4 million to Finisar. Post-judgment
interest accrues on the total judgment.
We filed a notice of appeal to the Court of Appeals for the Federal Circuit on October 5, 2006
and Finisar also filed a notice of appeal on October 18, 2006. A bond was submitted to the District
Court in the amount of $126.7 million as required security for the damages awarded but not yet paid
pending appeal plus interest for the anticipated duration of the appeal. We were successful in obtaining
an order that post-judgment royalties pursuant to the compulsory license shall be held in escrow
pending outcome of the appeal, and the initial quarterly payment has been made. Through
December 31, 2006, the amount of the compulsory license fee amounted to $12.1 million, which was
paid into escrow.
Based on our review of the record in this case, including discussion with and analysis by counsel of
the bases for our appeal, we have determined that we have a number of strong arguments available on
appeal and, although there can be no assurance as to the ultimate outcome, we are confident that the
judgment against us will ultimately be reversed, or remanded for a new trial in which we believe we
would prevail. As a result, we have concluded that it is not probable that Finisar will ultimately prevail
in this matter; therefore, we have not recorded any liability for this judgment nor are we recording any
expense for the compulsory license.
Income Tax Matters
In the second quarter of 2005, a settlement was reached in connection with adjustments proposed
by the IRS for the tax years 1991 through 1994 in regards to the determination and allocation of the
purchase price with respect to a prior business acquisition. As a result of the favorable settlement, we
recognized an income tax benefit of approximately $31.3 million which was reported in ‘‘Income (loss)
from discontinued operations, net of taxes’’ in our Consolidated Statements of Operations.
We have received tax assessments from certain foreign jurisdictions and have agreed to indemnify
previously divested businesses for certain tax assessments relating to periods prior to their respective
divestitures. These assessments are in various stages of the administrative process or litigation, and we
believe we have adequately provided for any related liability.
While the outcome of these assessments and other tax issues cannot be predicted with certainty,
we believe that the ultimate outcome will not have a material effect on our consolidated results of
operations or financial position.
Satellites
We may purchase in-orbit and launch insurance to mitigate the potential financial impact of
satellite launch and in-orbit failures if the premium costs are considered economic relative to the risk
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