Digital River 2002 Annual Report Download - page 30

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ITEM 2. PR OPERTIES.
We currently lease approximately 134,000 square feet of office and warehouse space in two facilities in Eden Prairie, Minnesota. The lease for
one facility of approximately 82,000 square feet expires in September 2005. The lease for the second facility of approximately 52,000 square
feet expires on July 31, 2003. We also lease approximately 9,000 square feet of office space in Chicago, Illinois, expiring in October 2004 and
approximately 3,300 square feet of office space in suburban London, England, expiring in September 2003. In addition, we lease on a month-to-
month basis approximately 800 square feet of office space in Issaquah, Washington. We terminated a month-to-month lease of approximately
2,500 square feet of office space in San Jose, California in 2002.
ITEM 3. LEGAL P R OC EED IN GS.
On February 27, 2002, ePedas initiated arbitration before the American Arbitration Association against us. The demand for arbitration alleged
breach of contract and tortious interference claims against us. The case was transferred to the International Section of the American Arbitration
Association. The matter was settled by way of a settlement agreement executed on October 22, 2002, and the arbitration was dismissed on
November 12, 2002.
Beginning in August 2001, we and certain of our officers and directors were named as defendants in several class action shareholder complaints
filed in the United States District Court for the Southern District of New York, now consolidated as In re Digital River, Inc. Initial Public
Offering Securities Litigation, Case No. 01-CV-7355. In the consolidated amended complaint, the plaintiffs allege that we, certain of our
officers and directors and the underwriters of our initial public offering, or IPO, violated Section 11 of the Securities Act of 1933 based on
allegations that our IPO registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and
the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities
Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints, referred to here as the IPO Lawsuits, were filed in the same court against hundreds of other public
companies.
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern
District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among
other things, that the time for all defendants in the IPO Lawsuits to respond to any complaint be postponed until further order of the court. Thus,
we have not been required to answer any of the complaints, and no discovery has been served on us.
On July 15, 2002, we joined in a global motion to dismiss the IPO Lawsuits filed by all of the issuers (among others). On October 9, 2002, the
court entered an order dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling
the statute of limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the court issued a decision
denying the motion to dismiss the Section 11 claims against us and almost all of the other issuers and denying the motion to dismiss the Section
10(b) claims against us and many of the other issuers.
We are also party to patent litigation, along with other defendants, regarding United States Patent No. 6,014,651 owned by Christopher M.
Crawford ("Crawford") of Washington, D.C. The case was filed on August 21, 2001. Crawford alleges that we directly infringe the patent by
the provision of online software purchase and delivery services, that we actively induce infringement of the patent by supporting and otherwise
promoting our electronic software delivery services to others and that we contributorily infringed the patent by making, using, selling and
offering to sell components of our electronic software delivery services. Crawford seeks an unspecified award of damages and to enjoin us from
further infringement. We answered the complaint on September 12, 2001. The case is pending in the U.S. District Court in the District of
Columbia. No substantive actions have taken place as yet in this case. The court has delayed substantive discovery in this case, pending a
preliminary determination of the legal scope of Crawford's claim. We are in the process of preparing materials regarding claim interpretation to
present to the court. Once the court determines the scope of the claims, we may file for a dismissal of the case if the court's decision is
consistent with ours and the other defendants' position regarding the interpretation of this patent claim.
We, along with RegSoft.com, Inc., a subsidiary of ours, and Register Now, a division of ours, and other various defendants, were named as
defendants in a patent litigation regarding United States Patent No. 4,500,919 assigned to the Massachusetts Institute of Technology, or MIT, by
the inventor William F. Schreiber of Cambridge, Massachusetts. MIT licensed the patent to Electronics for Imaging, Inc. or EFI, and these
parties jointly filed a lawsuit in the U.S. District Court in the Eastern District of Texas on December 28, 2001. EFI served us its First Amended
Complaint on April 25, 2002, alleging that we infringed its patent by offering to sell and selling infringing color image editing software in the
United States. EFI seeks to enjoin us from infringing, inducing infringement and contributing to infringement. EFI seeks an award for
monetary damages, prejudgment interest and attorney's fees. We answered EFI's complaint on June 17, 2002. The suit is still pending. The
court has accepted documents from the parties and held a hearing regarding claim interpretation. The claim interpretation process will
determine both the scope of the claims and whether we may be liable based on this interpretation of the claims. Upon the determination of the
claims' scope, we may file for a dismissal of the case if the court construes the patent claims consistently with our position. The parties have
sought indemnification from vendors. We have been indemnified for portions of the liability, but remain potentially liable for other portions.