Digital River 2006 Annual Report Download - page 34

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systems. The case was filed in the U.S. District Court for the District of Minnesota on October 5, 2006. The
complaint seeks injunctive relief, declaratory relief, damages and attorney’s fees. We have answered this
complaint and are in the early stages of discovery. We intend to vigorously defend ourselves in this matter.
Voice Signal Technologies, Inc. (“VST”) has brought a claim against us and several other defendants
regarding US Patent No. 5,855,000, which is owned by VST. This patent claim is on the use of general
purpose dictation for personal computers and mobile devices. The case was filed in the U.S. District Court for
the Western District of Pennsylvania on November 8, 2006. This complaint relates to our resale of a product
from one of our software publisher clients. Under the terms of the contract that we have with this client, the
client will defend and indemnify us for intellectual property claims. In accordance with the terms of that
contract, this client is assuming the defense of this matter.
On October 31, 2006, a party identifying itself as a shareholder of the Company filed a derivative
shareholder suit against us and certain of our current and former officers and directors in the U.S. District
Court for the District of Minnesota. The action made general allegations regarding our purported stock option
practices and on that basis asserted claims for violations of Section 10(b) of the Securities Exchange Act of
1934 (the “Exchange Act”) and Rule 10b-5 thereunder, Sections 14(a) and 20(a) of the Exchange Act, breach
of the fiduciary duties of loyalty and good faith, an accounting, unjust enrichment and rescission. On
November 17, 2006, we filed a motion to dismiss the action in its entirety. On December 22, 2006, rather than
opposing this motion to dismiss, plaintiff filed a motion for voluntary dismissal of the case. On January 3,
2007, the Court entered an order granting plaintiff’s motion for voluntary dismissal without prejudice. On
February 6, 2007, this shareholder filed a complaint in the Court of Chancery of the State of Delaware. The
complaint seeks an order pursuant to Section 220 of the Delaware General Corporation Law permitting
plaintiff to inspect and make copies and extracts of certain of our books and records. We intend to vigorously
defend ourselves in this matter.
On November 21, 2006, a separate plaintiff filed a derivative shareholder suit against us and certain of
our current and former officers and directors in the U.S. District Court for the District of Minnesota
substantially similar to the complaint filed against us on October 31, 2006. On January 11, 2007, plaintiff filed
a motion for voluntary dismissal of the case. On January 17, 2007, the Court entered an order granting
plaintiff’s motion for voluntary dismissal without prejudice.
In December 2006, we announced that we had received an informal inquiry from the SEC relating to our stock
option grant practices. We have cooperated with the SEC regarding this matter and intend to continue to do so.
We are subject to legal proceedings, claims and litigation arising in the ordinary course of business.
While the final outcome of these matters is currently not determinable, we believe there is no litigation
pending against us that is likely to have, individually or in the aggregate, a material adverse effect on our
consolidated financial position, results of operation or cash flows. Because of the uncertainty inherent in
litigation, it is possible that unfavorable resolutions of these lawsuits, proceedings and claims could exceed the
amount we have currently reserved for these matters.
Third parties have from time-to-time claimed, and others may claim in the future, that we have infringed
their intellectual property rights. We have been notified of several potential patent disputes, and expect that we
will increasingly be subject to patent infringement claims as our services expand in scope and complexity. We
have in the past been forced to litigate such claims. We also may become more vulnerable to third-party
claims as laws, such as the Digital Millennium Copyright Act, the Lanham Act and the Communications
Decency Act are interpreted by the courts and as we expand geographically into jurisdictions where the
underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear
or less favorable. These claims, whether meritorious or not, could be time-consuming and costly to resolve,
cause service upgrade delays, require expensive changes in our methods of doing business, or could require us
to enter into costly royalty or licensing agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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