Dish Network 2009 Annual Report Download - page 47

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The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions, but has ordered that
enforcement of any sanctions award will be stayed pending our appeal of the contempt order. Tivo sought up to
$975 million in contempt sanctions for the period from April 2008 to June 2009 based on, among other things,
profits Tivo alleges we made from subscribers using DVRs. We opposed Tivo’s request arguing, among other
things, that sanctions are inappropriate because we made good faith efforts to comply with the Court’s injunction.
We also challenged Tivo’s calculation of profits.
On August 3, 2009, the Patent and Trademark Office (the “PTO”) issued an initial office action rejecting the
software claims of United States Patent No. 6,233,389 (the ‘389 patent) as being invalid in light of two prior patents.
These are the same software claims that we were found to have infringed and which underlie the contempt ruling
now pending on appeal. We believe that the PTO’s conclusions are relevant to the issues on appeal as well as the
pending sanctions proceedings in the District Court. The PTO’s conclusions support our position that our original
alternative technology is more than colorably different than the devices found to infringe by the jury; that our
original alternative technology does not infringe; and that we acted in good faith to design around Tivo’s patent.
On September 4, 2009, the District Court partially granted Tivo’s motion for contempt sanctions. In partially
granting Tivo’s motion for contempt sanctions, the District Court awarded $2.25 per DVR subscriber per month for
the period from April 2008 to July 2009 (as compared to the award for supplemental damages for the prior period
from September 2006 to April 2008, which was based on an assumed $1.25 per DVR subscriber per month). By the
District Court’s estimation, the total award for the period from April 2008 to July 2009 is approximately $200
million (the enforcement of the award has been stayed by the District Court pending DISH Network’s appeal of the
underlying June 2009 contempt order). The District Court also awarded Tivo its attorneys’ fees incurred during the
contempt proceedings. On February 8, 2010, we and Tivo submitted a stipulation to the District Court that the
attorneys’ fees and costs, including expert witness fees and costs, that Tivo incurred during the contempt
proceedings amounted to $6 million. During the year ended December 31, 2009, we increased our total reserve by
$361 million to reflect the supplemental damages and interest for the period from implementation of our original
alternative technology through April 2008 and for the estimated cost of alleged software infringement (including
contempt sanctions for the period from April 2008 through June 2009) for the period from April 2008 through
December 2009 plus interest. Our total reserve at December 31, 2009 was $394 million and is included in “Tivo
litigation accrual” on our Consolidated Balance Sheets.
In light of the District Court’s finding of contempt, and its description of the manner in which it believes our original
alternative technology infringed the ‘389 patent, we are also developing and testing potential new alternative
technology in an engineering environment. As part of EchoStar’s development process, EchoStar downloaded
several of our design-around options to less than 1,000 subscribers for “beta” testing.
If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a license
agreement with Tivo on reasonable terms, we would be required to eliminate DVR functionality in all but
approximately 192,000 digital set-top boxes in the field and cease distribution of digital set-top boxes with DVR
functionality. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality, which would likely result in a significant decrease in new subscriber additions as well
as a substantial loss of current subscribers. Furthermore, the inability to offer DVR functionality could cause certain
of our distribution channels to terminate or significantly decrease their marketing of DISH Network services. The
adverse effect on our financial position and results of operations if the District Court’s contempt order is upheld is
likely to be significant. Additionally, the supplemental damage award of $103 million and further award of
approximately $200 million does not include damages, contempt sanctions or interest for the period after June 2009.
In the event that we are unsuccessful in our appeal, we could also have to pay substantial additional damages,
contempt sanctions and interest. Depending on the amount of any additional damage or sanction award or any
monetary settlement, we may be required to raise additional capital at a time and in circumstances in which we
would normally not raise capital. Therefore, any capital we raise may be on terms that are unfavorable to us, which
might adversely affect our financial position and results of operations and might also impair our ability to raise
capital on acceptable terms in the future to fund our own operations and initiatives. We believe the cost of such
capital and its terms and conditions may be substantially less attractive than our previous financings.