Medtronic 2008 Annual Report Download - page 88

lease and included in the preceding table. Payments for the remaining
balance of the sale-leaseback agreement are due semi-annually. The
lease provides for an early buyout option whereby the Company, at its
option, could repurchase the equipment at a predetermined fair market
value in calendar year 2009.
15. Contingencies
The Company is involved in a number of legal actions. The outcomes
of these legal actions are not within the Company’s complete control
and may not be known for prolonged periods of time. In some actions,
the claimants seek damages, as well as other relief, including injunctions
barring the sale of products that are the subject of the lawsuit, that
could require significant expenditures or result in lost revenues. In
accordance with SFAS No. 5, “Accounting for Contingencies” (SFAS
No. 5), the Company records a liability in the consolidated financial
statements for these actions when a loss is known or considered
probable and the amount can be reasonably estimated. If the reasonable
estimate of a known or probable loss is a range, and no amount within
the range is a better estimate than any other, the minimum amount of
the range is accrued. If a loss is possible but not known or probable,
and can be reasonably estimated, the estimated loss or range of loss is
disclosed. In most cases, significant judgment is required to estimate
the amount and timing of a loss to be recorded. While it is not possible
to predict the outcome for most of the matters discussed, the Company
believes it is possible that costs associated with them could have a
material adverse impact on the Company’s consolidated earnings,
financial position or cash flows on any one interim or annual period.
With the exception of the Cordis, Marquis and Kyphon matters discussed
below, negative outcomes for the balance of the litigation matters are
not considered probable or cannot be reasonably estimated.
Litigation with Cordis Corporation
On October 6, 1997, Cordis, a subsidiary of J&J, filed suit in U.S. District
Court for the District of Delaware against Arterial Vascular Engineering,
Inc., which Medtronic acquired in January 1999 and which is now
known as Medtronic Vascular, Inc. (Medtronic Vascular). The suit alleged
that Medtronic Vascular’s previously marketed stents infringe certain
patents owned by Cordis. Boston Scientific Corporation is also a
defendant in this suit. On December 22, 2000, a jury rendered a verdict
that Medtronic Vascular’s previously marketed MicroStent and GFX
stents infringed valid claims of two Cordis patents and awarded
damages to Cordis totaling approximately $270. On March 28, 2002, the
District Court entered an order in favor of Medtronic Vascular, deciding
as a matter of law that Medtronic Vascular’s MicroStent and GFX stents
did not infringe the patents. Cordis appealed, and on August 12, 2003,
the U.S. Court of Appeals for the Federal Circuit reversed the District
Court’s decision and remanded the case to the District Court for further
proceedings. The District Court thereafter issued a new patent claim
construction and a new trial was held in March 2005. On March 14, 2005,
the jury found that the previously marketed MicroStent and GFX stent
products infringed valid claims of Cordis’ patents. On March 27, 2006,
the District Court denied post-trial motions filed by the parties, including
Cordis’ motion to reinstate the previous damages award. On April 26,
2006, Medtronic filed its Notice of Appeal of the judgment of
infringement. On February 23, 2007, the United States Patent and
Trademark Office (USPTO) granted a request for reexamination of the
claims of the patent at issue in the above proceedings. Until that
reexamination is concluded, its impact remains unknown. On January 7,
2008, the U.S. Court of Appeals for the Federal Circuit upheld the District
Court’s judgment of infringement. The District Court had deferred any
hearing on damages issues until after the U.S. Court of Appeals for the
Federal Circuit resolved the appeal on the finding of liability. A hearing
date to address damages issues has not yet been set. The Company
believes an unfavorable outcome in the matter is probable. In
accordance with SFAS No. 5, Medtronic has recorded a $243 reserve in
the third quarter of fiscal year 2008 for estimated damages in the matter.
The range of potential loss related to this matter is subject to a high
degree of estimation. The amount recorded represents an estimate of
the low end of the range of probable outcomes related to this matter.
At the time the reserve was recorded, the high end of the range was
undeterminable, but the range of loss included the previous jury award
of approximately $270, which did not include post-judgment interest.
When including post-judgment interest, the award would have equaled
approximately $450.
Litigation with Wyeth and Cordis Corporation
On February 22, 2008, Wyeth and Cordis filed a lawsuit against the
Company and its subsidiary, Medtronic AVE, Inc., in U.S. District Court
for the District of New Jersey, alleging that Medtronic’s Endeavor drug-
eluting stent infringes three U.S. “Morris” patents alleged to be owned
by Wyeth and exclusively licensed to Cordis. The same three patents are
the subject of a pending arbitration between Medtronic and J&J in
which Medtronic asserts that under a 1997 Agreement J&J has
covenanted not to sue Medtronic on the three patents. The arbitration
hearing is scheduled to start July 21, 2008, before a panel of three
arbitrators. On May 15, 2008, the District Court stayed the lawsuit filed
by Wyeth and Cordis pending the result of the arbitration. Additionally,
the Company believes it is indemnified for the claims made by Wyeth
and Cordis. The Company has not recorded an expense related to
damages in connection with these matters because any potential loss
is not currently probable or reasonably estimable under SFAS No. 5.
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
84 Medtronic, Inc.