Medtronic 2011 Annual Report Download - page 36

32 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Certain Litigation Charges, Net We classify material litigation
reserves and gains recognized as certain litigation charges, net.
During fiscal year 2011, we recorded certain litigation charges,
net of $245 million related primarily to a $221 million settlement
involving the Sprint Fidelis family of defibrillation leads and
accounting charges for Other Matters litigation. The Sprint Fidelis
settlement related to the resolution of certain outstanding
product liability litigation related to the Sprint Fidelis family of
defibrillation leads that were subject to a field action announced
October 15, 2007.
During fiscal year 2010, we recorded certain litigation charges,
net of $374 million related to settlements with Abbott Laboratories
(Abbott) and W.L. Gore & Associates, Inc. (Gore). The Abbott
settlement accounted for $444 million in litigation charges and
the Gore settlement accounted for a $70 million litigation gain.
The Abbott settlement related to the global resolution of all
outstanding intellectual property litigation. The terms of the
Abbott agreement stipulate that neither party will sue the other
in the field of coronary stent and stent delivery systems for a
period of at least 10 years, subject to certain conditions. Both
parties also agreed to a cross-license of the disputed patents
within the defined field. The $444 million settlement amount
included a $400 million payment made to Abbott and a $42
million success payment made to evYsio Medical Devices, LLC
(evYsio). In addition, a $2 million payment was made to evYsio in
connection with an amendment to the parties’ existing agreement
in order to expand the scope of the definition of the license field
from evYsio. We paid the settlement in the second quarter of
fiscal year 2010. The Gore settlement related to the resolution of
outstanding patent litigation related to selected patents in
Medtronic’s Jervis and Wiktor patent families. The terms of the
agreement stipulate that neither party will sue the other in the
defined field of use, subject to certain conditions. We granted
Gore a worldwide, irrevocable, non-exclusive license in the
defined field of use. In addition and subject to certain conditions,
Gore began paying us quarterly payments in January 2010 that
will continue through the fiscal quarter ending October 2018.
During fiscal year 2009, we incurred four certain litigation
charges, net totaling $714 million. The first charge of $178 million
related to litigation with DePuy Spine (formerly DePuy/AcroMed),
a subsidiary of Johnson & Johnson (J&J), and Biedermann Motech
GmbH (collectively, DePuy) regarding patent infringement claims
stemming from the Vertex line of multiaxial screws. On June 1,
2009, the U.S. Court of Appeals for the Federal Circuit affirmed
the December 2007 ruling of infringement and awarded damages
based on lost profits, but reversed certain elements of the original
2007 award. Prior to the U.S. Court of Appeals’ decision, we had
not recorded expense related to the damages awarded in 2007 as
we did not believe that an unfavorable outcome in this matter
was probable under U.S. GAAP. As a result of the U.S. Court of
Appeals’ decision, we recorded a reserve of $178 million which
covered the revised damages award and pre- and post-judgment
interest. The settlement amount was paid in June 2009.
The second charge in fiscal year 2009 of $270 million related
to a settlement of royalty disputes with J&J which concern
Medtronic’s licensed use of certain patents. The agreement
reached in the fourth quarter of fiscal year 2009 ended all current
and potential disputes between the two parties under their 1997
settlement and license agreement relating to coronary angioplasty
stent design and balloon material patents. The settlement amount
was paid in May 2009.
The third charge in fiscal year 2009 of $229 million related to
litigation with Cordis Corporation (Cordis), a subsidiary of J&J. The
Cordis litigation originated in October 1997 and pertains to patent
infringement claims on previous generations of bare metal stents
that are no longer on the market. On September 30, 2008, the
U.S. District Court entered final judgment including accrued
interest, totaling approximately $521 million, to Cordis. We had
previously recorded a charge of $243 million related to this
litigation in the third quarter of fiscal year 2008. At the time the
$243 million charge was recorded, the range of potential loss
related to this matter was subject to a high degree of estimation.
The amount recorded represented an estimate at the low end
of the range of probable outcomes related to the matter. Given
that the Company and J&J were involved in a number of
litigation matters which span across businesses, we entered
into negotiations with J&J in an attempt to settle some of the
additional litigation simultaneous with the payment of this
judgment. Ultimately, the agreement reached with Cordis
required a total cash payment of $472 million, which included the
settlement of several outstanding legal matters between the
parties. The charge of $229 million in fiscal year 2009 is the net
result of $472 million in cash payments, offset by the existing
reserves on the balance sheet including interest accrued on the
$243 million since the date established. The settlement amount
of $472 million was paid in fiscal year 2009.
The fourth charge recognized in fiscal year 2009 related to
litigation that originated in May 2006 with Fastenetix LLC
(Fastenetix), a patent holding company. The litigation related to
an alleged breach of a royalty agreement in the Spinal business.