NetFlix 2004 Annual Report Download - page 79

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and percentages)
Litigation
From time to time, in the normal course of its operations, the Company is a party to litigation matters and
claims, including claims relating to employee relations and business practices. Litigation can be expensive and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to
predict. Listed below are material legal proceedings to which the Company is a party. The Company believes that
it has defenses to the cases set forth below and is vigorously contesting these matters. An unfavorable outcome of
any of these matters could have a material adverse effect on the Company’s financial position, liquidity or results
of operations.
Between July 22 and September 9, 2004, seven purported securities class action suits were filed in the
United States District Court for the Northern District of California against the Company and, in the aggregate,
Reed Hastings, W. Barry McCarthy, Jr., and Leslie J. Kilgore. These class action suits were consolidated in
January 2005, and a consolidated complaint was filed on February 24, 2005, and the lead plaintiff is Todd Noel.
The complaint alleges violations of certain federal securities laws, seeking unspecified damages on behalf of a
class of purchasers of the Company’s common stock between October 1, 2003 and October 14, 2004. The
plaintiffs allege that the Company made false and misleading statements and omissions of material facts based on
our disclosure regarding churn and delivery speed, claiming alleged violations by each named defendant of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
alleged violations by certain of its officers of Section 20A of Securities Exchange Act of 1934.
On September 14, 2004, BTG International Inc. filed suit against the Company and other, unaffiliated
companies in the United States District Court for the District of Delaware. The complaint alleges that the
Company infringed U.S. Patent No. 5,717,860 entitled “Method and Apparatus for Tracking the Navigation Path
of a User on the World Wide Web.” The complaint also alleges infringement of another patent by certain of the
other named defendants, not including the Company. The complaint seeks unspecified compensatory and
enhanced damages, interest and fees, and to permanently enjoin the defendants from infringing the patents in the
future.
On September 23, 2004, Frank Chavez, individually and on behalf of others similarly situated, filed a class
action lawsuit against the Company in California Superior Court, City and County of San Francisco. The
complaint asserts claims of, among other things, false advertising, unfair and deceptive trade practices, breach of
contract as well as claims relating to the Company’s statements regarding DVD delivery times. The complaint
seeks restitution, disgorgement, damages, and injunction and specific performance and other relief.
On August 13, 2004, Miles L. Mitzner, a shareholder claiming to be acting on the Company’s behalf, filed a
shareholder derivative suit in the United States District Court for the Northern District of California against
certain officers and certain current and former members of the board of directors, specifically Reed Hastings, W.
Barry McCarthy, Jr., Jay C. Hoag, A. Robert Pisano, Michael Ramsay and Timothy M. Haley. Mr. Mitzner
claimed that the named defendants breached their fiduciary duties by allowing allegedly false and misleading
statements to be made regarding, among other things, churn. Mr. Mitzner also claimed that the named defendants
illegally traded the Company’s stock while in possession of material nonpublic information. The lawsuit sought,
on the Company’s behalf, unspecified compensatory and enhanced damages, disgorgement of profits earned
through alleged insider trading, recovery of attorneys’ fees and costs, and other relief. However, on February 25,
2005, the Court dismissed the action with prejudice, and final judgment was entered in the Company’s favor.
On October 19, 2004, Doris Staehr and Steve Staehr, shareholders claiming to be acting on the Company’s
behalf, filed a shareholder derivative suit in the Superior Court of the State of California for the County of Santa
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