NetFlix 2006 Annual Report Download - page 71

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
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 Company
entered into an amended settlement under which Netflix subscribers who were enrolled in a paid membership
before January 15, 2005 and were a member on October 19, 2005 are eligible to receive a free one-month
upgrade in service level and Netflix subscribers who were enrolled in a paid membership before January 15,
2005 and were not a member on October 19, 2005 are eligible to receive a free one-month Netflix membership of
either the 1, 2 or 3 DVDs at-a-time unlimited program. The Court issued final judgment on the settlement on
July 28, 2006, awarding plaintiffs’ attorneys’ fees and expenses of $2,127. The final judgment has been appealed
to the California Court of Appeals, First Appellate District. The Appellate Court has not set a hearing date. In
accordance with SFAS No. 5, Accounting for Contingencies, the Company estimated and recorded a charge
against earnings in general and administrative expenses associated with the legal fees and the incremental
expected costs for the free one month membership to former subscribers, of which $6,615 is included in Accrued
expenses as of December 31, 2006. The charge for the free one month upgrade to the next level program for
existing subscribers will be recorded when the subscribers utilize the upgrade. The Company also recorded an
insurance receivable of $1,000, representing the portion of legal fees reimbursed by the Company’s insurer, all of
which had been fully reimbursed as of December 31, 2006. The actual cost of the settlement will be dependent
upon many unknown factors such as the number of former Netflix subscribers who will actually redeem the
settlement benefit when it is made available following the appeal period. The Company denies any wrongdoing.
On April 4, 2006, the Company filed a complaint for patent infringement against Blockbuster, Inc. in the
United States District Court for the Northern District of California. The complaint alleges that Blockbuster
willfully infringed two of the Company’s patents—U.S. Patent No. 7,024,381 entitled “Approach for Renting
Items to Customers” and U.S. Patent No. 6,584,450 entitled “Method and Apparatus for Renting Items.” The
complaint seeks a judgment that Blockbuster has willfully infringed the specified patents and seeks a preliminary
and/or permanent injunction enjoining Blockbuster from any further infringement, unspecified compensatory
enhanced damages, attorneys’ fees, expenses and costs. On June 13, 2006, Blockbuster responded and filed a
counterclaim alleging that the Company had violated Section 2 of the Sherman Antitrust Act. The counterclaim
also seeks a declaratory judgment that Blockbuster had not infringed the Company’s asserted patents and that
both patents were invalid. In addition to the declaratory judgment, Blockbuster is also seeking compensatory
damages, attorneys’ fees and expenses, costs of the suit, pre-and post-judgment damage on all amounts awarded
and general relief.
On January 2, 2007, Lycos, Inc. filed a complaint for patent infringement against the Company, TiVo, Inc.
and Blockbuster, Inc. in the United States District Court for the Eastern District of Virginia. The complaint
alleges that the Company infringed U.S. Patents Nos. 5,867,799 and 5,983,214, entitled “Information System and
Method for Filtering a Massive Flow of Information Entities to Meet User Information Classification Needs” and
“System and Method Employing Individual User Content-Based Data and User Collaboration Feedback Data to
Evaluate the Content of an Information Entity in a Large Information Communication Network,” respectively.
The complaint seeks unspecified compensatory and enhanced damages, interest and fees, and seeks to
permanently enjoin the defendants from infringing the patents in the future.
On January 31, 2007, Dennis Dilbeck filed a putative class action lawsuit against the Company in the United
States District Court for the Northern District of California captioned Dennis Dilbeck vs. Netflix, Inc., Civil Case
No. C 07 00643 PVT. The complaint alleges that the Company violated antitrust and unfair competition laws in
seeking to enforce two of its patents against Blockbuster, Inc. and other potential competitors, which patents
were allegedly obtained by deceiving the U.S. Patent and Trademark Office. The complaint alleges that the
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