NetFlix 2007 Annual Report Download - page 67

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company expenses legal fees as incurred. Listed below are material legal proceedings to which the Company is a
party. 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.
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 $2.1 million. 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 $6.7 million is included in
accrued expenses as of December 31, 2007. 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 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 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 August 6, 2007, the case was
transferred to the District of Massachusetts.
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
Company’s subscribers have paid artificially inflated subscription prices because potential competitors were
allegedly deterred from entering the online DVD rental market by the Company’s patents. The complaint
purports to be on behalf of existing and past subscribers who allegedly would have paid lower subscription rates
but for the alleged anticompetitive conduct. The complaint seeks injunctive relief, restitution and damages in an
unspecified amount. Subsequently, two other consumer class actions were filed in the United States District
Court for the Northern District of California—Melanie Polk-Stamps and Babacar Diene vs. Netflix, Inc., Civil
Case C 07-01266 and Steven Dassa v. Netflix, Inc., Civil Case C 07 1978 RS – each of which alleged the same
causes of actions and made the same request for damages as those set forth in the Dilbeck case. On March 17,
2007, the court entered an order consolidating all of the class actions. Netflix subsequently filed a motion to
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