NetFlix 2012 Annual Report Download - page 70

PROs. While the Company anticipates finalizing these negotiations, the outcome of these negotiations is
uncertain. The results of any negotiation may be materially different from management’s estimates.
Legal Proceedings
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, business practices and patent infringement. Litigation can
be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict and the Company’s view of these matters may change in the future as the litigation and
events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision
for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on
the Company’s operations or its financial position, liquidity or results of operations.
On December 5, 2012, the Company and its Chief Executive Officer Reed Hastings each received a
“Wells Notice” from the Staff of the Securities and Exchange Commission (“SEC”) indicating its intent to
recommend to the SEC that it institute a cease and desist proceeding and/or bring a civil injunctive action against
the Company and Mr. Hastings for violations of Regulation Fair Disclosure, Section 13(a) of the Securities
Exchange Act and Rules 13a-11 and 13a-15 thereunder.
On January 13, 2012, the first of three purported shareholder class action lawsuits was filed in the
United States District Court for the Northern District of California against the Company and certain of its officers
and directors. Two additional purported shareholder class action lawsuits were filed in the same court on
January 27, 2012 and February 29, 2012, respectively, alleging substantially similar claims. These lawsuits have
been consolidated and the Court has selected lead plaintiffs. Lead plaintiffs filed a consolidated complaint on
June 26, 2012. The consolidated complaint alleges violations of the federal securities laws and seeks unspecified
compensatory damages and other relief on behalf of a class of purchasers of the Company’s common stock
between October 20, 2010 and October 24, 2011. The complaint alleges among other things, that the Company
issued materially false and misleading statements regarding the Company’s business practices and violated
accounting rules concerning segment reporting, which led to artificially inflated stock prices. On February 4,
2013, the Company filed a demurrer to the consolidated complaint and a motion to stay the litigation.
Management has determined a potential loss is reasonably possible however, based on its current knowledge,
management does not believe that the amount of such possible loss or a range of potential loss is reasonably
estimable.
On November 23, 2011, the first of six purported shareholder derivative suits was filed in the Superior Court
of California, Santa Clara County, against the Company and certain of its officers and directors. Five additional
purported shareholder derivative suits were subsequently filed: two in the Superior Court of California, Santa
Clara County on February 9, 2012 and May 2, 2012; and three in the United States District Court for the
Northern District of California on February 13, 2012, February 24, 2012 and April 2, 2012. The purported
shareholder derivative suits filed in the Northern District of California have been voluntarily dismissed. On
July 5, 2012, the purported shareholder derivative suits filed in Santa Clara County were consolidated and lead
counsel was appointed. The lawsuits were subsequently consolidated and the Court selected lead plaintiffs. Lead
plaintiffs filed a consolidated complaint on June 26, 2012. The consolidated complaint alleges violations of the
federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a class of
purchasers of the Company’s common stock between October 20, 2010 and October 24, 2011. The consolidated
complaint alleges, among other things, that the Company issued materially false and misleading statements
regarding the Company’s business practices and violated accounting rules concerning segment reporting, which
led to artificially inflated stock prices. Defendants filed a motion to dismiss the consolidated complaint on
August 27, 2012. That motion is pending. Management has determined a potential loss is reasonably possible
however, based on its current knowledge, management does not believe that the amount of such possible loss or a
range of potential loss is reasonably estimable.
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