Pizza Hut 2004 Annual Report Download - page 74

Pursuant฀to฀the฀parties’฀agreement,฀on฀or฀about฀August฀31,฀
2004,฀the฀District฀Court฀ordered฀that฀the฀trial฀of฀this฀action฀
be฀bifurcated฀so฀that฀stage฀one฀will฀resolve฀Plaintiffs’฀claims฀
for฀equitable฀relief฀and฀stage฀two฀will฀resolve฀Plaintiffs’฀claims฀
for฀damages.฀The฀parties฀are฀currently฀proceeding฀with฀the฀
equitable฀relief฀stage฀of฀this฀action.฀During฀this฀stage,฀Taco฀
Bell฀filed฀a฀motion฀to฀partially฀decertify฀the฀class฀to฀exclude฀
from฀the฀Rule฀23(b)(2)฀class฀claims฀for฀monetary฀damages.฀
The฀District฀Court฀denied฀the฀motion.฀Plaintiffs฀filed฀their฀own฀
motion฀for฀partial฀summary฀judgment฀as฀to฀liability฀relating฀
to฀a฀subset฀of฀the฀California฀Restaurants.฀The฀District฀Court฀
denied฀that฀motion฀as฀well.
Taco฀Bell฀has฀denied฀liability฀and฀intends฀to฀vigorously฀
defend฀against฀all฀claims฀in฀this฀lawsuit.฀Although฀this฀lawsuit฀
is฀at฀an฀early฀stage฀in฀the฀proceedings,฀it฀is฀likely฀that฀certain฀
of฀the฀California฀restaurants฀will฀be฀determined฀to฀be฀not฀fully฀
compliant฀with฀accessibility฀laws฀and฀that฀Taco฀Bell฀will฀be฀
required฀to฀take฀certain฀steps฀to฀make฀these฀restaurants฀fully฀
compliant.฀However,฀at฀this฀time,฀it฀is฀not฀possible฀to฀estimate฀
with฀ reasonable฀certainty฀the฀ potential฀costs฀to฀ bring฀ any฀
non-compliant฀California฀Restaurants฀into฀compliance฀with฀
applicable฀state฀and฀federal฀disability฀access฀laws.฀Nor฀is฀it฀
possible฀at฀this฀time฀to฀estimate฀with฀reasonable฀certainty฀
the฀probability฀or฀amount฀of฀liability฀for฀monetary฀damages฀on฀
a฀class-wide฀basis฀to฀Taco฀Bell.
On฀January฀16,฀1998,฀a฀lawsuit฀against฀Taco฀Bell฀Corp.,฀
entitled฀Wrench฀LLC,฀Joseph฀Shields฀and฀Thomas฀Rinks฀v.฀Taco฀
Bell฀Corp.฀(“Wrench”)฀was฀filed฀in฀the฀United฀States฀District฀
Court฀ for฀ the฀ Western฀ District฀ of฀ Michigan.฀ The฀ lawsuit฀
alleged฀that฀Taco฀Bell฀Corp.฀misappropriated฀certain฀ideas฀
and฀concepts฀used฀in฀its฀advertising฀featuring฀a฀Chihuahua.฀
The฀ plaintiffs฀ sought฀to฀ recover฀monetary฀damages฀ under฀
several฀theories,฀including฀breach฀of฀implied-in-fact฀contract,฀
idea฀misappropriation,฀conversion฀and฀unfair฀competition.฀On฀
June฀10,฀1999,฀the฀District฀Court฀granted฀summary฀judgment฀
in฀favor฀of฀Taco฀Bell฀Corp.฀Plaintiffs฀filed฀an฀appeal฀with฀the฀
U.S.฀Court฀ of฀Appeals฀ for฀ the฀ Sixth฀ Circuit,฀and฀ oral฀ argu-
ments฀were฀held฀on฀September฀20,฀2000.฀On฀July฀6,฀2001,฀
the฀Sixth฀Circuit฀Court฀of฀Appeals฀reversed฀the฀District฀Court’s฀
judgment฀in฀favor฀of฀Taco฀Bell฀Corp.฀and฀remanded฀the฀case฀
to฀the฀District฀Court.฀Taco฀Bell฀Corp.฀unsuccessfully฀petitioned฀
the฀Sixth฀Circuit฀Court฀of฀Appeals฀for฀rehearing฀en฀banc,฀and฀
its฀petition฀for฀writ฀of฀certiorari฀to฀the฀United฀States฀Supreme฀
Court฀was฀denied฀on฀January฀21,฀2002.฀The฀case฀was฀returned฀
to฀District฀Court฀for฀trial฀which฀began฀on฀May฀14,฀2003฀and฀on฀
June฀4,฀2003฀the฀jury฀awarded฀$30฀million฀to฀the฀plaintiffs.฀
Subsequently,฀the฀plaintiffs฀moved฀to฀amend฀the฀judgment฀to฀
include฀pre-judgment฀interest฀and฀post-judgment฀interest฀and฀
Taco฀Bell฀filed฀its฀post-trial฀motion฀for฀judgment฀as฀a฀matter฀of฀
law฀or฀a฀new฀trial.฀On฀September฀9,฀2003,฀the฀District฀Court฀
denied฀Taco฀Bell’s฀motion฀and฀granted฀the฀plaintiff’s฀motion฀
to฀amend฀the฀judgment.
In฀view฀of฀the฀jury฀verdict฀and฀subsequent฀District฀Court฀
ruling,฀ we฀ recorded฀ a฀ charge฀ of฀ $42฀million฀ in฀ 2003.฀ We฀
appealed฀the฀verdict฀to฀the฀Sixth฀Circuit฀Court฀of฀Appeals฀and฀
interest฀continued฀to฀accrue฀during฀the฀appeal฀process.฀Prior฀
to฀a฀ruling฀from฀the฀Sixth฀Circuit฀Court฀of฀Appeals,฀we฀settled฀
this฀matter฀with฀the฀Wrench฀plaintiffs฀on฀January฀15,฀2005.฀
Concurrent฀with฀the฀settlement฀with฀the฀plaintiffs,฀we฀also฀
settled฀the฀matter฀with฀certain฀of฀our฀insurance฀carriers.฀As฀a฀
result฀of฀these฀settlements,฀reversals฀of฀previously฀recorded฀
expense฀ of฀ $14฀million฀ were฀ recorded฀ in฀ the฀ year฀ ended฀
December฀25,฀2004.฀ The฀amount฀ to฀ be฀ paid฀ to฀ the฀plain-
tiffs฀per฀the฀settlement฀agreement฀is฀included฀in฀accounts฀
payable฀ and฀ other฀ current฀ liabilities฀ in฀ our฀ Consolidated฀
Balance฀Sheet.
We฀intend฀to฀seek฀additional฀recoveries฀from฀our฀other฀
insurance฀carriers฀during฀the฀periods฀in฀question.฀We฀have฀also฀
filed฀suit฀against฀Taco฀Bell’s฀former฀advertising฀agency฀in฀the฀
United฀States฀District฀Court฀for฀the฀Central฀District฀of฀California฀
seeking฀reimbursement฀for฀the฀settlement฀amount฀as฀well฀as฀
any฀costs฀that฀we฀have฀incurred฀in฀defending฀this฀matter.฀Any฀
additional฀recoveries฀will฀be฀recorded฀as฀they฀are฀realized.
Obligations฀to฀PepsiCo,฀Inc.฀After฀Spin-off฀ In฀connection฀
with฀the฀Spin-off,฀we฀entered฀into฀separation฀and฀other฀related฀
agreements฀ (the฀ “Separation฀ Agreements”)฀ governing฀ the฀
Spin-off฀and฀our฀subsequent฀relationship฀with฀PepsiCo.฀These฀
agreements฀provide฀certain฀indemnities฀to฀PepsiCo.
Under฀ terms฀ of฀ the฀ agreement,฀ we฀ have฀ indemnified฀
PepsiCo฀for฀any฀costs฀or฀losses฀it฀incurs฀with฀respect฀to฀all฀
letters฀of฀credit,฀guarantees฀and฀contingent฀liabilities฀relating฀
to฀our฀businesses฀under฀which฀PepsiCo฀remains฀liable.฀As฀
of฀December฀25,฀2004,฀PepsiCo฀remains฀liable฀for฀approxi-
mately฀ $39฀million฀ on฀ a฀ nominal฀ basis฀ related฀ to฀ these฀
contingencies.฀ This฀ obligation฀ ends฀ at฀ the฀ time฀ PepsiCo฀
is฀released,฀terminated฀or฀replaced฀by฀a฀qualified฀letter฀of฀
credit.฀We฀have฀not฀been฀required฀ to฀make฀ any฀payments฀
under฀this฀indemnity.
Under฀ the฀ Separation฀ Agreements,฀ PepsiCo฀ main-
tains฀full฀control฀and฀absolute฀discretion฀with฀regard฀to฀any฀
combined฀ or฀ consolidated฀ tax฀ filings฀ for฀ periods฀ through฀
October฀6,฀1997.฀ PepsiCo฀also฀ maintains฀full฀ control฀and฀
absolute฀discretion฀regarding฀any฀common฀tax฀audit฀issues.฀
Although฀PepsiCo฀has฀contractually฀agreed฀to,฀in฀good฀faith,฀
use฀its฀best฀efforts฀to฀settle฀all฀joint฀interests฀in฀any฀common฀
audit฀issue฀on฀a฀basis฀consistent฀with฀prior฀practice,฀there฀
can฀be฀no฀assurance฀that฀determinations฀made฀by฀PepsiCo฀
would฀be฀the฀same฀as฀we฀would฀reach,฀acting฀on฀our฀own฀
behalf.฀Through฀December฀25,฀2004,฀there฀have฀not฀been฀
any฀determinations฀made฀by฀PepsiCo฀where฀we฀would฀have฀
reached฀a฀different฀determination.
72