Quest Diagnostics 2006 Annual Report Download - page 45

We seek to conduct our business in compliance with all statutes and regulations applicable to our operations.
Many of these statutes and regulations have not been interpreted by the courts. We cannot assure investors that
applicable statutes or regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial
authority in a manner that would adversely affect us. Potential sanctions for violation of these statutes include
significant damages, penalties and fines, exclusion from participation in governmental healthcare programs and
the loss of various licenses, certificates and authorization necessary to operate some or all of our business, which
could have a material adverse effect on our business.
Intellectual Property Rights
Our success in remaining a leading innovator in the diagnostic testing industry by continuing to introduce
new tests, technology and services will depend, in part, on our ability to license new and improved technologies
on favorable terms. Other companies or individuals, including our competitors, may obtain patents or other
property rights that would prevent, limit or interfere with our ability to develop, perform or sell our tests or
operate our business. As a result, we may be involved in intellectual property litigation and we may be found to
infringe on the proprietary rights of others, which could force us to do one or more of the following:
•cease developing, performing or selling products or services that incorporate the challenged intellectual
property;
•obtain and pay for licenses from the holder of the infringed intellectual property right;
•redesign or reengineer our tests;
•change our business processes; or
•pay substantial damages, court costs and attorneys’ fees, including potentially increased damages for any
infringement held to be willful.
Patents generally are not issued until several years after an application is filed. The possibility that, before a
patent is issued to a third party, we may be performing a test or other activity covered by the patent is not a
defense to an infringement claim. Thus, even tests that we develop could become the subject of infringement
claims if a third party obtains a patent covering those tests.
Infringement and other intellectual property claims, regardless of their merit, can be expensive and time-
consuming to litigate. In addition, any requirement to reengineer our tests or change our business processes could
substantially increase our costs, force us to interrupt product sales or delay new test releases. In the past, we
have settled several disputes regarding our alleged infringement of intellectual property rights of third parties. We
are currently involved in settling several additional disputes. We do not believe that resolution of these disputes
will have a material adverse effect on our results of operations, cash flows or financial condition. However,
infringement claims could arise in the future as patents could be issued on tests or processes that we may be
performing, particularly in such emerging areas as gene-based testing and other specialty testing.
Insurance
As a general matter, providers of clinical laboratory testing services may be subject to lawsuits alleging
negligence or other similar legal claims. Some of these suits involve claims for substantial damages. Any
professional liability litigation could also have an adverse impact on our client base and reputation. We maintain
various liability insurance coverages for claims that could result from providing or failing to provide clinical
laboratory testing services, including inaccurate testing results and other exposures. Our insurance coverage limits
our maximum exposure on individual claims; however, we are essentially self-insured for a significant portion of
these claims. The basis for claims reserves considers actuarially determined losses based upon our historical and
projected loss experience. Management believes that present insurance coverage and reserves are sufficient to
cover currently estimated exposures. Although management cannot predict the outcome of any claims made
against the Company, management does not anticipate that the ultimate outcome of any such proceedings or
claims will have a material adverse effect on our financial condition but may be material to our results of
operations and cash flows in the period in which the impact of such claims is determined or paid. Similarly,
although we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs,
we cannot assure you that we will be able to do so.
Employees
At December 31, 2006, we employed approximately 41,000 people. This total excludes employees of the
joint ventures where we do not have a majority interest. We have no collective bargaining agreements with any
unions covering any employees in the United States, and we believe that our overall relations with our employees
are good.
24