SanDisk 2007 Annual Report Download - page 67

In addition, our competitors may be able to design their products around our patents and other proprietary
rights. We also have patent cross-license agreements with several of our leading competitors. Under these
agreements, we have enabled competitors to manufacture and sell products that incorporate technology covered
by our patents. While we obtain license and royalty revenue or other consideration for these licenses, if we continue
to license our patents to our competitors, competition may increase and may harm our business, financial condition
and results of operations.
There are both flash memory producers and flash memory card manufacturers who we believe may require a
license from us. Enforcement of our rights often requires litigation. If we bring a patent infringement action and are
not successful, our competitors would be able to use similar technology to compete with us. Moreover, the
defendant in such an action may successfully countersue us for infringement of their patents or assert a counterclaim
that our patents are invalid or unenforceable. If we do not prevail in the defense of patent infringement claims, we
could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain
licenses to the infringing technology.
On October 24, 2007, we initiated two patent infringement actions in the United States District Court for the
Western District of Wisconsin and one action in the United States International Trade Commission against
25 companies that manufacture, sell and import USB flash drives, CompactFlash cards, multimedia cards, MP3/
media players and/or other removable flash storage products. There can be no assurance that we will be successful
in this litigation or that we will not face counterclaims of the nature described above.
We may be unable to license intellectual property to or from third parties as needed, or renew existing licenses,
which could expose us to liability for damages, reduce our royalty revenues, increase our costs or limit or prohibit us
from selling products. If we incorporate third-party technology into our products or if we are found to infringe
others’ intellectual property, we could be required to license intellectual property from a third party. We may also
need to license some of our intellectual property to others in order to enable us to obtain important cross-licenses to
third-party patents. We cannot be certain that licenses will be offered when we need them, that the terms offered will
be acceptable, or that these licenses will help our business. If we do obtain licenses from third parties, we may be
required to pay license fees or royalty payments. In addition, if we are unable to obtain a license that is necessary to
manufacture our products, we could be required to suspend the manufacture of products or stop our product
suppliers from using processes that may infringe the rights of third parties. We may not be successful in redesigning
our products, or the necessary licenses may not be available under reasonable terms. Our license and royalty
revenues comprise the majority of our cash provided by operating activities. For the year ended December 30, 2007
license revenue was $450 million, or approximately 12% of our total revenue. If our existing licensees do not renew
their licenses upon expiration and we are not successful in signing new licensees in the future, our license revenue,
profitability, and cash provided by operating activities would be adversely impacted. For example, our current
license agreement with Samsung expires in August 2009, and to the extent that we are unable to renew this
agreement under similar terms or if we are unable to renew at all, our financial results may be adversely impacted,
and we may incur additional patent litigation costs to renew Samsung as a licensee.
We are currently and may in the future be involved in litigation, including litigation regarding our intellectual
property rights or those of third parties, which may be costly, may divert the efforts of our key personnel and could
result in adverse court rulings, which could materially harm our business. We are involved in a number of
lawsuits, including among others, several cases involving our patents and the patents of third parties. We are the
plaintiff in some of these actions and the defendant in other of these actions. Some of the actions seek injunctions
against the sale of our products and/or substantial monetary damages, which if granted or awarded, could have a
material adverse effect on our business, financial condition and results of operations.
We and other companies have been sued in the United States District Court of the Northern District of
California in purported consumer class actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing of
flash memory, and concealment thereof, in violation of state and federal laws. The lawsuits purport to be on behalf
of classes of purchasers of flash memory. The lawsuits seek restitution, injunction and damages, including treble
damages, in an unspecified amount.
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