SanDisk 2007 Annual Report Download - page 77

On August 7, 2006, two purported shareholder class and derivative actions, captioned Capovilla v. SanDisk
Corp., No. 106 CV 068760, and Dashiell v. SanDisk Corp., No. 106 CV 068759, were filed in the Superior Court of
California in Santa Clara County, California. On August 9, 2006 and August 17, 2006, respectively, two additional
purported shareholder class and derivative actions, captioned Lopiccolo v. SanDisk Corp., No. 106 CV 068946, and
Sachs v. SanDisk Corp., No. 106 CV 069534, were filed in that court. These four lawsuits were subsequently
consolidated under the caption In re msystems Ltd. Shareholder Litigation, No. 106 CV 068759 and on October 27,
2006, a consolidated amended complaint was filed that superseded the four original complaints. The lawsuit was
brought by purported shareholders of msystems Ltd. (“msystems”), and named as defendants the Company and
each of msystems’ former directors, including its President and Chief Executive Officer, and its former Chief
Financial Officer, and named msystems as a nominal defendant. The lawsuit asserted purported class action and
derivative claims. The alleged derivative claims asserted, among other things, breach of fiduciary duties, abuse of
control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past stock
option grants. The alleged class and derivative claims also asserted claims for breach of fiduciary duty by msystems’
board, which the Company was alleged to have aided and abetted, with respect to allegedly inadequate consid-
eration for the merger, and allegedly false or misleading disclosures in proxy materials relating to the merger. The
complaints sought, among other things, equitable relief, including enjoining the proposed merger, and compen-
satory and punitive damages. In January 2008, the court granted, without prejudice, the Company’s and msystems’
motion to dismiss.
On September 11, 2006, Mr. Rabbi, a shareholder of msystems filed a derivative action and a motion to permit
him to file the derivative action against four directors of msystems and msystems, arguing that options were
allegedly allocated to officers and employees of msystems in violation of applicable law. Mr. Rabbi claimed that the
aforementioned actions allegedly caused damage to msystems. On January 25, 2007, msystems filed a motion to
dismiss the motion to seek leave to file the derivative action and the derivative action on the grounds, inter alia, that
Mr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and the Company. msystems
received an extension to file its comprehensive response to the motion, to be submitted 30 days after the decision of
the court in its motion to dismiss.
On February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against the Company, Samsung
Electronics Co., Ltd., Samsung Electronics America, Inc. and Apple Inc., Case No. 2:07-CV-52, in the Eastern
District of Texas, Marshall Division, alleging infringement of U.S. Patent 7,065,417 (the “’417 patent”). On June 19,
2007, the Company filed an answer and counterclaim: (a) denying infringement; (b) seeking a declaratory judgment
that the ’417 patent is invalid, unenforceable and not infringed by the Company. On July 31, 2007, Texas MP3 filed
an amended complaint against the Company and the other parties named in the original complaint, alleging
infringement of the ’417 patent. On August 1, 2007, defendant Apple, Inc. filed a motion to stay the litigation
pending completion of an inter-partes reexamination of the ’417 patent by the U.S. Patent and Trademark Office.
That motion was denied. On August 10, 2007, the Company filed an answer to the amended complaint and a
counterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is invalid,
unenforceable and not infringed by the Company. A status conference in the case was held on November 2,
2007. A Markman hearing has been scheduled for March 12, 2009 and jury selection for July 6, 2009. Discovery is
proceeding.
On or about May 11, 2007, the Company received written notice from Alcatel-Lucent, S.A., (“Lucent”),
alleging that the Company’s digital music players require a license to U.S. Patent No. 5,341,457 (the “’457 patent”)
and U.S. Patent No. RE 39,080 (the “’080 patent”). On July 13, 2007, the Company filed a complaint for a
declaratory judgment of non-infringement and patent invalidity against Lucent Technologies Inc. and Lucent in the
United States District Court for the Northern District of California, captioned SanDisk Corporation v. Lucent
Technologies Inc., et al., Civil Case No. C 07 03618. The complaint seeks a declaratory judgment that the Company
does not infringe the two patents asserted by Lucent against the Company’s digital music players. The complaint
further seeks a judicial determination and declaration that Lucent’s patents are invalid. Defendants have answered
and defendant Lucent has asserted a counterclaim of infringement in connection with the ’080 patent. Defendants
have also moved to dismiss the case without prejudice and/or stay the case pending their appeal of a judgment
involving the same patents in suit entered by the United States District Court for the Southern District of California.
The Company has moved for summary judgment on its claims for declaratory relief, and has moved to dismiss
31