Adobe 2006 Annual Report Download - page 105

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Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such
capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to
develop an estimate of the maximum potential amount of future payments that could potentially result from
any hypothetical future claim, but believe the risk of having to make any payments under this general
indemnification to be remote.
Legal Proceedings
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation,
Macromedia, Inc. and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging
infringement of U.S. Patent No. 5,835,712, entitled “Client-Server System Using Embedded Hypertext
Tags for Application and Database Development.” The Plaintiff’s complaint asserts that “defendants have
infringed, and continue to infringe, one or more claims of the ‘712 patent by making, using, selling and/or
offering for sale, inter alia, products supporting Microsoft Active Server Pages technology.” Plaintiff seeks
unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for
“willful infringement,” and fees and costs. We believe the action has no merit and are vigorously defending
against it. As of December 1, 2006, we do not believe that a loss is probable or estimable.
On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R.
Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of
the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The
complaint asserts that stock option grants to executives were priced retroactively by Adobe and were
improperly accounted for, and alleges various causes of action based on that assertion. The complaint
seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits,
as well as injunctive relief. As of December 1, 2006, we do not believe that a loss is probable or estimable.
In connection with our anti-piracy efforts, conducted both internally and through the Business
Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such
lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and
have recently increased in frequency, especially in Latin American countries. We believe we have valid
defenses with respect to such counter-claims; however, it is possible that our consolidated financial
position, cash flows or results of operations could be affected in any particular period by the resolution of
one or more of these counter-claims.
From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims,
investigations and proceedings in the ordinary course of business, including claims of alleged infringement
of third-party patents and other intellectual property rights, commercial, employment and other matters. In
accordance with U.S. generally accepted accounting principles, Adobe makes a provision for a liability
when it is both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a
particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses
with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated
financial position, cash flows or results of operations could be affected by the resolution of one or more of
such contingencies.
Note 16. Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting
for Derivative Instruments and Hedging Activities” we recognize derivative instruments and hedging
activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses
resulting from changes in fair value are accounted for depending on the use of the derivative and whether it
is designated and qualifies for hedge accounting.