Canon 2007 Annual Report Download - page 95

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GmbH seeking levies on multi-function printers. This is an
industry test case under which Hewlett-Packard GmbH represents
other companies sharing common interests, and Canon has
undertaken to be bound by the final decision of this court case.
The court of first instance and the court of appeals held that
the multi-function printers were subject to a levy. In particular,
the court of appeals ordered Hewlett-Packard GmbH to pay
the amount equivalent to the levies imposed on photocopiers
(EUR 38.35 to EUR 613.56 per unit, depending on printing
speed and color printing capability). On January 30, 2008,
the Federal Supreme Court delivered its short judgment in favor
of VG Wort, maintaining the judgment of the court of appeals,
whereby the court decided that, for MFPs sold during the period
from 1997 through 2001, the same full tariff as applicable to
photocopier should be applied. It is expected that the Federal
Supreme Court will issue a written full judgment explaining
the rationale underlying its decision sometime in the next
several months. If Hewlett-Packard GmbH decides to file a claim
with the Federal Constitutional Court challenging the judgment
of the Federal Supreme Court, it will have 30 days to file a
claim from receipt of the Federal Supreme Court’s written full
judgment. With regard to single-function printers, VG Wort
filed a separate lawsuit in January 2006 against Canon, seeking
payment of copyright levies, and the court of first instance in
Düsseldorf ruled in favor of the claim by VG Wort in November
2006. Canon lodged an appeal against such decision in
December 2006. In a similar court case, which does not include
Canon, seeking copyright levies on single-function printers of
Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita
Deutschland GmbH, the court of appeals in Düsseldorf rejected
such alleged levies on January 23, 2007. Consistent with the
last decision, Canon won its appeal at the court of appeal. In
its judgment of November 13, 2007, the court of appeal
rejected VG Wort’s claim against Canon. VG Wort appealed
further against decisions of the court of appeal for both Epson
et al. and Canon cases before the Federal Supreme Court. In
December 2007, for a similar Hewlett-Packard GmbH case
relating to single-function printers, the Federal Supreme Court
delivered its judgment in favor of Hewlett-Packard GmbH and
dismissed VG Wort’s claim. Written full judgment by the Federal
Supreme Court was issued on January 24, 2008. Canon was
informed that VG Wort already filed a constitutional complaint
with the Federal Constitutional Court against said judgment of
the Federal Supreme Court. Canon, other companies and the
industry associations have expressed opposition to such exten-
sion of the levy scope. Based on industry opposition to the
extension of levies to digital products, Canon’s assessments of
the merits of various proceeding and Canon’s estimates of the
units impacted and levies, Canon has accrued amounts that it
believes are adequate to address the matters described above.
However, the final conclusion of these court cases including the
amount of levies to be imposed and the associated financial
impact on Canon remains uncertain.
In April 2005, a lawsuit was filed by Nano-Proprietary Inc.
(“NPI”) against the Company and Canon U.S.A., Inc. in the
United States District Court of Texas alleging that SED Inc., a
joint venture company established by the Company and
Toshiba Corporation, was not regarded as a “subsidiary” under
the Patent License Agreement between the Company and NPI
and that the extension of the license to SED Inc. constituted
a breach of the agreement. NPI also alleged that Canon
committed fraud in executing such agreement, and requested
rescission of the agreement and compensatory damages. In
November 2006, the Court denied Canon’s motion for a
summary judgment that SED Inc. was a subsidiary of the
Company. In January 2007, the Company purchased all the
shares of SED Inc. owned by Toshiba Corporation, making SED
Inc. a 100% owned subsidiary of the Company. However, on
February 22, 2007, the Court issued a summary judgment
stating that SED Inc. (before the above stock purchase) was not
a subsidiary of the Company, that the Company had materially
breached the patent license agreement and that NPI was
allowed to terminate that agreement. Thereafter, a trial was
held from April 30 to May 3, 2007, in Austin, Texas. NPI’s fraud
claims against Canon were withdrawn by NPI and the jury
returned a verdict that NPI had sustained no damages. All claims
against Canon U.S.A., Inc. were also withdrawn by NPI. On May
15, 2007, Canon filed a notice of appeal to the United States
Court of Appeals for the Fifth Circuit, appealing the District
Court’s prior ruling that Canon had breached the patent
license agreement with NPI that allowed NPI to terminate that
agreement. On June 4, 2007, NPI also filed a notice of appeal,
appealing the District Court’s determination that NPI had
sustained no damages. These appeals are still pending.
Canon is involved in various claims and legal actions,
including those noted above, arising in the ordinary course of
business. In accordance with SFAS No. 5, “Accounting for
Contingencies,” Canon has recorded provisions for liabilities
when it is probable that liabilities have been incurred and the
amount of loss can be reasonably estimated. Canon reviews
these provisions at least quarterly and adjusts these provisions
to reflect the impact of the negotiations, settlements, rulings,
advice of legal counsel and other information and events
pertaining to a particular case. Based on its experience, Canon
believes that any damage amounts claimed in the specific
matters discussed above are not a meaningful indicator of
Canon’s potential liability. In the opinion of management, the
ultimate disposition of the above mentioned matters will not
have a material adverse effect on Canon’s consolidated financial
position, results of operations, or cash flows. However, litigation
is inherently unpredictable. While Canon believes that it has
valid defenses with respect to legal matters pending against it,
it is possible that Canon’s consolidated financial position,
results of operations, or cash flows could be materially affected
in any particular period by the unfavorable resolution of one or
more of these matters.