Dish Network 2010 Annual Report Download - page 135

DISH NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F-50
In June 2009, the United States District Court granted Tivo’s motion for contempt, finding that our original
alternative technology was not more than colorably different than the products found by the jury to infringe
Tivo’s patent, that our original alternative technology still infringed the software claims, and that even if
our original alternative technology was “non-infringing,” the original injunction by its terms required that
we disable DVR functionality in all but approximately 192,000 digital set-top boxes in the field. The
District Court also amended its original injunction to require that we inform the court of any further
attempts to design around Tivo’s patent and seek approval from the court before any such design-around is
implemented. The District Court awarded Tivo $103 million in supplemental damages and interest for the
period from September 2006 through April 2008, based on an assumed $1.25 per subscriber per month
royalty rate. We posted a bond to secure that award pending appeal of the contempt order. On July 1,
2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Court’s contempt order
pending resolution of our appeal.
The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions. Tivo sought
up to $975 million in contempt sanctions for the period from April 2008 to June 2009 based on, among
other things, profits Tivo alleges we made from subscribers using DVRs. We opposed Tivo’s request
arguing, among other things, that sanctions are inappropriate because we made good faith efforts to comply
with the Court’s injunction. We also challenged Tivo’s calculation of profits. On September 4, 2009, the
District Court partially granted Tivo’s motion for contempt sanctions and awarded $2.25 per DVR
subscriber per month for the period from April 2008 to July 2009 (as compared to the award for
supplemental damages for the prior period from September 2006 to April 2008, which was based on an
assumed $1.25 per DVR subscriber per month). By the District Court’s estimation, the total award for the
period from April 2008 to July 2009 is approximately $200 million. The District Court also awarded Tivo
its attorneys’ fees and costs incurred during the contempt proceedings. Enforcement of these awards has
been stayed by the District Court pending resolution of our appeal of the underlying June 2009 contempt
order. On February 8, 2010, we and Tivo submitted a stipulation to the District Court that the attorneys’
fees and costs, including expert witness fees and costs, that Tivo incurred during the contempt proceedings
amounted to $6 million. During the year ended December 31, 2009, we increased our total accrual by
$361 million to reflect the supplemental damages and interest for the period from implementation of our
original alternative technology through April 2008 and for the estimated cost of alleged software
infringement (including contempt sanctions for the period from April 2008 through June 2009) for the
period from April 2008 through December 2009 plus interest. During the years ended December 31, 2010
and 2009, we recorded $124 million and $361 million, respectively, of “Litigation expense” on our
Consolidated Statements of Operations and Comprehensive Income (Loss). During the year ended
December 31, 2008, we did not record any litigation expense related to this case. Our total accrual at
December 31, 2010 was $517 million and is included in “Litigation accrual” on our Consolidated Balance
Sheets.
In light of the District Court’s finding of contempt, and its description of the manner in which it believes
our original alternative technology infringed the ‘389 patent, we are also developing and testing potential
new alternative technology in an engineering environment. As part of EchoStar’s development process,
EchoStar downloaded several of our design-around options to less than 1,000 subscribers for “beta”
testing. On March 11, 2010, we requested that the District Court approve the implementation of one of our
design-around options on an expedited basis. There can be no assurance that the District Court will
approve this request.
Oral argument on our appeal of the contempt ruling took place on November 2, 2009, before a three-judge
panel of the Federal Circuit Court of Appeals. On March 4, 2010, the Federal Circuit affirmed the District
Court’s contempt order in a 2-1 decision. On May 14, 2010, our petition for en banc review of that
decision by the full Federal Circuit was granted and the opinion of the three-judge panel was vacated. Oral
argument occurred on November 9, 2010. There can be no assurance that the full Federal Circuit will
reverse the decision of the three-judge panel. Tivo has stated that it will seek additional damages for the
period from June 2009 to the present. Although we have accrued our best estimate of damages, contempt
sanctions and interest through December 31, 2010, there can be no assurance that Tivo will not seek, and
that the court will not award, an amount that exceeds our accrual.