Expedia 2008 Annual Report Download - page 107

Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. In the opinion of management, we
do not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial
condition of Expedia. We also evaluate other potential contingent matters, including value-added tax, federal
excise tax, transient occupancy or accommodation tax and similar matters. We do not believe that the
aggregate amount of liability that could be reasonably possible with respect to these matters would have a
material adverse effect on our financial results.
Securities Related Class Action Litigations. While we are not a party to the securities litigation filed
against IAC, under the terms of our separation agreement with IAC, we have generally agreed to bear a
portion of the costs and liabilities, if any, associated with any securities law litigation relating to conduct prior
to the Spin-Off of the businesses or entities that comprise Expedia following the Spin-Off. This case arises out
of IAC’s August 4, 2004, announcement of its earnings for the second quarter of 2004.
Litigation relating to the IAC/hotels.com merger agreement announced April 10, 2003, is pending in
Delaware. The principal claim in these actions is that the defendants breached their fiduciary duty to the
plaintiffs by entering into or approving the merger agreement.
Litigation Relating to Hotel Occupancy Taxes. Lawsuits have been filed by forty-four cities and counties
involving hotel occupancy taxes. In addition, there have been six consumer lawsuits filed relating to taxes and
fees. The municipality and consumer lawsuits are in various stages ranging from responding to the complaint
to discovery. We continue to defend these lawsuits vigorously. To date, fifteen of the municipality lawsuits
have been dismissed. Most of these dismissals have been without prejudice and, generally, allow the
municipality to seek administrative remedies prior to pursuing further litigation. Five dismissals (Pitt County,
North Carolina; Findlay, Ohio; Columbus and Dayton, Ohio; City of Orange, Texas; and Louisville, Kentucky)
were based on a finding that the defendants were not subject to the local hotel occupancy tax ordinance. As a
result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a
reserve for the potential settlement of issues related to hotel occupancy taxes in the amount of $20 million and
$19 million at December 31, 2008 and 2007, respectively. Our reserve is based on our best estimate and the
ultimate resolution of these issues may be greater or less than the liabilities recorded.
In connection with various occupancy tax audits and assessments, certain jurisdictions require that tax
payers pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances,
which is referred to as “pay to play.” We have been assessed approximately $8.2 million in taxes, plus
$9.5 million in penalties and interest by the city of Anaheim, which has a “pay to play” tax ordinance. To
preserve our right to contest this assessment, it is possible that we may be required to make a payment to
Anaheim, as well as to other California jurisdictions that make similar assessments. We are challenging the
city’s purported right to require us to pay the tax assessment prior to commencing litigation. Other
jurisdictions may also attempt to require that we pay any assessed taxes prior to being allowed to contest or
litigate the applicability of similar tax ordinances. Payment of these amounts is not an admission that we
believe we are subject to such taxes and we intend to continue defending our position vigorously.
NOTE 15 — Related Party Transactions
In connection with the Spin-Off, we entered into various agreements with IAC, a related party due to
common ownership, to provide for an orderly transition and to govern our ongoing relationships with IAC.
These agreements include, among others, a separation agreement, a tax sharing agreement, an employee
matters agreement and a transition services agreement.
In addition, in conjunction with the Spin-Off, we entered into a joint ownership and cost sharing
agreement with IAC, under which IAC transferred to us 50% ownership in an airplane, which is available for
use by both companies. We share equally in capital costs; operating costs are pro-rated based on actual usage.
F-35
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)