LeapFrog 2010 Annual Report Download - page 26

Third parties have claimed, and may claim in the future, that we are infringing their intellectual property
rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some of our
products or using some of our trademarks.
In the course of our business, we periodically receive claims of infringement or otherwise become aware of
potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties. For
example, we recently settled a trademark suit related to our Tag reading system and, since April 2010, we have
been subject to a patent suit relating to the same system. Responding to any infringement claim, regardless of its
validity, may be costly and time-consuming and may divert our management and key personnel from our
business operations. If we, our distributors or our manufacturers are adjudged to be infringing the intellectual
property rights of any third party, we or they may be required to obtain a license to use those rights, which may
not be obtainable on reasonable terms, if at all. We also may be subject to significant damages or injunctions
against the development and sale of some of our products or against the use of a trademark or copyright in the
sale of some of our products. Our insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all the liability that could be imposed.
Any errors or defects contained in our products, or our failure to comply with applicable safety standards,
could result in recalls, delayed shipments, rejection of our products and damage to our reputation, and
could expose us to regulatory or other legal action.
Our products may contain errors or defects that are discovered after commercial shipments have begun, which
could result in the rejection of our products by our retailers, damage to our reputation, lost sales, diverted
development resources and increased customer service and support costs and warranty claims. Individuals could
sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries.
There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage.
Moreover, we may be unable to retain adequate liability insurance in the future.
Concerns about potential public harm and liability may involve involuntary recalls or lead us to voluntarily recall
selected products. Recalls or post-manufacture repairs of our products could harm our reputation and our
competitive position, increase our costs or reduce our net sales. Costs related to unexpected defects include the
costs of writing down the value of our inventory of defective products and providing product replacement, as
well as the cost of defending against litigation related to the defective products. Further, as a result of recent
recalls and safety issues related to products of a number of manufacturers in the toy industry, some of our retailer
customers have been increasing their testing requirements of the products we ship to them. These additional
requirements may result in delayed or cancelled shipments, increased logistics and quality assurance costs, or
both, which could adversely affect our operations and financial results. In addition, recalls or post-manufacturing
repairs by other companies in our industry could affect consumer behavior and cause reduced purchases of our
products and increase our quality assurance costs in allaying consumer concerns.
Privacy concerns about our web-connected products and related software and applications could harm
our reputation and hinder adoption of these products.
By using the Internet-based Learning Path application, information captured by our web-connected products
about a child’s performance and activities will be transferred and stored on our website servers. Due to privacy,
confidentiality and security concerns, parents may not want us to collect information about their child’s activities
and performance and may not feel comfortable uploading and storing this information on our website servers. If
these concerns prevent parents from accepting or adopting our connected products, the sales of our products and
our business results could suffer and our plans to expand this portion of our business could be affected. In
addition, if the confidentiality of such information stored on our website servers is compromised or breached by
third parties, our reputation could be tarnished, which in turn could adversely affect our operating results.
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