LeapFrog 2011 Annual Report Download - page 25

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.
In addition, we rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks, service
trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our
proprietary rights. Contractual arrangements and other steps we have taken to protect our intellectual property
may not prevent misappropriation of our intellectual property or deter independent third-party development of
similar technologies. The steps we have taken may not prevent unauthorized use of our intellectual property,
particularly in foreign countries where we do not hold patents or trademarks or where the laws may not
protect our intellectual property as fully as in the U.S. Some of our products and product features have limited
intellectual property protection, and, as a consequence, we may not have the legal right to prevent others from
reverse engineering or otherwise copying and using these features in competitive products. In addition,
monitoring the unauthorized use of our intellectual property is costly, and any dispute or other litigation,
regardless of outcome, may be costly and time-consuming and may divert our management and key personnel
from our business operations. However, if we fail to protect or to enforce our intellectual property rights
successfully, our rights could be diminished and our competitive position could suffer, which could harm our
operating results.
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 retail 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 Internet-connected products and related content and applications could
harm our reputation and hinder adoption of these products.
By using the online LeapFrog Connect application, information captured by our Internet-connected products
about a child’s performance and activities will be transferred and stored on our 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
servers. If these concerns prevent parents from accepting or adopting our connected products, 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 or we could be subject to litigation, which in
turn could adversely affect our operating results.
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