Medtronic 2009 Annual Report Download - page 65

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Medtronic, Inc.
incurred four certain litigation charges totaling $714 million. The
first charge in the amount of $178 million relates to litigation with
DePuy Spine (formerly DePuy/AcroMed), a subsidiary of J&J, and
Biedermann Motech GmbH (collectively, DePuy) regarding patent
infringement claims stemming from the Vertex line of multiaxial
screws. On June 1, 2009, the U.S. Court of Appeals for the Federal
Circuit affirmed the December 2007 ruling of infringement and
awarded damages based on lost profits, but reversed certain
elements of the original 2007 award. Prior to the U.S. Court of
Appeals’ decision, the Company had not recorded expense related
to the damages awarded in 2007 as the Company did not believe
that an unfavorable outcome in this matter was probable under
SFAS No. 5, “Accounting for Contingencies” (SFAS No. 5). As a
result of the U.S. Court of Appeals’ decision, the Company has
now recorded a reserve of $178 million which is expected to cover
the revised damages award and pre- and post-judgment interest.
Since the DePuy litigation originated prior to April 24, 2009, the
Company has appropriately recognized this charge in the
consolidated financial statements for the fiscal year ended April
24, 2009. See Note 16 for additional information.
The second charge in the amount of $270 million relates to
a settlement of royalty disputes with Johnson & Johnson (J&J)
which concern Medtronic’s licensed use of certain patents. The
agreement reached in the fourth quarter of fiscal year 2009 ended
all current and potential disputes between the two parties under
their 1997 settlement and license agreement relating to coronary
angioplasty stent design and balloon material patents. The
Company paid the settlement in May 2009. See Note 16 for
additional information.
The third charge in the amount of $229 million relates to
litigation with Cordis Corporation (Cordis), a subsidiary of J&J. The
Cordis litigation originated in October 1997 and pertains to patent
infringement claims on previous generations of bare metal stents
that are no longer on the market. On September 30, 2008, the
U.S. District Court entered final judgment including accrued
interest, totaling approximately $521 million, to Cordis. The
Company had previously recorded a charge of $243 million related
to this litigation in the third quarter of fiscal year 2008. At the
time the $243 million charge was recorded, the range of potential
loss related to this matter was subject to a high degree of
estimation. The amount recorded represented an estimate of the
low end of the range of probable outcomes related to the matter.
Given that the Company and J&J were involved in a number of
litigation matters which span across businesses, the Company
entered into negotiations with J&J in an attempt to settle some
of the additional litigation simultaneous with the payment of
this judgment. Ultimately, the agreement reached with Cordis
required a total cash payment of $472 million, which included the
settlement of several outstanding legal matters between the
parties. The charge of $229 million in fiscal year 2009 is the net
result of $472 million in cash payments, offset by the existing
reserves on the balance sheet including interest accrued on the
$243 million since the date established. As of April 24, 2009, the
settlement amount of $472 million was paid.
The fourth charge recognized in fiscal year 2009 relates
to litigation that originated in May 2006 with Fastenetix LLC
(Fastenetix), a patent holding company. The litigation related to
an alleged breach of a royalty agreement in the Spinal business.
The agreement reached with Fastenetix required total cash
payment of $125 million for the settlement of ongoing litigation
and the purchase of patents. Of the $125 million, $37 million was
assigned to past damages in the case and the remaining $88
million was recorded as purchased intellectual property that
has an estimated useful life of 7 years. As of April 24, 2009, the
settlement amount of $125 million was paid.
In fiscal year 2008, the Company incurred certain litigation
charges of $366 million. Of that amount, $123 million related
to the settlement of certain lawsuits relating to the Marquis line
of implantable cardioverter defibrillators (ICDs) and cardiac
resynchronization therapy-defibrillators (CRT-Ds) that were subject
to a field action announced on February 10, 2005. As discussed
above, the remainder of the charge, $243 million, relates to an
estimated reserve established for litigation with Cordis. In May
2008, the Company paid substantially all of the settlement for
certain lawsuits relating to the Marquis line of ICDs and CRT-Ds.
See Note 16 for additional information.
In fiscal year 2007, the Company recorded a certain litigation
charge of $40 million related to a settlement agreement with the
U.S. Department of Justice which requires the government to
obtain dismissal of the two qui tam civil suits and is conditioned
upon such dismissal being obtained. To resolve the matter,
Medtronic has entered into a five-year corporate integrity
agreement effective upon dismissal of the two suits that further
strengthens its employee training and compliance systems
surrounding sales and marketing practices. The settlement
agreement also reflects Medtronic’s assertion that the Company
and its current employees have not engaged in any wrongdoing
or illegal activity. The settlement amount was paid in May 2009.