Nautilus 2006 Annual Report Download - page 56

Table of Contents
information becomes known, may change our estimates significantly. A significant change in our estimates, or a result that materially differs
from our estimates, could have a significant impact on our financial position, results of operations and cash flows.
In November 2005, the Company proceeded to trial in Salt Lake City, Utah in a case filed by ICON Health & Fitness, Inc. (“ICON”)
claiming false advertising involving the Company’s advertising and promotion going back to 1987 for certain elements of its Bowflex home
gyms and claiming trademark infringement for the name placed on a treadmill belt sold in 2002. On November 15, 2005, the jury returned a
verdict in favor of ICON in the amount of $7.8 million which the Court subsequently increased to $8.1 million. By an order dated April 21,
2006, the Court refused to modify the amount of the jury verdict. The Company has filed a notice of appeal of this judgment and has posted the
necessary bond with the Court for the appeal. The Company, based on discussion with its legal counsel, believes the verdict is inconsistent with
the law and the evidence presented at trial. Further, the Company believes that the evidence does not support the damage award and thus the
likelihood of loss is neither probable nor is the amount of potential loss estimable. Therefore, no accrual has been recorded by the Company.
In December 2002, the Company filed suit against ICON in the Federal District Court, Western District of Washington (the “District
Court”) alleging infringement by ICON of the Company’s Bowflex patents and trademarks. The Company sought injunctive relief, monetary
damages and its fees and costs. In October 2003, the District Court dismissed the patent infringement claims. The Company appealed the
District Court’s decision to the United States Court of Appeals for the Federal Circuit (the “Appeals Court”) and in November 2003, the
Appeals Court overruled the District Court and reinstated the patent infringement claims. In May 2005, the District Court again dismissed the
patent infringement case against ICON. The Company appealed this case to the Appeals Court, which issued an order in August 2006 affirming
the ruling of the District Court dismissing the patent infringement case.
In July 2003, the District Court ruled in favor of the Company on a motion for preliminary injunction on the issue of trademark
infringement and entered an order barring ICON from using the trademark “CrossBow” on any exercise equipment. In its ruling, the District
Court concluded that the Company showed “a probability of success on the merits and irreparable injury” on its trademark infringement claim.
In August 2003, the Appeals Court granted ICON a temporary stay regarding the motion for a preliminary injunction, which enjoined ICON
from using the trademark “CrossBow.” This stay allowed ICON to continue using the trademark “CrossBow”
until a decision was issued by the
Appeals Court. In June 2004, the Appeals Court issued its decision upholding the issuance of an injunction and preventing ICON from selling
exercise equipment using the trademark “CrossBow” pending trial on the trademark issue. This matter is currently pending before the federal
court in Seattle.
The Company and ICON have been in settlement discussions to resolve all outstanding litigation which, if successful, will result in a
dismissal of all claims between the parties. If settlement discussions do not result in an acceptable agreement, the Company will pursue its
remaining claims for trademark infringement and will proceed to trial of this matter in federal court in Seattle, Washington.
In October 2006, the Company filed a complaint in the Superior Court for Clark County, Washington against Gately’s LLC seeking
damages in the amount of $5.1 million plus interest, attorney’s fees and costs, for collection of outstanding accounts receivable for product
purchased by Gately’s. This case has been dismissed and refiled by the Company in state court in Boulder County, Colorado. It is currently
being litigated and is in the early stages of discovery. In its answer to the complaint, Gately’s has asserted defenses to payment and
counterclaims against Nautilus in an unspecified amount.
In addition to the matters described above, from time to time the Company is subject to litigation, claims and assessments that arise in the
ordinary course of business, including disputes that may arise from intellectual property related matters. Many of our legal matters are covered
in whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on
the Company’s financial position, results of operations, or cash flows.
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