SanDisk 1999 Annual Report Download - page 29

26 Annual Report 1999
MANAGEMENT’S DISCUSSION AND ANALYSIS
line and we cannot assure you that we will be successful in operat-
ing it on a cost-effective basis or at all.
Risks associated with patents, proprietary rights
and related litigation.
GENERAL
We rely on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrange-
ments to protect our intellectual property rights. In the past, we
have been involved in significant disputes regarding our intellectual
property rights and claims that we may be infringing third parties’
intellectual property rights. We expect that we may be involved in
similar disputes in the future. We cannot assure you that:
•any of our existing patents will not be invalidated;
•patents will be issued for any of our pending applications;
•any claims allowed from existing or pending patents will
have sufficient scope or strength;
•our patents will be issued in the primary countries where
our products are sold in order to protect our rights and
potential commercial advantage; or
•any of our products may infringe on the patents of
other companies.
In addition, our competitors may be able to design their products
around our patents.
We intend to vigorously enforce our patents but we cannot be sure
that our efforts will be successful. If we were to have an adverse
result in any litigation, we could be required to pay substantial dam-
ages, cease the manufacture, use and sale of infringing products,
expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the
infringing technology. Any litigation is likely to result in significant
expense to us, as well as divert the efforts of our technical and man-
agement personnel. For example the Lexar litigation described
below has resulted in cumulative litigation expenses of approxi-
mately $1.3 million.
CROSS-LICENSES AND INDEMNIFICATION OBLIGATIONS
If we decide to incorporate third party technology into our products
or if we are found to infringe on others’ intellectual property, we
could be required to license intellectual property from a third party.
We may also need to license some of our intellectual property to
others in order to enable us to obtain cross-licenses to third party
patents. Currently, we have patent cross-license agreements with
several companies, including Hitachi, Intel, Samsung, Sharp and
Toshiba and we are in discussions with other companies regarding
potential cross-license agreements. We cannot be certain that
licenses will be offered when we need them, or that the terms
offered will be acceptable. If we do obtain licenses from third par-
ties, we may be required to pay license fees or royalty payments. In
addition, if we are unable to obtain a license that is necessary to the
manufacture of our products, we could be required to suspend the
manufacture of products or stop our wafer suppliers from using
processes that may infringe the rights of third parties. We cannot
assure you that we would be successful in redesigning our products or
that the necessary licenses will be available under reasonable terms.
We have historically agreed to indemnify various suppliers and
customers for alleged patent infringement. The scope of such
indemnity varies, but may, in some instances, include indemnifica-
tion for damages and expenses, including attorney’s fees. We may
periodically engage in litigation as a result of these indemnification
obligations. We are not currently engaged in any such indemnifica-
tion proceedings. Our insurance policies exclude coverage for third
party claims for patent infringement. Any future obligation to
indemnify our customers or suppliers could harm our business,
financial condition or results of operations.
LITIGATION RISKS ASSOCIATED WITH
OUR INTELLECTUAL PROPERTY
From time to time, it may be necessary to initiate litigation against
third parties to preserve our intellectual property rights. These par-
ties could in turn bring suit against us. For example, in March 1998
we filed a complaint in federal court against Lexar Media, Inc. for
infringement of one of our flash card patents. Lexar disputed this
claim and asserted that our patent was invalid or unenforceable, as
well as asserting various counterclaims including unfair competi-
tion, violation of the Lanham Act, patent misuse, interference with
prospective economic advantage, trade defamation and fraud. We
have denied all of these counterclaims. In July 1998, the court
denied Lexar’s request to have the case dismissed. Discovery in this
suit began in August 1998. On February 22, 1999, the court con-
sidered arguments and papers submitted by the parties regarding