SanDisk 2002 Annual Report Download - page 28

2 6 S a nD isk C o rp o ra tio n
Sales of our products in the consum er electronics m arket
m ay be subject to seasonality. As a result, product sales
m ay be im pacted by seasonal purchasing patterns w ith
higher sales generally occurring in the fourth quarter of each
year followed by declines in the first quarter of the follow ing
year. In addition, in the past we have experienced a
decrease in orders in the first quarter from our Japanese
OEM custom ers prim arily because m ost custom ers in Japan
operate on a fiscal year ending in M arch and prefer to delay
purchases until the beginning of their next fiscal year.
W e m a y not b e s uc c ess ful se lling o ur p ro d uc ts o n the
Inte rnet and the se sa les m ay unde rc ut o ur trad itio nal
sale s c hanne ls.
Web-based sales of our products today represent a sm all
but grow ing portion of our overall sales. Sales on the
Internet tend to undercut traditional distribution channels
and m ay dramatically change the w ay our consum er prod-
ucts are purchased in future years. We cannot assure you
that we w ill successfully develop the Internet sales channel
or successfully m anage the inherent conflict between the
Internet and our traditional sales channels.
Risk s Re la te d to O ur Inte lle c tua l Prop e rty
W e m a y b e unab le to prote c t o ur intellec tua l p rop e rty
rig hts, w hic h w o uld harm o ur b usines s, financ ial c o nd i-
tio n and res ults of o p erations.
We rely on a com bination of patents, tradem arks, copy-
right and trade secret law s, confidentiality procedures and
licensing arrangem ents to protect our intellectual property
rights. In the past, w e have been involved in significant dis-
putes regarding our intellectual property rights and claim s
that we m ay be infringing third parties’ intellectual property
rights. We expect that w e m ay be involved in sim ilar dis-
putes in the future. We cannot assure you that:
• any of our existing patents w ill not be invalidated;
• patents w ill be issued for any of our pending
applications;
• any claim s allow ed from existing or pending patents
w ill have sufficient scope or strength;
• our patents will be issued in the prim ary countries
w here our products are sold in order to protect our
rights and potential com m ercial advantage; or
• any of our products do not infringe on the patents of
other com panies.
In addition, our com petitors m ay be able to design their
products around our patents.
We intend to vigorously enforce our patents but we can-
not be sure that our efforts w ill be successful. If w e w ere to
have an adverse result in any litigation, w e could be required
to pay substantial dam ages, cease the m anufacture, 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 tech-
nology. Any litigation is likely to result in significant expense
to us, as w ell as divert the efforts of our technical and m an-
agem ent personnel.
W e m a y b e unab le to lic ense intelle c tual p ro p e rty to
or fro m third p arties a s ne ede d , o r re ne w e xisting
lic ense s, and w e have ag re e d to indem nify vario us sup -
pliers a nd c us tom e rs fo r a lle g ed pate nt infring e m ent,
w hic h c o uld e xp o s e us to lia bility for d a m a g e s,
inc reas e o ur c o sts o r lim it o r p ro hibit us fro m se lling
c e rtain p ro duc ts.
If w e decide to incorporate third party technology into our
products or if w e are found to infringe on others’ intellectual
property, w e could be required to license intellectual prop-
erty from a third party. We m ay also need to license som e
of our intellectual property to others in order to enable us to
obtain cross-licenses to third party patents. Currently, w e
have patent cross-license agreem ents with several com pa-
nies, including Hitachi, Intel, M atsushita, SST, Sam sung,
Sharp, Sm artdisk, Sony, TDK and Toshiba and w e are in dis-
cussions w ith other com panies regarding potential cross-
license agreem ents. We cannot be certain that licenses w ill
be offered w hen w e need them , or that the term s offered
w ill be acceptable. If w e do obtain licenses from third par-
ties, w e m ay be required to pay license fees or royalty pay-
m ents. In addition, if w e are unable to obtain a license that
is necessary to the m anufacture of our products, w e could
be required to suspend the m anufacture of products or stop
our w afer suppliers from using processes that m ay infringe
the rights of third parties. We cannot assure you that w e
w ould be successful in redesigning our products or that the
necessary licenses w ill be available under reasonable term s,
or that our existing licensees w ill renew their licenses upon
expiration, or that w e w ill be successful in signing new
licensees in the future.
We have historically agreed to indem nify various suppliers
and custom ers for alleged patent infringem ent. The scope of
such indem nity varies, but may, in som e instances, include
indem nification for dam ages and expenses, including attor-
ney’s fees. We m ay periodically engage in litigation as a
result of these indem nification obligations. We are not cur-
rently engaged in any such indem nification proceedings. Our
insurance policies exclude coverage for third party claim s for
patent infringem ent. Any future obligation to indemnify our
custom ers or suppliers could harm our business, financial
condition or results of operations.
W e m a y b e involved in litig atio n reg arding o ur intel-
lec tual prop e rty rights o r tho se o f third p arties , w hic h
w ould b e c o s tly and w ould dive rt the e fforts o f o ur te c h-
nic al and m a nag e m e nt p e rso nnel.
Litigation is subject to inherent risks and uncertainties
that may cause actual results to differ m aterially from our
expectations. Factors that could cause litigation results to
differ include, but are not lim ited to, the discovery of previ-
ously unknown facts, changes in the law or in the interpreta-
tion of law s, and uncertainties associated w ith the judicial
decision-m aking process. Furtherm ore, parties that w e have
sued and that w e m ay sue for patent infringem ent m ay
counter sue us for infringing their patents.
On or about August 3, 2001, the Lemelson M edical,
Education & Research Foundation, or Lemelson Foundation,
filed a com plaint for patent infringem ent against us and four
other defendants. The suit, captioned Lem elson M edical,
Education, & Research Foundation, Lim ited Partnership vs.
Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX
HRH, w as filed in the United States District Court, District of
Arizona. On Novem ber 13, 2001, the Lem elson Foundation
filed an Amended Com plaint, w hich m ade the sam e sub-
stantive allegations against us but nam ed m ore than tw enty-
five additional defendants. The Am ended Com plaint alleges
that we, and the other defendants, have infringed certain
patents held by the Lem elson Foundation pertaining to bar
code scanning technology. By its com plaint, the Lem elson
Foundation requests that w e be enjoined from our allegedly