SanDisk 2005 Annual Report Download - page 97

Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from
our expectations. Factors that could cause litigation results to differ include, but are not limited to, the discovery of
previously unknown facts, changes in the law or in the interpretation of laws, and uncertainties associated with the
judicial decision-making process. If we receive an adverse judgment in any litigation, we could be required to pay
substantial damages and/or cease the manufacture, use and sale of products. Litigation, including intellectual
property litigation, can be complex, can extend for a protracted period of time, and can be very expensive. Litigation
initiated by us could also result in counter-claims against us, which could increase the costs associated with the
litigation and result in our payment of damages or other judgments against us. In addition, litigation may divert the
efforts and attention of some of our key personnel.
We have been, and expect to continue to be, subject to claims and legal proceedings regarding alleged
infringement by us of the patents, trademarks and other intellectual property rights of third parties. From time to
time we have sued, and may in the future sue, third parties in order to protect our intellectual property rights. Parties
that we have sued and that we may sue for patent infringement may countersue us for infringing their patents. If we
are held to infringe the intellectual property of others, we may need to spend significant resources to develop non-
infringing technology or obtain licenses from third parties, but we may not be able to develop such technology or
acquire such licenses on terms acceptable to us or at all. We may also be required to pay significant damages and/or
discontinue the use of certain manufacturing or design processes. In addition, we or our suppliers could be enjoined
from selling some or all of our respective products in one or more geographic locations. If we or our suppliers are
enjoined from selling any of our respective products or if we are required to develop new technologies or pay
significant monetary damages or are required to make substantial royalty payments, our business would be harmed.
Moreover, from time to time we agree to indemnify certain of our suppliers and customers for alleged patent
infringement. The scope of such indemnity varies but may in some instances include indemnification for damages
and expenses, including attorneys’ fees. We may from time to time be engaged in litigation as a result of these
indemnification obligations. Third-party claims for patent infringement are excluded from coverage under our
insurance policies. A future obligation to indemnify our customers or suppliers may have a material adverse effect
on our business, financial condition and results of operations. For additional information concerning legal
proceedings, see Item 3, “Legal Proceedings.”
Because of our international business and operations, we must comply with numerous international laws and
regulations, and we are vulnerable to political instability, currency fluctuations and other risks related to
international operations. Currently, all of our products are produced overseas in China, Israel, Japan, Taiwan
and South Korea. We may, therefore, be affected by the political, economic and military conditions in these
countries.
Specifically, China does not currently have a comprehensive and highly developed legal system, particularly
with respect to the protection of intellectual property rights. This result, among other things, in the prevalence of
counterfeit goods in China. The enforcement of existing and future laws and contracts remains uncertain, and the
implementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy and
degradation of our intellectual property protection. Our results of operations and financial condition could be
harmed by the sale of counterfeit products.
Our international business activities could also be limited or disrupted by any of the following factors:
• the need to comply with foreign government regulation;
• general geopolitical risks such as political and economic instability, potential hostilities and changes in
diplomatic and trade relationships;
• natural disasters affecting the countries in which we conduct our business, particularly Japan, such as the
earthquakes experienced in Taiwan in 1999, in Japan in 2004, 2003 and previous years, and in China in
previous years;
• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may
arise from regional issues in Asia;
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