THQ 2006 Annual Report Download - page 25

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conduct by JAKKS, certain executives of JAKKS, an employee of the WWE and an agent of the WWE in
granting the WWE video game license to the THQ/JAKKS joint venture. The complaint seeks various
forms of relief, including monetary damages and a judicial determination that, among other things, the
THQ/JAKKS video game license is void. On March 30, 2005, WWE filed an amended complaint, adding
both new claims and THQ’s president and chief executive officer, Brian Farrell, as a defendant. In
August 2005, the Court directed the parties to file briefs on the three federal law claims alleged by the
Plaintiffs ( i.e., Robinson-Patman, and Sherman Act, and a threshold issue concerning thePlaintiff’s RICO
claim). The motions to dismiss the amended complaint based on these issues were fully briefed and argued
and, on March 31, 2006, the Court granted the defendants’ motion to dismiss the Robinson-Patman Act
and Sherman Act claims and denied the defendants’ motion seeking to dismiss the RICO claims on the
basis of the threshold “enterprise” issue that was briefed (the “March 31 Order”). On April 7, 2006, the
Company and the other defendants sought certification to appeal from the portion of the March 31 Order
denying the motion to dismiss the RICO claim on the one ground that was briefed. Shortly thereafter,
WWE filed a motion for re-argument with respect to the portion of the March 31 Order that dismissed the
Sherman Act claim and, alternatively, sought judgment with respect to the Sherman Act claim so that it
could pursue an immediate appeal. At a court hearing on April 26, 2006, the Court deferred a ruling on the
requests for partial judgment and for certification and set briefing schedules with respect to the remaining
grounds for defendants’ motion to dismiss the RICO claim, currently the sole remaining basis for federal
jurisdiction in this action, that were not the subject of the first round of briefing. The Court also
established a briefing schedule for WWE’s motionfor re-argument of the dismissal of the Sherman Act
claim. The briefing and argument of these motions is scheduled to be completed by September 2006.
Discovery in this action remainsstayed. On June 2, 2006, we filed a motion to dismiss the RICO claims
against THQ and Brian Farrell. THQ believes that neither it, nor Brian Farrell, is primarily accused of any
wrongdoing in the complaint or the amended complaint, and believes that either there is no basis for
terminating the license with THQ, or that THQ will be made whole by those whose conduct is eventually
found to be unlawful. We intend to vigorously protect our rights and, if necessary, pursue appropriate
claims against third parties.
On March 30, 2006, WWE’s counsel wrote a letterto our counsel and counsel for JAKKS, alleging
breaches by the THQ/JAKKS joint venture of the video game license related to the manner of distribution
and payment of royalties to the WWE with respect to sales of the WWE video games in Japan. WWE
demanded that the alleged breaches be cured within the time periods provided in the video game license,
while reserving all of its rights, including its alleged right of termination of the video game license. On
April 28, 2006, our counsel responded on behalf of the THQ/JAKKS joint venture, asserting, among other
things, that the WWE had been aware and had consented to the manner of distribution in Japan and the
payment of royalties with respect to such sales and, in addition, had separately released the joint venture
from any claims with respect to such matter as aresult of a settlement of a royalty audit of the
THQ/JAKKS joint venture. We have also provided documentation to the WWE’s counsel in support of
our position. WWE’s counsel has subsequently responded by letter, reiterating its claims and reservation of
all rights, and has requested additional information regarding sales of WWE video games in Japan and
certain other Asian countries. We are currently developing our response to WWE’s counsel’s most recent
communications. We believe we have several bases fordefending any claim of breach of the video game
license agreement resulting from the manner of distribution of WWE-licensed products in Japan and other
Asian territories.
Due to the early status of this litigation with WWE we cannot estimate a possible loss, if any. Games we
develop based upon our WWE license have contributed to approximately 15% of our net sales during each
of the three years in the period ended March 31, 2006. The loss of the WWE license would have a negative
impact on our future financial results.