THQ 2008 Annual Report Download - page 25

allegations and claims substantially similar to those already pending in WWE’s lawsuit in the Southern
District of New York and to ‘‘cite in’’ the other defendants from that action, including our CEO, Brian
Farrell. Following the dismissal without prejudice of WWE’s lawsuit in the Southern District of New York,
WWE sought leave to refile its state law claims in this action, which was granted. The claims now pending
in this action are a combination of the earlier claims relating to the Yuke’s agreements and the
Connecticut equivalents of the state law claims that had previously been pending in the Southern District
of New York. We have moved to dismiss many of the claims in this action. Moreover, JAKKS has filed a
summary judgment motion based on the collateral estoppel effects of the dismissal of WWE’s lawsuit in
the Southern District of New York, and we intend to join in that motion. JAKKS’s motion was scheduled
for hearing on May 19, 2008, and there is not yet a hearing scheduled on the THQ defendants’ motion.
Discovery in this action is scheduled to be completed by June 2009, and the case is to be ready for trial by
May 1, 2010.
We intend to vigorously defend ourselves against the claims raised in this action, including those raised in
the amended complaint. However, in light of the early status of this litigation, we cannot estimate a
possible loss, if any. Games we develop based upon our WWE videogame license have contributed to
approximately 25% of our net sales in fiscal 2008, up from approximately 15% of our net sales in fiscal
2007 and 2006. The loss of the WWE license would have a negative impact on our future financial results.
Operating agreement with JAKKS Pacific, Inc.
In June 1999 we entered into an operating agreement with JAKKS that governs our relationship with
respect to the WWE videogame license. Pursuant to the terms of this agreement, JAKKS is entitled to a
preferred payment from revenues derived from exploitation of the WWE videogame license. The amount
of the preferred payment to JAKKS for the period beginning July 1, 2006 and ending December 31, 2009
(the ‘‘First Subsequent Distribution Period’’) is to be determined by agreement or, failing that, by
arbitration.
The parties have not reached agreement on the preferred payment for the First Subsequent Distribution
Period. Accordingly, as provided in the operating agreement, the parties are in the process of selecting an
arbitrator to resolve this dispute. Although we believe continuation of the previous preferred payment
would represent significantly excessive compensation to JAKKS for the First Subsequent Distribution
Period, we are not able to predict the outcome of the arbitration or otherwise estimate the amount of the
preferred payment for the First Subsequent Distribution Period. Accordingly, we are currently accruing for
a preferred payment to JAKKS at the previous rate. However, we have advised JAKKS that we do not
intend to make any payment until the amount of the preferred payment payable to JAKKS for the First
Subsequent Distribution Period is agreed or otherwise determined as provided in the operating agreement.
On April 30, 2007, we filed a petition to compel arbitration and appoint an arbitrator in the Superior Court
of the State of California for the County of Los Angeles, West District. At a hearing on June 19, 2007 (with
a subsequent order entered on June 25, 2007), the Court established a process for selecting an arbitrator
and denied a request by JAKKS for provisional relief requesting that, pending conclusion of the
arbitration, THQ either be enjoined from distributing to itself any proceeds from the joint venture since
June 2006 or be compelled to resume payments to JAKKS at the same rate that was in effect prior to June
2006. Pursuant to the process, the judge named a ‘‘shortlist’’ of five arbitrator candidates drawn from lists
submitted by the parties, and afforded the parties five days to agree upon an arbitrator candidate, failing
which the judge would appoint an arbitrator from the ‘‘shortlist.’’ On July 18, 2007, JAKKS filed a notice of
disqualification, purporting to disqualify all of the arbitrator candidates on the ‘‘shortlist’’ other than the
one individual who had been among the candidates submitted by JAKKS. We objected to this notice. On
July 31, 2007, the Court struck JAKKS’s notice and selected an arbitrator from the ‘‘shortlist.’’ On or about
August 22, 2007 JAKKS filed in the Court of Appeal of the State of California a petition for writ of
mandate/prohibition or other appropriate relief, seeking an order directing the judge to disqualify all of
the arbitrator candidates other than the one individual who had been submitted by JAKKS. In its filing,
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