THQ 2008 Annual Report Download - page 98

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barred by the statutes of limitations. The Court also dismissed WWE’s state law claims, without prejudice
to refiling them in state court, for lack of federal jurisdiction. WWE has now asserted its state law claims in
Connecticut, as described below. WWE has appealed the Court’s rulings, and the appeal is pending in the
Second Circuit Court of Appeals. The appeal is currently in abeyance, and there is currently no briefing
schedule or timetable for resolution of the appeal.
On October 12, 2006, WWE filed a separate lawsuit against us and the LLC in the Superior Court of the
State of Connecticut, alleging that the Company’s agreements with Yuke’s Co., Ltd. (‘‘Yuke’s’’), a
developer and distributor in Japan, violated a provision of the WWE videogame license prohibiting
sublicenses without WWE’s written consent. The lawsuit seeks, among other things, a declaration that the
WWE is entitled to terminate the video game license and seek monetary damages. On February 8, 2007,
we and the LLC jointly moved to strike one of the claims, for violation of the Connecticut Unfair Trading
Practices Act; on March 28, 2007, the Court denied that motion, without prejudice to our ability to raise
the same issue at a later date. At a hearing on May 8, 2007, the Court granted WWE’s request to amend its
pleadings to add 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
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