TiVo 2003 Annual Report Download - page 83

Table of Contents
California. The complaint alleges that, in connection with its sale of digital video recorders and other products, Sony infringes upon two patents owned by
Command Audio (U.S. Patent Nos. 5,590,195 ("Information Dissemination Using Various Transmission Modes") and 6,330,334 ("Method and System for
Information Dissemination Using Television Signals"). The complaint seeks injunctive relief, compensatory and treble damages and Command Audio's costs
and expenses, including reasonable attorneys' fees. Under the terms of the Company's agreement with Sony governing the distribution of certain digital video
recorders that enable the TiVo service, TiVo is required to indemnify Sony against any and all claims, damages, liabilities, costs and expenses relating to
claims that its technology infringes upon intellectual property rights owned by third parties. The Company believes Sony has meritorious defenses against this
lawsuit; however, due to its indemnification obligations, the Company is incurring expenses in connection with this litigation. Since February 2002, the
Company had incurred $4.2 million in legal expenses. The outcome of this matter or range of potential losses is currently not determinable. If Sony were to
lose this lawsuit, the Company's business could be harmed.
On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against TiVo in the U.S. District
Court for the Northern District of California alleging willful and deliberate violation of U.S. Patent Number 4,706,121, entitled "TV Schedule System and
Process," held by StarSight. The complaint alleged that TiVo infringed the StarSight patent by, among other things, making, using, selling, offering to sell
and/or importing its TV schedule systems and processes without a license from StarSight. On February 25, 2000, TiVo counterclaimed against StarSight,
Gemstar Development Corporation and Gemstar International Group Limited seeking damages for federal antitrust violations and state unfair business
practices claims, as well as declaratory relief of non-infringement, invalidity and unenforceability with respect to the patent. On June 21, 2002, a United States
International Trade Commission ("ITC") Administrative Law Judge found, among other things, that there had been no infringement of the this patent by
EchoStar Communications, Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer New Media Technologies Inc., Pioneer North America, Inc.,
Scientific-Atlanta Inc. and SCI Systems Inc. and that StarSight had misused this patent which was also found to be unenforceable for failure to name a co-
inventor. On August 2, 2002, the Court entered an Order staying all proceedings in the StarSight lawsuit until after final resolution to this ITC action
(including any and all appeals) involving this patent. TiVo is not a party to this ITC action although the same patent is at issue. On August 29, 2002, StarSight
announced that the ITC had declined to review the decision of its Administrative Law Judge and that StarSight intended to appeal the decision of the ITC to
the United States Court of Appeals for the Federal Circuit.
Without either party admitting any wrongdoing or liability, on June 6, 2003, the Company and Gemstar agreed to release and dismiss without prejudice
all claims against each other and their respective subsidiaries related to the StarSight Telecast litigation described above. The Company and Gemstar also
agreed to release each other from all claims and liabilities relating to the subject matter of the StarSight litigation and all other actual or alleged infringing acts
occurring prior to the effective date of the agreement, except that Gemstar did not release its claims against the Company or its licensees, customers and other
third parties for patent infringement relating to any past, current or future TiVo-enabled DIRECTV set-top boxes.
On June 6, 2003, the Company also entered into a licensing agreement with Gemstar – TV Guide International, Inc. ("Gemstar") pursuant to which
Gemstar granted a non-exclusive license of certain interactive program guide-related patents to the Company and its subsidiaries for use in TiVo-branded
devices. In consideration for the license granted under the agreement, the Company agreed to pay Gemstar an upfront license fee for existing units that have
entered the stream of commerce prior to the effective date of the agreement and a per unit fee for future TiVo-enabled devices. The Company has also agreed
to provide Gemstar with TiVo Showcases and certain branding in the TiVo interface of its Series2 devices. In exchange for its promise to provide these and
other services, Gemstar waived the upfront license fee and will pay the Company a per unit fee. The Company may use the per unit fees Gemstar will pay to it
to offset a portion of the per unit fees it will pay to Gemstar.
The per unit fees are payable upon activation of the TiVo service on the unit, including activation of the recently announced no-fee TiVo Basic service
level. The license applies to TiVo-enabled devices that are manufactured by the Company. In certain circumstances, the license may be extended to TiVo-
enabled devices manufactured by existing and future licensees of the TiVo technology. Notwithstanding the foregoing, the license does not extend to TiVo-
enabled DIRECTV set-top boxes or any other service provider-provisioned devices, and the upfront fee did not include DIRECTV set-top boxes.
The Company is involved in numerous lawsuits in the ordinary course of its business. The Company assesses potential liabilities in connection with
these lawsuits under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." The Company accrues an estimated loss for these
loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable
that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. As of January 31, 2004, the
Company had not accrued a liability for any of the lawsuits filed against it as the conditions for accrual have not been met.
81