Western Digital 2004 Annual Report Download - page 35

have to make signiÑcant capital expenditures to comply with environmental laws, or if we are subject to signiÑcant capital
expenses in connection with a violation of these laws, our Ñnancial condition or operating results could suÅer.
The nature of our business and our reliance on intellectual property and other proprietary information subjects us to the risk
of signiÑcant litigation.
The hard disk drive industry has been characterized by signiÑcant litigation. This includes litigation relating to
patent and other intellectual property rights, product liability claims and other types of litigation. Litigation can be
expensive, lengthy, and disruptive to normal business operations. Moreover, the results of litigation are inherently
uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that
may, individually or in the aggregate, have a material adverse eÅect on our business, Ñnancial condition or results of
operations.
We are currently evaluating notices of alleged patent infringement or notices of patents from patent holders. We also
are a party to several judicial and other proceedings relating to patent and other intellectual property rights. If claims or
actions are asserted against us, we may be required to obtain a license or cross-license, modify our existing technology or
design a new non-infringing technology. Such licenses or design modiÑcations can be extremely costly. We may also be
liable for any past infringement. If there is an adverse ruling against us in an infringement lawsuit, an injunction could be
issued barring production or sale of any infringing product. It could also result in a damage award equal to a reasonable
royalty or lost proÑts or, if there is a Ñnding of willful infringement, treble damages. Any of these results would likely
increase our costs and harm our operating results.
Our reliance on intellectual property and other proprietary information subjects us to the risk that these key ingredients of our
business could be copied by competitors.
Our success depends, in signiÑcant part, on the proprietary nature of our technology, including non-patentable
intellectual property such as our process technology. Despite safeguards, to the extent that a competitor is able to
reproduce or otherwise capitalize on our technology, it may be diÇcult, expensive or impossible for us to obtain necessary
legal protection. Also, the laws of some foreign countries may not protect our intellectual property to the same extent as
do the laws of the United States. In addition to patent protection of intellectual property rights, we consider elements of
our product designs and processes to be proprietary and conÑdential. We rely upon employee, consultant and vendor non-
disclosure agreements and contractual provisions and a system of internal safeguards to protect our proprietary
information. However, any of our registered or unregistered intellectual property rights may be challenged or exploited by
others in the industry, which might harm our operating results.
We are subject to risks related to product defects, which could result in product recalls and could subject us to warranty
claims in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability
limitations.
We generally warrant our products for one to Ñve years. We test our hard disk drives in our manufacturing facilities
through a variety of means. However, there can be no assurance that our testing will reveal latent defects in our products,
which may not become apparent until after the products have been sold into the market. Accordingly, there is a risk that
product defects will occur, which could require a product recall. Product recalls can be expensive to implement and, if a
product recall occurs during the product's warranty period, we may be required to replace the defective product. In
addition, a product recall may damage our relationship with our customers, and we may lose market share with our
customers, including our OEM customers.
The standard warranties used by us contain limits on damages and exclusions of liability for consequential damages
and for negligent or improper use of the products. We record an accrual for estimated warranty costs at the time revenue
is recognized. We may incur additional operating expenses if our warranty provision does not reÖect the actual cost of
resolving issues related to defects in our products. If these additional expenses are signiÑcant, it could adversely aÅect our
business, Ñnancial condition and results of operations.
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