ITEM 1. LEGAL PROCEEDINGS
In accordance with SFAS No. 5, Accounting for Contingencies, we assess the
probability of an unfavorable outcome of all our material litigation, claims, or
assessments to determine whether a liability has been incurred and whether it is
probable that one or more future events will occur confirming the fact of the
loss. In the event that an unfavorable outcome is determined to be probable and
the amount of the loss can be reasonably estimated, we establish an accrual for
the litigation, claim or assessment. Litigation is inherently uncertain and may
result in adverse rulings or decisions. Additionally, we may enter into
settlements or be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on our results of operations.
Accordingly, actual results could differ materially.
Intellectual Property Litigation
Convolve, Inc. and Massachusetts Institute of Technology ("MIT") v. Seagate
Technology LLC, et al. Between 1998 and 1999, Convolve, Inc., a small privately
held technology consulting firm founded by an MIT Ph.D., engaged in discussions
with Seagate Technology, Inc. with respect to the potential license of
technology that Convolve claimed to own. During that period, the parties entered
into non-disclosure agreements. We declined Convolve's offer of a license in
late 1999. On July 13, 2000, Convolve and MIT filed suit against Compaq Computer
Corporation and us in the U.S. District Court for the Southern District of New
York, alleging patent infringement, misappropriation of trade secrets, breach of
contract, tortious interference with contract and fraud relating to Convolve and
MIT's Input Shaping® and Convolve's Quick and Quiet™ technology. The plaintiffs
claim their technology is incorporated in our sound barrier technology, which
was publicly announced on June 6, 2000. The complaint seeks injunctive relief,
$800 million in compensatory damages and unspecified punitive damages. We
answered the complaint on August 2, 2000 and filed counterclaims for declaratory
judgment that two Convolve/MIT patents are invalid and not infringed and that we
own any intellectual property based on the information that we disclosed to
Convolve. The court denied plaintiffs' motion for expedited discovery and
ordered plaintiffs to identify their trade secrets to defendants before
discovery could begin. Convolve served a trade secrets disclosure on August 4,
2000, and we filed a motion challenging the disclosure statement. On May 3,
2001, the court appointed a special master to review the trade secret issues.
The special master resigned on June 5, 2001, and the court appointed another
special master on July 26, 2001. After a hearing on our motion challenging the
trade secrets disclosure on September 21, 2001, the special master issued a
report and recommendation to the court that the trade secret list was
insufficient. Convolve revised the trade secret list, and the court entered an
order on January 1, 2002, accepting the special master's recommendation that
this trade secret list was adequate. On November 6, 2001, the U.S. Patent and
Trademark Office ("USPTO") issued US Patent No. 6,314,473 to Convolve. Convolve
filed an amended complaint on January 16, 2002, alleging defendants'
infringement of this patent, and we answered and filed counterclaims on
February 8, 2002. On July 26, 2002, we filed a
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Rule 11 motion challenging the adequacy of plaintiffs' pre-filing investigation
on the first two patents alleged in the complaint and seeking dismissal of
plaintiffs' claims related to these patents and reimbursement of attorney's
fees. The court denied our motion on May 23, 2003. On May 6, 2003, the USPTO
issued to Convolve U.S. Patent No. 6,560,658 B2, entitled "Data Storage Device
with Quick and Quiet Modes." Convolve indicated that it would seek leave of the
court to add this patent to the lawsuit, but it never did so. This latest patent
is a continuation of a patent currently in the lawsuit (U.S. Patent
No. 6,314,473). We believe any claims that may relate to this continuation
patent would be without merit, regardless of whether such claims were added to
the ongoing litigation or asserted against us in a separate lawsuit. Judge John
Martin, who was assigned this case, announced his retirement from the federal
bench. The case was reassigned to Judge George B. Daniels. On October 14, 2003,
the Special Master resigned from the case due to Convolve's claim that he had a
conflict of interest. Magistrate Judge James C. Francis IV was appointed to
handle all discovery matters. Plaintiffs have indicated that they will dismiss
claims regarding U.S. Patent No. 5,638,267 from the case. The claims
construction hearing on U.S. Patent Nos. 4,916,635 and 6,314,473 was held on
March 30 and 31, 2004. On August 11, 2005, the court entered an order construing
the patent claims. Both Seagate and Compaq moved for reconsideration of its
claim construction in light of intervening new law in the Federal Circuit's
then-recent decision in Phillips v. AWH Corp., et al., 415 F.3d 1303 (Fed. Cir.
2005). Convolve also moved for clarification. The court denied reconsideration
without oral argument on December 7, 2005. The court later granted Convolve's
unopposed clarification motion. On March 29, 2006, the court granted Seagate's
summary judgment motion that Convolve's fraud, tortious interference with
contract, unfair competition, and breach of confidence claims are preempted by
the California Uniform Trade Secrets Act (CUTSA). The court also held that while
Convolve's claim for breach of the covenant of good faith and fair dealing is
not preempted by the CUTSA, no tort damages are available. The court denied our
motion for summary judgment on a trade secret issue, finding there is an issue
of fact that must be decided. Finally, the court entered an order on July 14,
2006, that Convolve has no evidence to prove its claims regarding 10 alleged
trade secrets, precluding Convolve from proceeding at trial on those claims, and
precluding Convolve from alleging violations of the 10 alleged trade secrets by
either defendant prior to December 7, 2005, the date of the hearing. At
Seagate's request, the USPTO determined that both patents in suit have
substantial new issues of patentability and ordered reexamination of the
patents. The court denied our motion to stay the case pending patent
reexamination. In initial office actions, the USPTO Examiner rejected all claims
of both patents as unpatentable. No trial date has been set. We believe the
claims are without merit, and we intend to defend against them vigorously.
Shao Tong, et al. v. Seagate International (Wuxi) Co., Ltd. In July 2002, we
were sued in the People's Court of Nanjing City, China, by an individual, Shao
Tong, and a private Chinese company, Nanjing Yisike Network Safety Technique
Co., Ltd. The complaint alleged that two of our personal storage disc drive
products infringe Chinese patent number ZL94111461.9, which prevents the
corruption of systems data stored on disc drives. The suit, which sought to stop
us from manufacturing the two products and claimed immaterial monetary damages,
was dismissed by the court on procedural grounds on November 29, 2002. On
December 3, 2002, the plaintiffs served us with notice that they had refiled the
lawsuit. The new complaint contains identical infringement claims against the
same disc drive products, claims immaterial monetary damages and attorney's fees
and requests injunctive relief and a recall of the products from the Chinese
market. Manufacture of the accused products ceased in May 2003. At a hearing on
March 10, 2003, the court referred the matter to an independent technical
advisory board for a report on the application of the patent claims to the two
products. On June 10, 2003, we presented our non-infringement case to the
technical panel. The panel issued a technical advisory report to the court
finding no infringement. The court heard oral arguments on the technical
advisory report in September 2003, issued an order that our products do not
infringe the patent and rejected plaintiffs' lawsuit. Plaintiffs filed an appeal
with the Jiangsu High Court, and we filed our opposition brief on January 21,
2004. The PRC Patent Reexamination Board declared patent ZL94111461.9 invalid on
March 28, 2004. The Jiangsu High Court stayed the appeal on the infringement
case pending a final judgment on patent invalidity. On June 22, 2004, Shao Tong
filed a lawsuit in the Beijing Intermediate People's Court against the PRC PRB
challenging its patent invalidity decision. On November 29, 2004, the court
affirmed the decision of patent invalidity. In December 2004, Shao Tong appealed
the decision to the Beijing High People's Court, the highest appellate court,
and a hearing was held June 22, 2005. The court scheduled a rehearing
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on December 8, 2005, and subsequently reversed the lower court and PRB decisions
due to a procedural error. The case was remanded to the PRB for further action
to correct the procedural error. A new PRB panel was appointed and the
procedural error was corrected. The invalidity case was reargued at a hearing on
May 9, 2006. In 2006, we filed a second invalidity proceeding with the PRB. On
June 14, 2007, the PRB issued an order holding the patent invalid based on the
first invalidity request. The second invalidity request was stayed as a result
of the ruling on the first request. Shao Tong again filed a lawsuit against the
PRC PRB and the court affirmed the invalidity decision in December 2007. In
January 2008, Shao Tong appealed this decision to the Beijing High People's
Court. We believe the claims are without merit, and we intend to defend against
them vigorously.
Siemens, AG v. Seagate Technology. On August 23, 2006, Siemens, AG, a German
corporation, filed a complaint against Seagate Technology in the U.S. District
Court for the Central District of California alleging infringement of
U.S. Patent No. 5,686,838 (the '838 patent) entitled "Magnetoresistive Sensor
Having at Least a Layer System and a Plurality of Measuring Contacts Disposed
Thereon, and a Method of Producing the Sensor." The suit alleges that Seagate
drives incorporating Giant Magnetic Resistance (GMR) sensors infringe the '838
patent. The complaint seeks damages in an unstated amount, an accounting,
preliminary and permanent injunctions, prejudgment interest, enhanced damages
for alleged willful infringement, and attorney fees and costs. The lawsuit was
served on Seagate on September 6, 2006. We served an answer to the complaint on
November 27, 2006, denying all material allegations and asserting affirmative
defenses. Siemens amended its complaint to add Tunnel Magnetic Resistance (TMR)
sensors to the case. Trial is scheduled to begin November 11, 2008. We believe
the claims are without merit, and we intend to defend against them vigorously.
StorMedia Texas LLC v. Comp USA, et al. On January 22, 2007, a lawsuit was filed
against 11 defendants, alleging infringement of U.S. Patent No. 6,805,891 (the
'891 patent), a media patent that is allegedly owned by StorMedia Texas LLC. The
suit was filed in U.S. District Court for the Eastern District of Texas,
Marshall Division. All major hard disc drive companies are named, including
Seagate Technology, Seagate Technology LLC, Hitachi, Fujitsu, Samsung, Toshiba,
and Western Digital, as well as retailers Comp USA, J&R Electronics, and Tiger
Direct. We served an answer to the complaint on April 13, 2007, denying all
material allegations and asserting affirmative defenses. Trial is scheduled to
begin March 4, 2009. A request for reexamination of the '891 patent was granted
and all claims were rejected as unpatentable over the prior art in an initial
office action dated March 17, 2008. We believe the claims are without merit, and
we intend to defend against them vigorously.
Reiber, et al. v. Western Digital, et al. On September 15, 2007, Steven F. and
Mary L. Reiber filed a complaint with the International Trade Commission ("ITC")
against Certain Hard Disk Drives, Components Thereof, and Products Containing
the Same, requesting an investigation of Western Digital Corporation, Seagate
Technology, Toshiba America Information Systems, Inc., Hewlett-Packard Company,
and Dell, Inc. The complaint alleges that the Reibers are inventors on three
patents: U.S. Patent Nos. 6,354,479 (the '479 patent), 6,651,864 (the '864
patent), and 6,935,548 (the '548 patent) that generally relate to dissipative
bonding tips used to form electrical connections, and methods of using such tips
in producing disk drives. The ITC complaint seeks to enjoin respondents from
importing hard disk drives and certain products containing hard disk drives into
the United States. Simultaneously, the Reibers filed a case in the U.S. District
Court for the Eastern District of California, Sacramento Division, alleging
infringement of the same three patents against the same defendants and seeking
damages. On April 17, 2008, we reached a settlement of both cases with the
Reibers. The Reibers took discovery of Seagate's hard disk drive products
(HDDs), as well as the processes and equipment used to perform bonding functions
in the manufacture of Seagate's HDDs. Based on that discovery, the Reibers
determined that Seagate's HDDs, and the processes and equipment used in the
manufacture of Seagate's HDDs, do not infringe the patents that the Reibers
asserted against Seagate and certain customers who bought Seagate's HDDs. As a
part of the Settlement Agreement, the Reibers have agreed not to assert the
relevant patents in the future against Seagate, customers of Seagate, or vendors
who supply either components that are incorporated into Seagate HDDs or
equipment that is used in the manufacture of
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Seagate HDDs, to the extent that the processes and equipment used in the
manufacture of Seagate HDDs or the components therein have the same relevant
characteristics as those determined to be non-infringing in the pending
litigation. Both parties have given each other full releases with respect to
claims made in the instant litigation and other claims arising before the
effective date of the Settlement Agreement. The release provided by the Reibers
also extends to customers who have purchased Seagate HDDs, and to vendors who
have supplied either components that were incorporated into Seagate's HDDs or
equipment that was used in the manufacture of Seagate's HDDs. The cases will be
dismissed with prejudice.
Environmental Matters
Our operations inside and outside the United States are subject to laws and
regulations relating to protection of the environment, including those governing
the discharge of pollutants into the air, soil and water, the management and
disposal of hazardous substances and wastes and clean-up of contaminated sites.
Contaminants have been detected at some of our current and former sites,
principally in connection with historical operations. In addition, we have been
named as a potentially responsible party at several superfund sites.
Investigative activities have taken place at all sites of known contamination.
One former site is under a Consent Order by the U.S. Environmental Protection
Agency. The extent of the contamination at this site has been investigated and
defined and remediation is underway. We are indemnified by a third party for a
portion of the costs it may incur in the clean up of contamination at most
sites. In the opinion of management, the probability is remote that the losses
arising from these environmental matters would be material to our financial
position, cash flows or results of operations.
We may be subject to various state, federal and international laws and
regulations governing the environment, including those restricting the presence
of certain substances in electronic products. For example, the European Union
("EU") has enacted the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment ("RoHS"), which prohibits the use of certain
substances, including lead, in certain products, including hard drives, put on
the market after July 1, 2006 as well as the Waste Electrical and Electronic
Equipment ("WEEE") directive, which makes producers of electrical goods,
including disc drives, financially responsible for specified collection,
recycling, treatment and disposal of past and future covered products. Similar
legislation has been or may be enacted in other jurisdictions, including in the
United States, Canada, Mexico, China and Japan. We will need to ensure that we
comply with such laws and regulations as they are enacted, and that our
component suppliers also timely comply with such laws and regulations. If we
fail to timely comply with the legislation, our customers may refuse to purchase
our products, which would have a materially adverse effect on our business,
financial condition and results of operations.
Other Matters
We are involved in a number of other judicial and administrative proceedings
incidental to our business, and we may be involved in various legal proceedings
arising in the normal course of our business in the future. Although occasional
adverse decisions or settlements may occur, we believe that the final
disposition of such matters will not have a material adverse effect on our
financial position or results of operations.
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