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The following is an excerpt from a S-1/A SEC Filing, filed by LINDOWS INC on 7/19/2004.
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LINDOWS INC - S-1/A - 20040719 - LEGAL_PROCEEDINGS

Legal Proceedings

     Microsoft Litigation and Settlement

      On December 20, 2001, Microsoft initiated an action against us in U.S. District Court for the Western District of Washington, asserting that our use of the Lindows mark violated U.S. trademark law and U.S. and Washington state unfair competition laws. On November 28, 2003, Microsoft initiated an action against us in the Helsinki District Court of Finland, asserting that our use of the Lindows name violated Finland’s trademark law. Microsoft initiated similar actions against us in the Stockholm City Court in Sweden on December 8, 2003, the District Court in Amsterdam on December 11, 2003, the Tribunal de Grande Instance de Paris, or Paris Civil Court, on December 4, 2003, the Federal Court in Canada on February 11, 2004, and the Madrid First Instance Court in Spain on February 3, 2004. On May 12, 2004, Microsoft sent us a letter alleging that we were distributing copyrighted Microsoft Windows Media technology with our operating system without a license.

      On July 16, 2004, we entered into a settlement agreement with Microsoft pursuant to which all of the foregoing matters were resolved. The settlement agreement provides that, among other things:

  •  Microsoft will pay us $15 million no later than August 15, 2004;
 
  •  Microsoft will pay us an additional $5 million by February 1, 2005 in exchange for us assigning to Microsoft the lindows.org, lindowsinc.net, lindowsinc.org, lindowsos.com, lindos.com, lindoors.com, lindowsemail.com, lindowsfan.com, lin - - - - s.com, lin - - - s.com, lin - - s.com, lin-s.com, and lindash.com domain names;
 
  •  no later than September 14, 2004, we will change our corporate name and will permanently cease all use of the “Lindows Marks,” which is defined to include “Lindow” or “Lindows” or “Lindoz” or “lindows.com” or “lindowsinc.com” or “lin - - - s.com” or any other term including “ - indows” or “indoz.” However, until July 15, 2008, we may use www.lindows.com and www.lindowsinc.com solely for the purpose of redirecting traffic to other websites. After July 15, 2008, we will assign the www.lindowsinc.com and www.lindows.com domain names to Microsoft;
 
  •  no later than September 14, 2004, we will offer to our distributors a modified version of our Linspire operating system that does not include any of the Lindows Marks. The settlement agreement defines the term “distributors” to include any third party to which we have granted distribution rights for our products, including but not limited to distributors, resellers and builders;
 
  •  to the extent that we have contractual authority to do so under our agreements with distributors, no later than September 14, 2004, we will inform our distributors that they are to discontinue all further use of the Lindows Marks, and that any authorization or license from us to use the Lindows Marks is withdrawn and replaced with our authorization to use the Linspire mark. To the extent that we do not have the contractual authority referenced above, no later than October 14, 2004 we will inform our distributors that we have entered into the settlement agreement, that we have acknowledged the validity of the Windows marks and that we will not provide distributors with indemnity against claims brought by Microsoft arising out of future use of the Lindows Marks;
 
  •  no later than October 14, 2004, we will cease any further use or distribution of the Windows Media Files. The settlement agreement defines the term “Windows Media Files” to mean five copyrighted files owned by Microsoft, which are included in Linspire 4.5 and a prior version of our operating system; however, in connection with the settlement agreement, Microsoft has agreed to grant us limited four-year, royalty-free licenses to certain Windows Media software components, which we plan to include and distribute with our Linspire operating system;

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  •  no later than October 14, 2004, we will offer to our distributors a modified version of our Linspire operating system that does not include the Windows Media Files, but which may include the Windows Media software components;
 
  •  no later than October 14, 2004, we will inform our distributors to discontinue all further use of any versions of our products that contain the Windows Media Files and that any authorization or license from us to distribute versions of our products that contain the Windows Media Files is withdrawn and replaced with our authorization or license to use the modified version that does not contain the Windows Media Files, but which may include the Windows Media software components;
 
  •  to the extent that we do not have the contractual authority to require our distributors to discontinue the use of versions of our products that contain the Windows Media Files, we will no later than October 14, 2004 inform our distributors that we have entered into a settlement agreement with Microsoft providing that we will cease distribution of the Windows Media Files, that Microsoft alleges that unauthorized distribution of the Windows Media Files infringes its copyrights, and that we will not provide distributors with indemnity against claims brought by Microsoft arising out of unauthorized use of the Windows Media Files;
 
  •  no later than October 14, 2004, we will review several additional products to assure that Windows Media Files are not included in them. We agree not to post on our website any links or directions to other locations from which users may download unauthorized copies of the Windows Media Files from other sources;
 
  •  no later than August 15, 2004, we agree to expressly abandon with prejudice any pending applications for registrations for trademarks or trade names containing the Lindows Marks in the United States or any foreign jurisdiction. We further agree to immediately dismiss with prejudice all claims, counterclaims or other legal proceedings in whatever form or forum that we have brought for cancellation of any U.S. or foreign trademark registration issued to Microsoft containing the term Windows;
 
  •  we and Microsoft will immediately direct our respective counsel to dismiss with prejudice all pending litigation between us. Microsoft further agrees to refrain from filing any new cases outside the U.S. against us concerning the Lindows Marks, unless Microsoft has given us 30 days written notice of the use of the Lindows Marks to which Microsoft objects. If we provide Microsoft written confirmation of our intent to cure within the 30 day notice period, we will have an additional 30 days to cure our use of the Lindows Marks;
 
  •  we agree to acknowledge Microsoft’s ownership of, and the validity of, the Windows trademark; and
 
  •  Microsoft agrees not to sue us for past damages for any patent infringement that may have occurred prior to the date of the settlement agreement, and the parties mutually release each other from any claims relating to the litigation being settled or our prior distribution of the Windows Media Files.

     St. Paul Fire and Marine Insurance Company Litigation

      On February 3, 2002, our commercial general liability insurer, St. Paul Fire and Marine Insurance Company, or St. Paul, initiated a civil action against us in the U.S. District Court for the Central District of California. In this lawsuit, St. Paul sought declaratory relief that it had no duty to defend or indemnify us in connection with our litigation with Microsoft currently pending in the U.S. District Court for the Western District of Washington. Please see “Business — Legal Proceedings — Microsoft Litigation and Settlement” for a description of our prior litigation with Microsoft. In support of this claim, St. Paul asserted that our insurance policy excludes litigation relating to the Lindows name because we used the Lindows name before the policy went into effect.

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St. Paul also asserted that it was entitled to deny coverage because we allegedly knew that using the Lindows name would result in a lawsuit by Microsoft.

      We asserted several defenses and a counterclaim in this lawsuit. We asserted that St. Paul has breached its contract with us and has acted in bad faith. We asked the court to give us monetary damages, including punitive damages, as well as a declaratory order by the court that St. Paul must defend and indemnify us in connection with the U.S. Microsoft litigation.

      Both parties filed motions for partial summary judgment. The court granted our motion and denied St. Paul’s motion. The court ruled that St. Paul had an obligation to defend us and had breached its contract by denying coverage. Based on this decision, and our recent settlement with Microsoft, the only remaining issues to be decided by the court are issues related to damages for St. Paul’s breach of contract, and our bad faith claim against St. Paul for its failure to defend. After the court granted our motion for partial summary judgment, St. Paul agreed to defend us in the U.S. Microsoft litigation, but reserved its right to appeal the court’s order after a final adjudication of the remaining issues in the lawsuit. The court then stayed the proceedings pending a final outcome in the U.S. Microsoft litigation. Now that we have settled with Microsoft, the stay can be lifted.

      On January 6, 2004, we initiated a separate civil action against St. Paul in the U.S. District Court for the Central District of California. In this lawsuit, we assert that St. Paul has wrongfully denied us coverage in connection with the lawsuits Microsoft brought against us in Finland, Sweden, the Netherlands, and France. Our complaint seeks monetary damages, including punitive damages, as well as a declaratory order by the court that St. Paul must fully defend and indemnify us in connection with the Microsoft litigation pending in Finland, Sweden, the Netherlands, and France.

      In response to our lawsuit, St. Paul sent us letters agreeing to pay partial defense costs for the lawsuits in Finland, Sweden, the Netherlands and France, subject to St. Paul’s reservation of its rights to deny coverage. In response to these letters we amended our complaint to address St. Paul’s refusal to pay complete defense costs and its reservation of rights. In addition, St. Paul recently advised us that it will agree to pay defense costs for lawsuits filed against us by Microsoft in Canada and Spain on the same terms as set forth above with respect to the lawsuits in Finland, Sweden, the Netherlands and France. We have amended our complaint to add the Canada and Spain lawsuits.

      St. Paul has filed an answer to our second amended complaint and a counterclaim. St. Paul seeks a declaratory order that it has no duty to defend or indemnify us in connection with the lawsuits in Finland, Sweden, the Netherlands, France, Canada and Spain. It also seeks a declaratory order that any attorneys’ fees it is obligated to pay be at a reduced hourly rate. We filed a motion for preliminary injunction in which we asked the court to immediately enforce St. Paul’s obligation to pay attorneys’ fees at the full hourly rate. The court denied our motion and ordered us to arbitrate the hourly rate issue. Now that we have settled with Microsoft, the claims relating to St. Paul’s obligation to indemnify us for any amounts that we might have to pay Microsoft have become moot.

      Both of our lawsuits with St. Paul may proceed for an extended period of time. We intend to pursue our rights in the lawsuits vigorously, but cannot assure you that they will be resolved in our favor. If St. Paul successfully appeals the decision relating to its obligation to bear the cost of our legal defense with respect to Microsoft’s U.S. litigation, we may be forced to reimburse St. Paul for some or all of the legal fees and costs it has paid to us or our legal counsel in the Microsoft U.S. litigation. If we are unsuccessful in our lawsuit relating to the foreign litigation, we also may be forced to reimburse St. Paul for some or all legal fees and costs it has paid to us or our legal counsel relating to the foreign litigation. Furthermore, even if St. Paul is required to bear the cost of our legal defense in the foreign litigation, it may only be required to cover a portion of the fees charged by the attorneys defending the case, in which case we would be required to bear the portion of the legal fees in excess of the amounts covered by St. Paul. Because of the uncertainties as to whether St. Paul will be required to cover the legal defense costs in the foreign litigation, we have accrued $250,000 in estimated legal fees as of March 31, 2004 relating to the foreign litigation.

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      As of March 31, 2004, our carrier has paid approximately $3,280,000 of our legal fees and costs relating to our U.S. and foreign litigation with Microsoft. If we are forced to reimburse our carrier for these legal fees and costs, our financial position and ability to fund our operations could be materially harmed.

     Xandros Litigation

      On December 13, 2002, we initiated a civil action against Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman in U.S. District Court for the Southern District of California. Our action asserts that Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman fraudulently induced us to loan Xandros, Inc. $750,000 in exchange for convertible promissory notes. Xandros, Inc. then failed to repay the promissory notes when they became due. We are seeking $750,000, plus interest, attorneys’ fees and punitive damages. This lawsuit is in the discovery phase, and may proceed for an extended period of time. We intend to pursue the lawsuit vigorously, but cannot assure you that it will be resolved in our favor. Additionally, even if the court rules in our favor, we cannot assure you that we will be able to collect the amounts owed.

      Other than the immediately preceding discussion, we are not currently a party to any material legal proceedings.

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