FCS » Topics » NOTE 14-COMMITMENTS AND CONTINGENCIES

These excerpts taken from the FCS 10-K filed Feb 26, 2009.

NOTE 14—COMMITMENTS AND CONTINGENCIES

The company has future commitments to purchase chemicals for certain wafer fabrication facilities. In the event the company was to end the agreements, the company would be required to pay future minimum payments of approximately $10.5 million.

The company’s facilities in South Portland, Maine and West Jordan, Utah have ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of the company from National Semiconductor. Pursuant to the Asset Purchase Agreement with National Semiconductor, National Semiconductor has agreed to indemnify the company for the future costs of these projects. The terms of the indemnification are without time limit and without maximum amount. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. The carrying value of the liability at December 28, 2008 was $0.2 million.

The company’s former Mountain View, California, facility is located on a contaminated site under the Comprehensive Environmental Response, Compensation and Liability Act. Under the terms of the Acquisition Agreement with Raytheon Company, Raytheon Company has assumed responsibility for all remediation costs or other liabilities related to historical contamination. The purchaser of the Mountain View, California property received an environmental indemnity from the company similar in scope to the one the company received from Raytheon. The purchaser and subsequent owners of the property can hold the company liable under the company’s indemnity for any claims, liabilities or damages it incurs as a result of the historical contamination, including any remediation costs or other liabilities related to the contamination. The company is unable to estimate the potential amounts of future payments; however, any future payments are not expected to have a material impact on the company’s earnings or financial condition.

Pursuant to the 1999 asset agreement to purchase the power device business of Samsung Electronics Co., Ltd., Samsung agreed to indemnify the company for remediation costs and other liabilities related to historical contamination, up to $150 million. The company is unable to estimate the potential amounts of future payments, if any; however, any future payments are not expected to have a material impact on the company’s earnings or financial condition.

The company’s facility in Mountaintop, Pennsylvania has an ongoing remediation project to respond to releases of hazardous materials that occurred prior to acquisition of the site from Intersil Corporation. Under the Asset Purchase Agreement with Intersil, Intersil indemnified the company for specific environmental issues. The terms of the indemnification are without time limit and without maximum amount.

Patent Litigation with Power Integrations, Inc. On October 20, 2004, the company and its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the U.S. District Court for the District of Delaware. Power Integrations alleges that certain of the company’s pulse width modulation (PWM) integrated circuit products infringe four Power Integrations U.S. patents, and seeks a permanent injunction preventing the company from manufacturing, selling or offering the products for sale in the U.S., or from importing the products into the U.S., as well as money damages for past infringement. The company has analyzed the Power Integrations patents in light of the company’s products and, based on that analysis, does not believe the company’s products violate Power Integrations’ patents. Accordingly, the company is vigorously contesting this lawsuit.

The company also petitioned the U.S. Patent and Trademark Office for reexamination of all unexpired patent claims asserted in the case (those being all asserted claims from three of the four patents asserted in the case; the fourth patent has expired), and as a consequence the patent office initiated reexamination proceedings

 

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on all of those claims. In the first half of 2008, in the patent office’s first formal correspondence regarding the validity of the patents, all of those asserted claims were rejected by the patent office. In December 2008, the patent office issued final rejections of 12 of 14 patent claims from two of the three unexpired Power Integrations patents. The patent office has twice issued preliminary rejections of all claims asserted by Power Integrations in the third unexpired patent.

The trial in the case was divided into three phases. The first phase, held in October 2006, was on infringement, the willfulness of any infringement, and damages. On October 10, 2006, a jury returned a verdict finding that thirty-three of the company’s PWM products infringe one or more of seven claims of the four patents being asserted. The jury also found that the company’s infringement was willful, and assessed damages against the company of approximately $34 million. The second phase of the trial, held in September 2007 before a different jury, was on the validity of the Power Integrations patents being asserted. On September 21, 2007 a jury returned a verdict in the second phase, finding that the four Power Integrations patents asserted in the lawsuit are valid. The third phase of the trial began on September 21, 2007, and covered the enforceability of the patents. On September 24, 2008, the court ruled on the third phase, finding that the patents are enforceable.

On December 12, 2008, the judge overseeing the case reduced the jury’s October 10, 2006 damages award from approximately $34 million to approximately $6 million, and ordered a new trial on whether the company willfully infringed Power Integrations’ asserted patents. The court also issued a permanent injunction on a limited number of Fairchild’s products enjoining the company from making, selling or offering to sell the products in the U.S., or from importing the products into the U.S. On December 22, 2008, the judge ordered a 90-day stay of the permanent injunction to allow the company to seek a longer stay from the U.S. Court of Appeals for the Federal Circuit, and the company is currently seeking such a stay. The company voluntarily stopped U.S. sales and importation of those products in 2007 and now offers replacement products worldwide.

Final judgment in the case is not expected until after the new trial on willfulness. If the jury in the new willfulness trial finds that the company’s infringement was willful, the judge in the case has discretion to increase the final $6 million damages award by up to three times the amount of the award. The judge in the case has also awarded Power Integrations pre-judgment interest. It is also possible that the company could be required to pay Power Integrations’ attorney’s fees. The final damages award and injunction are subject to appeal and the company expects to contest several aspects of the litigation and to appeal on several grounds at the appropriate time. If the company chooses to appeal, the company would likely be required to post a bond or provide other security for some or the entire amount of the final damages award during the appeal process.

On May 23, 2008, Power Integrations filed another lawsuit against the company, Fairchild Semiconductor Corporation and the company’s wholly owned subsidiary System General Corporation in the U.S. District Court for the District of Delaware, alleging infringement of three patents. Of the three patents claimed in this lawsuit, two are patents that were asserted against the company and Fairchild Semiconductor Corporation in the October 2004 lawsuit described above. As mentioned above, all claims asserted in the first lawsuit from these two patents have now received final rejections from the patent office. The company believes it has strong defenses against Power Integrations’ claims and intends to vigorously defend this second lawsuit.

On October 14, 2008, Fairchild Semiconductor Corporation and System General Corporation filed a patent infringement lawsuit against Power Integrations in the U.S. District Court for the District of Delaware, alleging that certain PWM integrated circuit products infringe one or more claims of three U.S. patents owned by System General. The lawsuit seeks monetary damages and an injunction preventing the manufacture, use, sale, offer for sale or importation of Power Integrations products found to infringe the asserted patents.

Patent Litigation with Infineon. On November 25, 2008, the company was sued by Infineon Technologies AG, Infineon Technologies Austria AG, and Infineon Technologies North America Corporation in the U.S. District Court for the District of Delaware. Infineon alleges that the company infringes five Infineon U.S. patents and seeks a declaratory judgment that Infineon does not infringe six Fairchild patents. On November 28, 2008,

 

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the company answered the Infineon complaint with denials of their claims and the company’s own counterclaims of infringement. In the company’s counterclaim the company is asserting that certain Infineon products infringe one or more claims of six Fairchild patents.

On November 28, 2008, Fairchild Semiconductor Corporation also filed a separate infringement action against Infineon Technologies AG and Infineon Technologies North America Corporation in the U.S. District Court for the District of Maine, alleging that Infineon infringes two Fairchild patents that Infineon did not raise in the Delaware case.

Both Infineon and Fairchild are asking for unspecified money damages, including enhanced damages for willful infringement, and a permanent injunction.

Settlement of Patent Litigation with Alpha & Omega Semiconductor, Inc. On October 17, 2008, the company and Alpha & Omega Semiconductor, Inc. agreed to a settlement of the existing lawsuits between the parties. The settlement encompasses actions that each party filed in the U.S. as well as in Taiwan. The agreement includes cross licensing agreements and an immaterial settlement amount paid to the company.

The company has analyzed the potential litigation outcomes from the above mentioned claims in accordance with SFAS 5, Accounting for Contingencies. While the exact amount of these losses is not known, the company has recorded a charge for potential litigation outcomes in the Consolidated Statement of Operations, based upon the company’s assessments of the potential liability using an analysis of the claims and historical experience in defending and/or resolving these claims. As of December 28, 2008, the company’s reserve for potential litigation outcomes was $6.7 million.

From time to time the company is involved in legal proceedings in the ordinary course of business. The company believes that there is no such ordinary-course litigation pending that could have, individually or in the aggregate, a material adverse effect on the company’s business, financial condition, results of operations or cash flows.

NOTE 14—COMMITMENTS AND
CONTINGENCIES

The company has future commitments to purchase chemicals for certain wafer fabrication facilities. In the event the
company was to end the agreements, the company would be required to pay future minimum payments of approximately $10.5 million.

The
company’s facilities in South Portland, Maine and West Jordan, Utah have ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of the company from
National Semiconductor. Pursuant to the Asset Purchase Agreement with National Semiconductor, National Semiconductor has agreed to indemnify the company for the future costs of these projects. The terms of the indemnification are without time limit
and without maximum amount. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. The carrying value of the liability at December 28, 2008 was $0.2 million.

The company’s former Mountain View, California, facility is located on a contaminated site under the Comprehensive Environmental
Response, Compensation and Liability Act. Under the terms of the Acquisition Agreement with Raytheon Company, Raytheon Company has assumed responsibility for all remediation costs or other liabilities related to historical contamination. The
purchaser of the Mountain View, California property received an environmental indemnity from the company similar in scope to the one the company received from Raytheon. The purchaser and subsequent owners of the property can hold the company liable
under the company’s indemnity for any claims, liabilities or damages it incurs as a result of the historical contamination, including any remediation costs or other liabilities related to the contamination. The company is unable to estimate the
potential amounts of future payments; however, any future payments are not expected to have a material impact on the company’s earnings or financial condition.

FACE="Times New Roman" SIZE="2">Pursuant to the 1999 asset agreement to purchase the power device business of Samsung Electronics Co., Ltd., Samsung agreed to indemnify the company for remediation costs and other liabilities related to historical
contamination, up to $150 million. The company is unable to estimate the potential amounts of future payments, if any; however, any future payments are not expected to have a material impact on the company’s earnings or financial
condition.

The company’s facility in Mountaintop, Pennsylvania has an ongoing remediation project to respond to releases of hazardous
materials that occurred prior to acquisition of the site from Intersil Corporation. Under the Asset Purchase Agreement with Intersil, Intersil indemnified the company for specific environmental issues. The terms of the indemnification are without
time limit and without maximum amount.

Patent Litigation with Power Integrations, Inc. On October 20, 2004, the company and
its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the U.S. District Court for the District of Delaware. Power Integrations alleges that certain of the company’s pulse width modulation
(PWM) integrated circuit products infringe four Power Integrations U.S. patents, and seeks a permanent injunction preventing the company from manufacturing, selling or offering the products for sale in the U.S., or from importing the products into
the U.S., as well as money damages for past infringement. The company has analyzed the Power Integrations patents in light of the company’s products and, based on that analysis, does not believe the company’s products violate Power
Integrations’ patents. Accordingly, the company is vigorously contesting this lawsuit.

The company also petitioned the U.S. Patent
and Trademark Office for reexamination of all unexpired patent claims asserted in the case (those being all asserted claims from three of the four patents asserted in the case; the fourth patent has expired), and as a consequence the patent office
initiated reexamination proceedings

 


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on all of those claims. In the first half of 2008, in the patent office’s first formal correspondence regarding the validity of the patents, all of
those asserted claims were rejected by the patent office. In December 2008, the patent office issued final rejections of 12 of 14 patent claims from two of the three unexpired Power Integrations patents. The patent office has twice issued
preliminary rejections of all claims asserted by Power Integrations in the third unexpired patent.

The trial in the case was divided into
three phases. The first phase, held in October 2006, was on infringement, the willfulness of any infringement, and damages. On October 10, 2006, a jury returned a verdict finding that thirty-three of the company’s PWM products infringe one
or more of seven claims of the four patents being asserted. The jury also found that the company’s infringement was willful, and assessed damages against the company of approximately $34 million. The second phase of the trial, held in September
2007 before a different jury, was on the validity of the Power Integrations patents being asserted. On September 21, 2007 a jury returned a verdict in the second phase, finding that the four Power Integrations patents asserted in the lawsuit
are valid. The third phase of the trial began on September 21, 2007, and covered the enforceability of the patents. On September 24, 2008, the court ruled on the third phase, finding that the patents are enforceable.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">On December 12, 2008, the judge overseeing the case reduced the jury’s October 10, 2006 damages award from approximately $34 million to
approximately $6 million, and ordered a new trial on whether the company willfully infringed Power Integrations’ asserted patents. The court also issued a permanent injunction on a limited number of Fairchild’s products enjoining the
company from making, selling or offering to sell the products in the U.S., or from importing the products into the U.S. On December 22, 2008, the judge ordered a 90-day stay of the permanent injunction to allow the company to seek a longer stay
from the U.S. Court of Appeals for the Federal Circuit, and the company is currently seeking such a stay. The company voluntarily stopped U.S. sales and importation of those products in 2007 and now offers replacement products worldwide.


Final judgment in the case is not expected until after the new trial on willfulness. If the jury in the new willfulness trial finds that the
company’s infringement was willful, the judge in the case has discretion to increase the final $6 million damages award by up to three times the amount of the award. The judge in the case has also awarded Power Integrations pre-judgment
interest. It is also possible that the company could be required to pay Power Integrations’ attorney’s fees. The final damages award and injunction are subject to appeal and the company expects to contest several aspects of the litigation
and to appeal on several grounds at the appropriate time. If the company chooses to appeal, the company would likely be required to post a bond or provide other security for some or the entire amount of the final damages award during the appeal
process.

On May 23, 2008, Power Integrations filed another lawsuit against the company, Fairchild Semiconductor Corporation and the
company’s wholly owned subsidiary System General Corporation in the U.S. District Court for the District of Delaware, alleging infringement of three patents. Of the three patents claimed in this lawsuit, two are patents that were asserted
against the company and Fairchild Semiconductor Corporation in the October 2004 lawsuit described above. As mentioned above, all claims asserted in the first lawsuit from these two patents have now received final rejections from the patent office.
The company believes it has strong defenses against Power Integrations’ claims and intends to vigorously defend this second lawsuit.

SIZE="2">On October 14, 2008, Fairchild Semiconductor Corporation and System General Corporation filed a patent infringement lawsuit against Power Integrations in the U.S. District Court for the District of Delaware, alleging that certain PWM
integrated circuit products infringe one or more claims of three U.S. patents owned by System General. The lawsuit seeks monetary damages and an injunction preventing the manufacture, use, sale, offer for sale or importation of Power Integrations
products found to infringe the asserted patents.

Patent Litigation with Infineon. On November 25, 2008, the company was sued
by Infineon Technologies AG, Infineon Technologies Austria AG, and Infineon Technologies North America Corporation in the U.S. District Court for the District of Delaware. Infineon alleges that the company infringes five Infineon U.S. patents and
seeks a declaratory judgment that Infineon does not infringe six Fairchild patents. On November 28, 2008,

 


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the company answered the Infineon complaint with denials of their claims and the company’s own counterclaims of infringement. In the company’s
counterclaim the company is asserting that certain Infineon products infringe one or more claims of six Fairchild patents.

On
November 28, 2008, Fairchild Semiconductor Corporation also filed a separate infringement action against Infineon Technologies AG and Infineon Technologies North America Corporation in the U.S. District Court for the District of Maine, alleging
that Infineon infringes two Fairchild patents that Infineon did not raise in the Delaware case.

Both Infineon and Fairchild are asking for
unspecified money damages, including enhanced damages for willful infringement, and a permanent injunction.

Settlement of Patent
Litigation with Alpha & Omega Semiconductor, Inc.
On October 17, 2008, the company and Alpha & Omega Semiconductor, Inc. agreed to a settlement of the existing lawsuits between the parties. The settlement encompasses
actions that each party filed in the U.S. as well as in Taiwan. The agreement includes cross licensing agreements and an immaterial settlement amount paid to the company.

FACE="Times New Roman" SIZE="2">The company has analyzed the potential litigation outcomes from the above mentioned claims in accordance with SFAS 5, Accounting for Contingencies. While the exact amount of these losses is not known, the
company has recorded a charge for potential litigation outcomes in the Consolidated Statement of Operations, based upon the company’s assessments of the potential liability using an analysis of the claims and historical experience in defending
and/or resolving these claims. As of December 28, 2008, the company’s reserve for potential litigation outcomes was $6.7 million.

SIZE="2">From time to time the company is involved in legal proceedings in the ordinary course of business. The company believes that there is no such ordinary-course litigation pending that could have, individually or in the aggregate, a material
adverse effect on the company’s business, financial condition, results of operations or cash flows.

This excerpt taken from the FCS 10-K filed Mar 1, 2007.

NOTE 14—COMMITMENTS AND CONTINGENCIES

The company has future commitments to purchase chemicals for certain wafer fabrication facilities. In the event the company was to end the agreements, the company would be required to pay future minimum payments of approximately $63.0 million.

The company’s facilities in South Portland, Maine and West Jordan, Utah have ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of the company from National Semiconductor. Pursuant to the Asset Purchase Agreement with National Semiconductor, National Semiconductor has agreed to indemnify the company for the future costs of these projects. The terms of the indemnification are without time limit and without maximum amount. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. The carrying value of the liability at December 31, 2006 was $0.4 million.

The company’s former Mountain View, California, facility is located on a contaminated site under the Comprehensive Environmental Response, Compensation and Liability Act. Under the terms of the Acquisition Agreement with Raytheon Company, Raytheon Company has assumed responsibility for all remediation costs or other liabilities related to historical contamination. The purchaser of the Mountain View, California property received an environmental indemnity from us similar in scope to the one we received from Raytheon. The purchaser and subsequent owners of the property can hold us liable under our indemnity for any claims, liabilities or damages it incurs as a result of the historical contamination, including any remediation costs or other liabilities related to the contamination. The company is unable to estimate the potential amounts of future payments; however, any future payments are not expected to have a material impact on the company’s earnings or financial condition.

Pursuant to the 1999 asset agreement to purchase the power device business of Samsung Electronics Co., Ltd., Samsung agreed to indemnify the company for remediation costs and other liabilities related to historical contamination, up to $150 million. The company is unable to estimate the potential amounts of future payments, if any; however, any future payments are not expected to have a material impact on the company’s earnings or financial condition.

The company’s facility in Mountaintop, Pennsylvania has an ongoing remediation project to respond to releases of hazardous materials that occurred prior to acquisition of the DPP business from Intersil Corporation. Under the Asset Purchase Agreement with Intersil, Intersil indemnified the company for specific environmental issues. The terms of the indemnification are without time limit and without maximum amount.

Phosphorus Mold Compound Litigation and Claims. From time to time since late 2001, the company has received claims from a number of customers seeking damages resulting from certain products manufactured with a phosphorus-containing mold compound. Mold compound is the plastic resin used to encapsulate semiconductor chips. This particular mold compound causes some chips to short in some situations, resulting in chip failure. The company has been named in lawsuits relating to these mold compound claims. In January 2005 the company was named as a defendant in a lawsuit filed by Lucent Technologies Inc. in the Superior Court of New Jersey. The Lucent lawsuit alleges breach of contract and breach of warranty claims and seeks unspecified damages allegedly caused by the company’s products. Lucent amended the lawsuit in the second quarter of 2006 to include a fraud claim against the company. The company believes it has strong defenses against Lucent’s claims and intends to vigorously defend the lawsuit. On January 5, 2007, White Rock Networks sued the company and two distributors, Arrow Electronics and All American Semiconductor, in the Eastern District of Texas, for violations of the Texas Deceptive Trade Practices Act (DTPA) relating to the mold compound issue, claiming unspecified damages. The company has not yet been served in the case. The company believes it has strong defenses against White Rock Networks’ claims and intends to vigorously defend the lawsuit if it is served on the company.

Several other customers have made claims for damages or threatened to begin litigation as a result of the mold compound issue if their claims are not resolved according to their demands, and the company may face

 

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additional lawsuits as a result. The company has resolved similar claims with several of its leading customers. The company has exhausted insurance coverage for such customer claims. While the exact amount of these losses is not known, the company recorded a reserve for estimated potential settlement losses of $11.0 million in the Consolidated Statement of Operations during the second quarter of 2004 and an additional $6.9 million in the fourth quarter of 2005. These estimates were based upon assessments of the potential liability using an analysis of the claims and historical experience. At December 31, 2006 and December 25, 2005, the reserve for estimated potential settlement losses was $5.8 million and $17.2 million, respectively. The decrease in the reserve is due to settlement payments made during the first quarter of 2006. If the company continues to receive additional claims for damages from customers beyond the period of time normally observed for such claims, if more of these claims proceed to litigation, or if the company chooses to settle claims in settlement of or to avoid litigation, then the company may incur a liability in excess of the current reserve.

Patent Litigation with Power Integrations, Inc. On October 20, 2004, the company and its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the United States District Court for the District of Delaware. Power Integrations alleges that certain of the company’s pulse width modulation (PWM) integrated circuit products infringe four Power Integrations U.S. patents, and seeks a permanent injunction preventing the company from manufacturing, selling or offering the products for sale in the United States, or from importing the products into the United States, as well as money damages for past infringement. The company has analyzed the Power Integrations patents in light of the company’s products and, based on that analysis, do not believe the company’s products violate Power Integrations’ patents. Accordingly, the company is vigorously contesting this lawsuit. The trial in the case has been divided into three phases. The first phase, held October 2-10, 2006, was on infringement, the willfulness of any infringement, and damages. On October 10, 2006, a jury returned a verdict finding that 33 of the company’s PWM products infringe one or more of seven claims of the four patents being asserted. The jury also found that the company’s infringement was willful, and assessed damages against the company of approximately $34 million. That verdict remains subject to the company’s appeal. The second phase of the trial will be on the validity of the Power Integrations patents being asserted, and will be before a different jury. The enforceability of the patents will be handled in a third phase before the judge who is overseeing the case. For Power Integrations to prevail in the case and receive a judgment and injunction against the company, the patent claims found to have been infringed must also be found to be valid and enforceable in the remaining phases of the trial. The company believes it has identified inventions and publications, known as prior art, that pre-date the Power Integrations patents which the company believes would invalidate the patents. The company is also claiming that Power Integrations officials engaged in inequitable conduct before the United States Patent and Trademark Office at the time when one or more of the patents was obtained, and the company believes that conduct should make the patent claims unenforceable.

In the second phase of the trial, the Power Integrations patents will be presumed to be valid and the company will have the burden of proving, by clear and convincing evidence, that the patents are invalid. To the extent the company is unable to do this, Power Integrations will be entitled to a judgment and damages as further discussed below. Power Integrations may also seek an injunction to prevent the company from making, selling or offering to sell in the United States, or from importing into the United States, products that infringe patents that are found valid and enforceable. Power Integrations has announced its intention to seek such an injunction in such event. The second phase of the jury trial was previously scheduled to begin December 4, 2006, but it was canceled by order of the Delaware U.S. District Court. The court questioned whether the KSR v. Teleflex case, currently pending before the U.S. Supreme Court, and argued on November 28, 2006, might impact the dispute between Fairchild and Power Integrations. The court found that the same issue of obviousness, a defense to the validity of the Power Integrations patents, “permeates the validity contentions in this case.” At issue in the KSR case is whether the defense of obviousness has been improperly restricted by lower court rulings. The second phase of the Power Integrations v. Fairchild Semiconductor jury trial on validity issues is now scheduled to begin on June 4, 2007.

The jury in the first phase of the trial assessed damages against the company of approximately $34 million. Because the jury also found that the company’s infringement was willful, the judge in the case will have

 

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discretion to increase the damages award by up to three times the amount of the final damages award. The final damages award would be determined after the next two phases of the trial. To the extent the company succeed in proving the patent claims invalid, the damages amount may be reduced, including to zero if we prove all the claims invalid or unforceable. If the company is not successful, damages may also be increased by the judge to account for certain sales by the company after October 20, 2006 and as a result of the willful infringement finding. It is also possible that the company could be required to pay Power Integrations’ attorney’s fees and pre-judgment interest.

Although the company believes, based on the prior art the company has identified, that the company has invalidity and unenforceability defenses to Power Integrations’ patent claims, the results of litigation are difficult to predict and no assurance can be given that the company will succeed in proving the patents invalid or unenforceable. As discussed above, the judge overseeing the case has discretion over the amount of damages awarded, and over the granting and scope of any injunction against the company. Any damages award or injunction would be subject to appeal and the company would expect to carefully consider an appeal at the appropriate time. In such a case, if the company chooses to appeal, the company would likely be required to post a bond or provide other security for some or the entire amount of the final damages award during the pendency of the appeal.

The company has analyzed the potential for a loss from this litigation in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. Due to the company’s beliefs about its position in the case, and because the company is unable to reasonably estimate the amount of loss the company would incur if the company does not prevail, the company has not recorded a reserve for contingent loss. Should the company ultimately lose the lawsuit, such result could have an adverse impact on the company’s ability to sell products found to be infringing, either directly or indirectly in the U.S.

In a separate action, the company filed a lawsuit on April 11, 2006, against Power Integrations in the United States District Court for the Eastern District of Texas. The lawsuit asserts that Power Integrations’ PWM products infringe U.S. Patent No. 5,264,719. Intersil Americas owns U.S. Patent No. 5,264,719, for High Voltage Lateral Semiconductor Devices, and is a co-plaintiff with the company in the lawsuit. The company has held license rights under the patent since acquiring Intersil’s power discrete business in 2001, and the company more recently secured exclusive rights to assert the patent against Power Integrations. The company intends to take all possible steps to seek a court order to stop Power Integrations from making, using, selling, offering for sale or importing the infringing products into the U.S. and to obtain monetary damages for Power Integrations’ infringing activities.

A company that Fairchild is acquiring is also involved in patent litigation with Power Integrations. The company is in the process of acquiring System General Corporation, a Taipei-based designer and seller of analog semiconductor devices. As of the date of this filing the company owns approximately 95.6% of System General shares and expects to acquire all remaining shares before the end of September 2007. System General is currently appealing the outcome of proceedings before the U.S. International Trade Commission (ITC) involving allegations of patent infringement, and is a defendant in a patent infringement lawsuit in the U.S. District Court for the Northern District of California. Both the ITC proceeding and the lawsuit were initiated by Power Integrations. As in all litigation, the results of these matters are difficult to predict and no assurance can be given as to the outcome of these proceedings. An adverse outcome in these matters after completion of the acquisition could negatively impact the company’s financial results.

ZTE Corporation v. Fairchild Semiconductor Corporation. On December 30, 2004, the company’s wholly owned subsidiary, Fairchild Semiconductor Corporation, was sued by Zhongxing Telecom Ltd. (ZTE), a communications equipment manufacturer, in Intermediate People’s Court of Shenzhen, Guangdong Province, People’s Republic of China. The complaint filed by ZTE alleges that certain of the company’s products were defective and caused personal injury and/or property loss to ZTE. ZTE claims 65,733,478 Chinese yuan as damages (equivalent to approximately $8.4 million U.S. dollars based on exchange rates at December 31, 2006).

 

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The company contested the lawsuit in a trial held on October 20, 2005. On December 29, 2006, the company was informed that the court had ruled in favor of ZTE and had ordered Fairchild to pay RMB 65,733,478 (approximately $8.4 million at current exchange rates) to ZTE. The company maintains that ZTE’s product liability claims are invalid and have appealed to the Higher People’s Court of Guangdong Province. The lawsuit relates to alleged defects in products shipped in late 2002 and early 2003. The company did not sell the allegedly defective products to ZTE directly. Among other defenses, the company has argued that limitations on damages in the company’s contract with its distributor at the time of shipment should limit any damages recovery by ZTE. The company recorded a charge of approximately $8.2 million in the fourth quarter 2006 related to this legal proceeding.

From time to time the company is involved in legal proceedings in the ordinary course of business. The company believes that there is no such ordinary-course litigation pending that could have, individually or in the aggregate, a material adverse effect on the company’s business, financial condition, results of operations or cash flows.

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