Perhaps one of the more interesting ways of looking at companies is trying to garner the mindset of the company’s legal department and the "Legal Proceedings" section of annual reports.  Crocs (CROX-NASDAQ) filed its annual report last night and it appears to be in many different legal activities where it is suing companies for trying to sell similar shoes and the companies distributing them.  Patent, trademark, and copyright does have to be protected, but sometimes things go too far.  At least they didn’t sue The Netherlands Historical Society for making clogs long ago as the original work shoes, even if theirs were made of wood.  The suits won’t likely damage Crocs, but they may be delusional on what they really own and what others should be allowed to do.  Read their pending lawsuits and legal actions below:

In January 2005, our direct subsidiary Foam Creations filed alawsuit against Holey Soles Holdings Ltd. (“Holey Soles”) in theFederal Court of Canada, Trial Division (at Toronto, Ontario). Thecomplaint alleges trademark and copyright infringement relating to thedesign of some of our shoe models. We are seeking a permanentinjunction with respect to any further acts of infringement on ourintellectual property, as well as damages and attorneys’ fees. Thisaction is still pending.

In August 2005, Holey Soles filed a lawsuit against us in the UnitedStates District Court for the Southern District of New York. HoleySoles seeks a declaratory judgment that we do not have any validcopyright or trade dress rights with respect to the design of ourfootwear. In addition, Holey Soles seeks a declaratory judgment thatthe manufacture, sale and distribution of its footwear products doesnot constitute unfair competition and does not infringe on ourcopyrights or trade dress rights. On our motion, the action has beentransferred to the United States District of Colorado where it has beenstayed pending the outcome of The International Trade Commission(“ITC”) Investigation No. 337-TA-567 discussed below. We do not expectthe ultimate resolution of this matter will have a material adverseimpact on our business.

On March 31, 2006, we filed a complaint with the ITC against AcmeEx-Im, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc.,Collective Licensing International, LLC, D. Myers & Sons, Inc.,Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports,Inc., Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation,and Shaka Holdings, Inc., alleging patent and trade dress infringementand seeking an exclusion order banning the importation and sale ofinfringing products. The utility and design patents asserted in thecomplaint were issued to us on February 7, 2006 and March 28, 2006respectively, by the United States Patent and Trademark Office. The ITChas issued final determinations terminating Shaka Holdings, Inc.,Inter-Pacific Trading Corporation, Acme Ex-Im, Inc., D. Myers &Sons, Inc., and Australia Unlimited, Inc. from the ITC investigationNo. 337-TA-567 on the basis of settlement and Cheng’s Enterprises, Inc.on the suspension of accused activities. The ITC Administrative LawJudge issued an Initial Determination of non-infringement related toone of the patents at issue. Crocs filed a petition with the Commissionto review this determination. The Commission granted us a petition andon February 15, 2007, after briefing by the parties, the Commissionvacated the ALJ’s determination of non-infringement with respect to theremaining respondents and remanded it to the ALJ for furtherproceedings consistent with the Commission’s order. On February 22,2007, the ALJ issued an order scheduling an administrative trial on allissues, which had previously been postponed, for January 14, 2008. OnMarch 1, 2007 we petitioned the Commission to review the ALJ’sscheduling order and set an earlier trial date.

On April 3, 2006, we filed a complaint in the U.S. District Court forthe District of Colorado alleging patent and trade dress infringementand seeking injunctive relief against Acme EX-IM, Inc., AustraliaUnlimited, Inc., Cheng’s Enterprises, Inc., Collective LicensingInternational, LLC, D. Myers & Sons, Inc., Double DiamondDistribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey SolesHoldings, Ltd., Inter-Pacific Trading Corporation, Shaka Holdings,Inc., and Does 1-10. The utility and design patents asserted in thecomplaint were issued to us on February 7, 2006 and March 28, 2006respectively, by the United States Patent and Trademark Office. Consentjudgments have been entered against Shaka Holdings, Inc., InterpacificTrading Corporation and Acme Ex-Im, Inc. We have entered into asettlement agreement with Australia Unlimited, Inc., and on January 25,2007 have filed a stipulation for dismissal of all claims andcounterclaims. We have entered into a settlement agreement with D.Myers & Sons, Inc. and plan to file a consent judgment with thecourt related to D. Myers & Sons, Inc. We do not expect theultimate resolution of this matter will have a material adverse impacton our business.

On January 29, 2007, we filed an action in Colorado District Court,Boulder County, alleging breach of contract by Australia Unlimited. Weallege Australia Unlimited breached the settlement agreement from theprior litigation by introducing a new shoe design not approved by us.We obtained a temporary restraining order enjoining Australia Unlimitedsale of the new shoe; however, our motion for preliminary injunctionwas denied. Australia Unlimited removed the case to federal court, CaseNo. 07CV00221, and alleged a counterclaim for breach of contract andthat it is entitled to recover damages for the time that the temporaryrestraining order was in effect.

Although we are subject to other litigation from time to time in theordinary course of business, we are not party to any other pendinglegal proceedings that we believe will have a material adverse impacton our business.

Hopefully the won’t sue us for pointing out how the ugliness of theirshoes has somehow contributed to all of their newfound success.  Theyneed a new slogan: "Crocs, Suing Our Way Out of Ugliness."

Jon C. Ogg
April 3, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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