Does Google Adequately Reserve for Losses in Copyright Infringement Suits?

Now that it appears that Google has been dealt a major setback in the Google Books case, questions are raised about how effectively Google has been handling its—what would you call it? “massive”?–exposure to copyright infringement litigation from a financial accounting and SarbanesOxley perspective.

It would not be unusual to see personal liability for CEOs and CFOs in SEC actions relating to failing to adequately reserve for other liabilities, such as environmental liabilities. I was discussing this issue with a friend of mine who raised some very interesting similarities between these situations from a securities law and financial accounting perspective.

Google’s 10K handles it this way:

“We have also had copyright claims filed against us by companies alleging that features of certain of our products and services, including Google Web Search, Google News, Google Video, Google Image Search, Google Book Search, and YouTube, infringe their rights. In the U.S. we announced a settlement with the Authors Guild and the Association of American Publishers; however, this class action settlement is subject to approval by the U.S. District Court for the Southern District of New York, and we are subject to additional claims with respect to Google Book Search in other parts of the world. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain functionalities, and may also result in a change in our business practices, which could result in a loss of revenue for us or otherwise harm our business. In addition, any time one of our products or services links to or hosts material in which others allegedly own copyrights, we face the risk of being sued for copyright infringement or related claims. Because these products and services comprise the majority of our products and services, the risk of harm from such lawsuits could be substantial.
We have also had patent lawsuits filed against us alleging that certain of our products and services, including Google Web Search, Google AdWords, Google AdSense, and Google Chrome, infringe patents held by others. In addition, the number of demands for license fees and the dollar amounts associated with each request continue to increase. Adverse results in these lawsuits, or our decision to license patents based upon these demands, may result in substantial costs and, in the case of adverse litigation rulings, could prevent us from offering certain features, functionalities, products, or services, which could result in a loss of revenue for us or otherwise harm our business.

Although the results of litigation and claims cannot be predicted with certainty, we believe that the final outcome of the matters discussed above will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows. “

So let’s say one or the other of the Viacom case or the class action against Google for YouTube resulted in a $1 billion judgement. Just blow that off as nonmaterial? Google discloses that the company maintains an allowance for doubtful accounts, tax liabilities, a couple other things. But no express statement that they reserve for the infringement cases.

If you can find any place in Google’s financials that Google actually mentions a liability account accruing for potential damages arising out of the numerous copyright cases against the company, I’d love to see it. This would be something in line with FASB Statement 5.

And so it is well to say again in light of three governments objecting to Google Books for what are obvious copyright issues–where is the board?

Where is the Securities and Exchange Commission?