Note 3 — Commitments and Contingencies

Commitments

We have entered into non-cancellable operating, capital and financing leases for equipment and office, fulfillment center, and data center facilities. Rental expense under operating lease agreements was $85 million and $53 million for Q2 2011 and Q2 2010, and $159 million and $100 million for the six months ended June 30, 2011 and 2010.

For buildings that are under build-to-suit lease arrangements where we have taken occupancy in Q2 2011, we determined that we continue to be the deemed owner of these buildings. These arrangements do not qualify for sales recognition under the sale-leaseback accounting guidance due principally to our significant investment in tenant improvements. As a result, the buildings, in the amount of $454 million, are being depreciated over the shorter of their useful lives or the lives of the related leases. The long-term construction obligation is now considered a long-term financing obligation with amounts payable during the next 12 months recorded as “Accrued expenses and other.”

The following summarizes our principal contractual commitments, excluding open orders for inventory purchases that support normal operations, as of June 30, 2011:


	Six Months Ended December 31, 2011		Year Ended December 31,
	Six Months Ended December 31, 2011		2012		2013		2014		2015		Thereafter		Total
	(in millions)
Operating and capital commitments:
Debt principal and interest	$	28	$	103	$	226	$	—	$	—	$	—	$	357
Capital leases, including interest		166		295		212		69		33		9		784
Financing lease obligations, including interest (1)		19		37		38		41		41		491		667
Operating leases		159		321		306		275		243		865		2,169
Other commitments (2) (3)		47		106		69		60		68		735		1,085

Total commitments	$	419	$	862	$	851	$	445	$	385	$	2,100	$	5,062

(1)	Relates to the 1,370,000 square feet of occupied corporate office space under build-to-suit lease arrangements.

(2)

Includes the estimated timing and amounts of payments for rent, operating expenses, and tenant improvements associated with approximately 330,000 square feet of corporate office space currently being developed under build-to-suit leases and which we anticipate occupying in 2013. The amount of space available and our financial and other obligations under the lease agreements are affected by various factors, including government approvals and permits, interest rates, development costs, and other expenses and our exercise of certain rights under the lease agreements.

(3)	Excludes $222 million of tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.

Pledged Securities

As of June 30, 2011, and December 31, 2010, we have pledged or otherwise restricted $149 million and $160 million of our cash and marketable securities as collateral for standby and trade letters of credit, guarantees, debt related to our international operations, as well as real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current “Other assets” on our consolidated balance sheets.

Legal Proceedings

The Company is involved from time to time in claims, proceedings and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Commitments and Contingencies — Legal Proceedings” and “— Other Contingencies” of our 2010 Annual Report on Form 10-K and in Item 1, “Financial Statements – Note 3 – Commitments and Contingencies – Legal Proceedings” and “— Other Contingencies” of our Quarterly Report on Form 10-Q for the Period Ended March 31, 2011, as supplemented by the following:

In September 2009, Alcatel-Lucent USA Inc. filed a complaint against us for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges that our website technology and digital content distribution systems infringe six of Alcatel-Lucent’s patents and seeks injunctive relief, monetary damages, a continuing royalty sufficient to compensate Alcatel-Lucent for any future infringement, treble damages, costs and attorneys’ fees. In January 2010, we filed counterclaims against Alcatel-Lucent alleging infringement of a patent owned by Amazon and that the patents asserted by Alcatel-Lucent are invalid and unenforceable. In May 2011, Alcatel-Lucent’s damages expert opined that, if we are found to infringe the patents-in-suit and the patents are found to be valid (both of which we dispute), Amazon and its affiliates should pay damages of approximately $106 million. Our damages expert opined that, under the same circumstances, the maximum damages fairly recoverable against Amazon and its affiliates would be less than $7 million. Alcatel-Lucent’s damages could be trebled if Alcatel-Lucent prevails in its claim that any infringement was willful. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in this matter.

In February 2011, Gildersleeve Holdings AG, LLC, filed a complaint against us for patent infringement in the United States District Court for the Northern District of Georgia. The complaint alleges, among other things, that by providing systems and methods for personalized presentation of information Amazon infringes a patent owned by the plaintiff purporting to cover a “Method and Apparatus for Viewer-Specific Presentation of Information” (No. 7,000,183), and seeks monetary damages, interest, injunctive relief, costs, and attorneys fees. In June 2011, we settled this litigation for an immaterial amount, on terms that include a nonexclusive license to the patent in suit.

In April 2011, Walker Digital LLC filed six complaints against us for patent infringement in the United States District Court for the District of Delaware. The complaints allege that we infringe several of the plaintiff’s U.S. patents by, among other things, providing “cross benefits” to customers through our promotions, (Patent Nos. 7,831,470 and 7,827,056), using a customer’s identified original product to offer a substitute product (No. 7,236,942), offering products and services from retailers at discounted prices and arranging for users to buy them from merchants (No. 6,249,772), using our product recommendations and personalization features to offer complementary products together (Nos. 6,601,036 and 6,138,105), enabling customers to subscribe to a delivery schedule for products they routinely use at reduced prices (No. 5,970,470), and offering personalized advertising based on customers’ preferences identified using a data pattern (No. 7,933,893). The complaints seek monetary damages, interest, injunctive relief, costs, and attorneys’ fees. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in these matters. In June 2011, the complaint alleging that we infringed Patent No. 6,249,772 was dismissed.

In July 2011, GPNE Corp. filed a complaint against us for patent infringement in the United States District Court for the District of Hawaii. The complaint alleges, among other things, that certain aspects of our technology, including our Kindle e-reader, infringe three patents owned by the plaintiff purporting to cover a “Network Communication System Wherein a Node Obtains Resources for Transmitting Data by Transmitting Two Reservation Requests” (No. 7,555,267), a “Communication System Wherein a Clocking Signal from a Controller, a Request from a Node, Acknowledgement of the Request, and Data Transferred from the Node are all Provided on Different Frequencies, Enabling Simultaneous Transmission of these Signals” (No. 7,570,954) and a “Network Communication System with an Alignment Signal to Allow a Controller to Provide Messages to Nodes and Transmission of the Messages over Four Independent Frequencies” (No. 7,792,492) and seeks monetary damages, interest, costs, and attorneys’ fees. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in this matter.

We cannot predict the impact (if any) that any of the matters described above or in our 2010 Annual Report on Form 10-K or Form 10-Q for the Period Ended March 31, 2011 may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate the range of possible losses from them (except as otherwise indicated).

Other Contingencies

At the end of June 2011, the State of California passed a law that purported to impose sales tax collection obligations on companies that make online retail sales to California customers based on a number of factors. We are participating in a process to seek a ballot referendum to overturn the law, which, if sufficient signatures are collected by the deadline this fall and the referendum is certified, should also cause the law to be stayed pending the outcome of the vote next year. Retailers are generally liable for any amounts that should have been, but were not, collected under the law. The potential amount of exposure under the new law for our second quarter 2011 sales to California customers was not material. We are unable to estimate a range of possible future liability related to the new sales tax collection requirement due to, among other things, uncertainties regarding the application of the new law to various parts of our business, when the tax collection obligations, if any, will begin, and the amount of future sales that would be subject to the tax collection obligation.

Depending on the amount and the timing, an unfavorable resolution of this matter could materially affect our business, results of operations, financial position, or cash flows.