**WHEREAS**, K-Swiss contends that Payless infringed K-Swiss’ trademarks and/or trade dresspreviously, in 1985 and in 1992. In 1992, K-Swiss filed suit against Payless (*K-Swiss Inc. v.Payless ShoeSource, Inc.*Action No. CV-92-4128-AWT (CTx) (the “1992 Litigation”)). Thereafter,Payless and K-Swiss settled the 1992 Litigation and agreed to settlement terms, the specific termsof which are set out in an agreement entitled the “1992 Settlement Agreement”;     **WHEREAS**, in 2004, K-Swiss filed a second action against Payless in the United States DistrictCourt for the Central District of California (Western Division), *K-Swiss Inc. v. Payless, Inc.*,Action No, CV 04-779 RJK (RCx) (the “2004 Litigation”). In the 2004 Litigation, the Court madevarious rulings, including rulings concerning the 1992 Settlement Agreement, which rulings theParties intend to be binding after the Effective Date as if incorporated into the binding judgmenthad been entered by the Court;     **WHEREAS**, in the 2004 Litigation, K-Swiss has accused Payless of infringing its rights inthirty-two (32) lots of footwear, listed and photographed in Exhibit 4 (“Known Payless Shoes”);     **WHEREAS**, Payless asserted in the 2004 Litigation a counterclaim for K-Swiss’ alleged breach ofthe 1992 Settlement Agreement (“Counterclaims”);     **WHEREAS**, the Parties have determined that it is in their mutual interests amicably to resolve,once and for all, their differences on the terms set forth in this Agreement, without any admissionof liability;     **WHEREAS**, K-Swiss claims that Payless’ advertising, promoting, distributing, offering for sale,and selling of those certain styles of footwear has infringed K-Swiss’ trademarks and trade dress,created a likelihood of consumer confusion, diluted K-Swiss’ brand, and disparaged K-Swiss goodwilland reputation;     **WHEREAS**, K-Swiss claims that Payless’ advertising and sale of footwear has caused it to losesales and to incur more than $58 Million in compensatory damages, including prejudgment interestand damages for corrective advertising;     **WHEREAS**, Payless disputes K-Swiss’ allegations and denies it is liable to K-Swiss for any ofthe matters claimed;     **WHEREAS**, the Parties intend that the releases in this Agreement cover all Payless shoes inexistence up to and including the Effective Date; and     **WHEREAS**, the Parties have determined that it is in their mutual interests amicably to resolve,once and for all, their differences on the terms set forth in this Agreement, without any admissionof liability.     **NOW, THEREFORE**, the Parties hereto agree as follows:     1. **K-Swiss Classic Trade Dress**. For purposes of this Agreement only and not any other purpose,the K-Swiss “Classic Trade Dress” shall mean two or more of the following (whether used alone, orin combination with other K-Swiss trademark, trade dress, or design features not described herein): (a) Stripes. The visual design feature of two or more verticalor diagonal stripes on either side of the shoe;  (b) D-Rings. D-Rings (or visually similar rings) usedincidentally as a lacing system rather than eyelets, hooks, loops or otherholding mechanism;  (c) Toe Box. The visual design on the toe of the shoeconsisting of a set of two substantially rectangular patterns formed by stitchingrunning from the front tip of the outsole back toward the lacing area of theshoe.
 

 
     2. **Agreement Not to Use.**Except as permitted under this Agreement during the Sell-Off Period(as defined below), Payless on behalf of itself and its affiliates, servants, agents, employees,subsidiaries, divisions, officers, licensees, suppliers, successors and assigns, and all thoseacting in concert or participation with them, agrees that it will not (except as expresslypermitted by the terms of this Agreement) sell, offer for sale, import, export, use, produce,manufacture, order, design, promote or distribute (or assist others in selling, offering for sale,importing, exporting, producing, manufacturing, ordering, designing, promoting or distributing)anywhere in the world any footwear that is a colorable imitation of or is confusingly similar toany shoes sold by K-Swiss as of the Effective Date that bear the K-Swiss trademarks, service marks,or the Classic Trade Dress or derivatives thereof including, without limitation, the Known PaylessShoes (collectively, the “Prohibited Shoes”). For purposes of this Agreement, Payless’ affiliatesshall include all entities controlled by, controlling, or under common control with Payless.Without limiting the foregoing, Payless specifically represents and agrees, on behalf of itself andthose entities and persons listed in this Paragraph 2 above, that, except as permitted by thisAgreement during the Sell-Off Period, it has ceased and will forever desist and refrain from: (a) Using in any manner any of the Five Stripe Mark, the Toe Box Mark,the Locarno Mark, the Classic Trade Dress, or any confusingly similar marks ortrade dresses or any colorable imitations thereof, including, without limitation,the Known Payless Shoes, on or in connection with the advertising, offering forsale or sale of any product which is not manufactured, distributed or otherwiseauthorized by or for K-Swiss;  (b) Using in any manner any of the Five Stripe Mark, the Toe Box Mark,the Locarno Mark, the Classic Trade Dress, or any confusingly similar marks ortrade dresses or any colorable imitations thereof, including, without limitation,the Known Payless Shoes, on or in connection with the advertising, offering torender or rendition or any service not approved by, sponsored by or otherwiseauthorized by K-Swiss;  (c) Attempting to or passing-off, inducing or enabling others to sellor pass-off any product or service as a product or service affiliated with orsponsored by K-Swiss, which product is not produced or service rendered under theauthorization, control and supervision of K-Swiss and approved by K-Swiss forsale under and any of the Five Stripe Mark, the Toe Box Mark, the Locarno Mark,the Classic Trade Dress, or any confusingly similar marks or trade dresses or anycolorable imitations thereof, including, without limitation, the Known PaylessShoes;  (d) Copying, making confusingly similar or colorable imitations of, ormodifying any of K-Swiss’ advertising or promotional materials for use inconnection with the advertising, promotion or sale of any of Payless’ goods;  (e) Committing any acts calculated or intended to cause purchasers tobelieve falsely that any of Payless’ products are associated with, sponsored by,approved by, guaranteed by, connected with or produced under the control andsupervision or within the authority of K-Swiss;  (f) Obtaining, possessing, shipping, delivering, distributing,returning or otherwise disposing of, in any manner, advertising materials, goodsor inventory bearing any of the Five Stripe Mark, the Toe Box Mark, the LocarnoMark, the Classic Trade Dress, or any confusingly similar marks or trade dressesor any colorable imitations thereof, including, without limitation, the KnownPayless Shoes, which materials, goods or inventories were not manufactured by orfor K-Swiss or authorized by K-Swiss to be used, sold or offered for sale inassociation with or bearing any of such marks or trade dresses;     3. **Permitted Sell-Off Period for Prohibited Shoes.**Payless and its affiliates shall have fromthe Effective Date to and including December 31, 2008 to sell-off any existing inventory ofProhibited Shoes (the “Sell-Off Period”). For purposes of the Consent Decree and PermanentInjunction pursuant to this Agreement, the sell-off shall be deemed authorized by K-Swiss. Withinten (10) days of the expiration of the Sell-Off Period, Payless shall destroy any unsold inventoryof Prohibited Shoes and certify such certification to K-Swiss. The term “existing inventory” shallinclude only completed shoes in inventory, in manufacturing process which can not be stopped, or intransit to Payless, and nothing in this Paragraph 3 shall be construed as permitting anyfurther manufacture of Prohibited Shoes by Payless following the Effective Date of this Agreement.
 

 
     4. **Future K-Swiss Registrations and Shoes.**Payless agrees that the terms of the permanentinjunction executed and filed by the Parties pursuant to Paragraph 5 (Stipulation for ConsentDecree and Permanent Injunction), and the terms of Paragraph 2 (Agreement not to Use) above, shallbe construed to include: any rights claimed hereafter by K-Swiss that are known by Payless or havebeen disclosed to Payless in writing, including writings filed with the Court, as of the EffectiveDate, are publicly registered and owned by K-Swiss (including, without limitation, any federal orstate trademark, trade dress or service mark registrations sought or acquired by K-Swiss after theEffective Date), or any shoes K-Swiss sells in the future embodying any such rights, to the extentthat the foregoing K-Swiss shoes bear the K-Swiss trademarks, service marks, or the Classic TradeDress or derivatives thereof. Payless acknowledges and agrees that any acquired distinctiveness ornon-functionality in such K-Swiss rights is deemed established without a requirement for anyfurther showing by K-Swiss.     5. **Consent Decree and Permanent Injunction.**Within five (5) calendar days of the fullexecution of this Agreement, K-Swiss and Payless shall jointly execute and file a Stipulation for aConsent Decree and Permanent Injunction in the form attached hereto as Exhibit 5. A materialelement of settlement hereunder is the retention by the Court of jurisdiction to enforce thisAgreement. Payless further agrees that, within ten (10) business days of the full execution of thisAgreement, it shall take all actions necessary to dismiss any pending oppositions it may have inthe United States Patent and Trademark Office against K-Swiss as of the Effective Date.     6. **Payments by Payless.**Payless shall pay the sum of US$30,000,000.00 (Thirty MillionDollars), by certified check or wire transfer, within five (5) business days of receiving a fullyexecuted counterpart of this Agreement. Such sum shall be in payment of the compensatory damagesclaimed by K-Swiss from Payless’ advertising, promotion, and sale of allegedly confusing footwear.     7. **Hold Harmless.** (a) Payless shall be responsible for all liability for all defects inthe Known Payless Shoes and for any damages (whether personal injury, propertydamage, advertising injuries, violation of intellectual property rights orotherwise) caused by or resulting from the manufacture, sale, import, export,promotion, distribution, or use of the Known Payless Shoes. Payless assumesliability for, and hereby agrees to indemnify, protect, save and hold K-Swissharmless from any and all liabilities, obligations, losses, damages, penalties,claims, actions, suits, costs, expenses, and disbursements (whether any of theforegoing are founded, unfounded, or allegedly involve the active or passivenegligence of K-Swiss, and including legal and related professional fees andcosts for counsel of K-Swiss’ choice) of whatever kind or nature which may besuffered by, imposed upon, incurred by, or asserted at any time against K-Swissandwhich in any way relate to or arise out of the manufacture, sale, import,export, promotion, use, or distribution of the Known Payless Shoes, whethersold or distributed by Payless or by any purchaser, transferee or other personor entity acquiring such shoes from Payless or its servants, agents, employees,subsidiaries, divisions, officers, attorneys, suppliers, successors or assigns.  (b) Payless shall be responsible for and shall indemnify, protect, saveand hold K-Swiss harmless (and shall reimburse all attorneys fees and costsincurred by K-Swiss) from any and all liabilities, obligations, losses, damages,penalties, claims, actions, suits, costs, expenses anddisbursements (whether any of the foregoing are founded, unfounded) broughtagainst K-Swiss by any of Payless’ insurers or by any third party claimingthrough Payless resulting from, emanating from or involving the subject matterof the 2004 Litigation or any claims or counterclaims brought thereinincluding, without limitation, intellectual property claims.
 

 
     8. **Warranties and Representations.** (a) Payless represents and warrants that it and its affiliates havecancelled all orders for any of the Known Payless Shoes not yet filled.  (b) Payless represents and warrants that it has not assigned or in anyway conveyed, donated, transferred, or encumbered all or any portion of theclaims or causes of action covered by this Agreement, that it has all rightsrequired to enter into this Agreement and to grant the releases and covenantsmade herein.  (c) K-Swiss represents and warrants that is has not assigned or in anyway conveyed, donated, transferred, or encumbered all or any portion of theclaims or causes of action covered by this Agreement, that it has all rightsrequired to enter into this Agreement and to grant the releases and covenantsmade herein.     9. **Disclosure by Payless.**Within ten (10) calendar days following Payless’ receipt of anexecuted copy of this Agreement, Payless shall disclose to K-Swiss or its counsel of record inwriting the following information and shall produce copies of the best available documentaryevidence establishing such information: (a) The names and addresses of the agents, manufacturers, suppliers, orfactories, if known, which or who designed, ordered or made Lot No. 44980, or anyother lot number with a similar design.  (b) The names and addresses of the agents, brokers, sellers or othersin the chain of distribution (other than shippers and carriers) used by Paylessin the purchase, sale and importation of Lot No. 44980, or any other lot numberwith a similar design.     10. **Attorneys Fees and Expenses in Actions for Breach.**In the event that either Party or itsaffiliates breach this Agreement or the terms of the 1992 Settlement Agreement or violate theStipulation for Consent Decree and Permanent Injunction, the breaching Party shall pay allreasonable attorneys fees and litigation expenses incurred by the non-breaching Party relating toenforcement, whether arising out of this Agreement, the 1992 Agreement, or any claim of violationof any federal or state laws relating to trademark, service mark, or trade dress infringement,unfair competition, dilution, or any related claim. Each Party agrees that the remedies set forthin this Agreement are in addition to any rights or remedies the other Party may have in the eventof breach or violation of this Agreement, the 1992 Agreement, or any other laws, whether or notasserted in the 1992 Litigation or the 2004 Litigation, all of which rights are expressly reserved.     11. **Retention of K-Swiss’ Rights Under Intellectual Property Laws.**It is understood and agreedthat, in addition to the rights and remedies provided for under this Agreement, K-Swiss retains allof its rights and remedies that may exist now or in the future under any intellectual propertylaws, all of which rights are expressly reserved. Nothing in this Paragraph 11 is intended toaffect any intellectual property rights of Payless or its affiliates.     12. **Validity and Enforceability of K-Swiss’ Registered and Unregistered Trademarks, ServiceMarks, and Trade Dress.**Payless acknowledges, accepts, and agrees never to contest the proprietaryor validity of the prior rulings by the Court in the 2004 Litigation regarding the 1992 SettlementAgreement. Payless further acknowledges and agrees to the validity and enforceability of K-Swiss’rights in its common law and registered trademarks, service marks, and trade dresses which nowexist or may exist in the future that bear or are derived from the common law or registeredtrademarks, service marks, or the Classic Trade Dress (including, without limitation, the FiveStripe Mark, the Toe Box Mark, and the Locarno Mark), and acknowledges and agrees that any acquireddistinctiveness or non-functionality in such rights is deemed established without a requirement forany further showing by K-Swiss (collectively, for purposes of this Agreement only, the “K-SwissRights”). Payless agrees never to challenge, directly or indirectly, or dispute in any Court oradministrative proceeding, regardless of the party bearing the burden of proof, anywhere in theworld, the validity or enforceability of any of the K-Swiss Rights including, without limitation,disputes or challenges based on non-distinctiveness or functionality. Payless further agrees thatit will not, anywhere in the world, initiate, prosecute or in any way aid or cooperate with othersin the commencement or prosecution or defense of any suit, action, claim, defense, counterclaim,cross-claim, affirmative defense,administrative proceeding, or other proceeding whatsoever, at law or otherwise, to invalidate,cancel or otherwise restrict or limit any of the K-Swiss Rights.
 

 
     13. **Confidentiality.**Except as otherwise provided herein, K-Swiss and Payless shall keep theamount paid by Payless pursuant to this Agreement private and confidential. A Party may, however,disclose the financial terms of this Agreement to a third party as follows: (a) when reasonably necessary to carry out the terms of this Agreement;  (b) to attorneys of the Parties;  (c) to auditors and insurance representatives as necessary to carry out their respectiveduties;  (d) to employees and shareholders (other than as provided insubparagraph (f)), past, present, or prospective lending institutions orinsurance companies, and potential acquisition, merger or similar candidates ofthe Parties, where business considerations necessitate disclosure, and who agree,in writing, to be bound by the terms of confidentiality contained herein.  (e) to officers, directors, and accountants who agree to be bound bythe terms of confidentiality contained herein;  (f) in litigation, whether pursuant to a document request, a subpoena,or as part of an affirmative pleading of K-Swiss against Payless or any otheralleged infringer of any of K-Swiss’ rights provided that the disclosing partyrequest this Agreement be subject to a confidentiality protective order;  (g) to anyone, the following words or substantially similar phrases:“That a substantial payment was made by Payless in recognition of the claims ofK-Swiss, and that K-Swiss is pleased with, and is willing to accept as, fullsatisfaction for its claims.”;  (h) to the United States Patent and Trademark Office to the extentdeemed necessary by K-Swiss to obtain registration for any K-Swiss Rights, thefollowing: the First Amended Complaint for the 2004 Litigation, Paragraph 1(K-Swiss Trade Dress) of this Agreement, Paragraph 2 (Agreement not to Use) ofthis Agreement, Paragraph 13 (Validity and Enforceability) of this Agreement, andthe fact that the payment made pursuant to Paragraph 6 (Payment by Payless) ofthis Agreement was in the range of millions of dollars;  (I) to the extent required by applicable law.     14. **Mutual Release of Claims.**On behalf of themselves, their affiliates, respective corporateofficers, directors, shareholders, agents, employees, personal representatives, assignees, andattorneys, the Parties hereby release, acquit, and forever absolutely discharge one another andtheir respective officers, directors, agents, servants, employees, stockholders, insurers, andassignees, all predecessor and successor companies, and all parent, subsidiary and other related oraffiliated companies, their attorneys, and the partners, associates, employees, agents, insurers,assignees and investigators of or for their attorneys, from any and all actions, causes of action,claims, counterclaims, cross-claims, defenses, affirmative defenses, debts, liabilities, accounts,damages, demands and causes, whether known or unknown, which were related to the subject matter ofthe 2004 Litigation and were brought or could have been brought in the 2004 Litigation or which inany way arise from or on account of the 2004 Litigation, or the marketing, advertising, promoting,distributing, manufacturing, offers for sale and sale of any shoes of Payless or its affiliatesthat were or are in existence up to and including the Effective Date.
 

 
     15. **Reservation of Rights.**Notwithstanding the mutual release in paragraph 14, Payless andK-Swiss agree that: (a) K-Swiss expressively reserves all of its rights under law toenforce any rights against Payless that are not expressively released herein.The terms of this Agreement shall not be deemed tolimit or restrict in any way K-Swiss intellectual property rights including,without limitation, the K-Swiss Rights. It is expressly understood and agreedthat nothing in the course of the negotiations between the Parties shall beconstrued as an estoppel against K-Swiss. All benefits, restrictions, andprohibitions agreed to and relied upon by the Parties are expressly set forthherein, and all other rights are expressly reserved. Nothing stated or impliedby either Party in the course of negotiations for settlement or of thisAgreement shall in any way alter, limit, waive or modify any rights K-Swiss mayhave in law or equity.  (b) K-Swiss expressly reserves any rights it may have in law or equity,to assert claims again Payless arising out of future manufacture, distribution,or sale of any shoe which infringes any of K-Swiss’ rights or that causes alikelihood of confusion in the marketplace (whether or not such shoes areexpressly prohibited to be sold by the terms of this Agreement) or which violatesthis Agreement.     16. **Complete Agreement.**Each Party hereto acknowledges that no other Party or any agent orattorney of any other Party, or any person, firm, corporation or any other entity has made anypromise, representation or warranty, whether express, implied or statutory, not contained orreferred to herein, concerning the subject matter hereof, to induce the execution of thisAgreement. Each signatory hereto acknowledges that he, she, or it has not executed this Agreementin reliance on any promise, representation or warranty not contained or referred to herein.Notwithstanding the foregoing, the Parties understand and agree that nothing in this Agreementshall be construed as a cancellation, rescission, amendment, or modification of the 1992 Agreementand that the 1992 Agreement shall remain in full force and effect following the execution of thisAgreement.     17. **Choice of Law and Forum.**K-Swiss has its principal place of business in California andPayless does business in California. In view thereof, this Agreement shall in all respects beinterpreted, enforced, and governed by and under the laws of the State of California without regardto conflict of laws provisions except to the extent the issue arising under the Agreement isgoverned by federal law, in which case federal law shall apply. Any action or claim arising out ofthis Agreement or its breach shall be filed only in the United States District Court for theCentral District of California or if such court lacks subject matter jurisdiction, then in anappropriately venued state court in California. The Parties consent and agree to in personamjurisdiction in these Courts for purposes of enforcing tills Agreement or any breach thereof.     18. **No Waiver.**The waiver of any breach of this Agreement by either Party shall not operate asa waiver of any subsequent or prior breach thereof.     19. **Preparation of Agreement; Construction.**This Agreement shall be construed without regardto the Party responsible for its preparation, and shall be deemed as prepared jointly by theParties. Any ambiguity or uncertainty existing herein shall not be interpreted or construed againstany Party by virtue of who may have drafted such provision.     20. **Authority of Parties.**K-Swiss and Payless represent and warrant to one another that theyhave the full right and exclusive authority to enter into and execute this Agreement.     21. **Amendment to Agreement.**This Agreement may not be altered, amended, modified, or otherwisechanged in any respect except by a writing executed by an authorized representative of each Party.     22. **Binding on Successors.**This Agreement shall be binding upon and inure to the benefit ofthe successors and assigns of the respective Parties.     23. **Notices.**All notices, requests, demands, directions, and other communications provided forhereunder shall be in writing and mailed or faxed or delivered to the applicable Party at theaddress of such Party set for the below (or such other address duly provided in writing to theother Party). Each such notice, request, demand, direction or other communication shall beeffective upon delivery.
 

 
If to K-Swiss:K-Swiss Inc.