Commitments and Contingencies | 13. Commitments and contingencies Operating and Capital Leases Our primary operating lease commitment as of September 30, 2015, related to our headquarters in Redwood City, California, requires monthly lease payments through April 2016. We recognize rent expense on a straight-line basis over the lease period. Rent expense for all facility leases was $1.4 million and $1.4 million for the three months ended September 30, 2015 and 2014, respectively, and $3.9 million and $4.0 million for nine months ended September 30, 2015 and 2014, respectively. On October 27, 2015, we entered into new lease agreements with CF Tasman SV LLC (the”Landlord”). See Note 14, Subsequent Event Notes to Condensed Consolidated Financial Statements The future minimum commitments under our operating and capital leases were as follows (in thousands): September 30, 2015 Operating Capital Leases 2015 $ 1,394 $ 175 2016 2,962 112 2017 722 — 2018 641 — 2019 548 — 2020 and thereafter 1,435 — Net minimum lease payments $ 7,702 $ 287 Less amount representing interest (10 ) Present value of net minimum capital lease payments $ 277 Legal Contingencies EON Patent Litigation . In June 2011, EON Corp. IP Holdings, LLC, a non-producing entity, or EON, filed suit in United States District Court for the Eastern District of Texas, Tyler Division against us and a number of smart grid providers. The lawsuit alleges infringement of United States Patent Nos. 5,388,101 (the “’101 Patent”), 5,481,546 (the “’546 Patent”), and 5,592,491 (the “’491 Patent,” and together with the ‘101 Patent and the ‘546 Patent, the “EON Patents”) by certain networking technology and services that we and the other defendants provide. Other defendants included Landis+Gyr AG, Aclara Power-Line Systems Inc., Elster Solutions, LLC, Itron, Inc. and Trilliant Networks Inc., all of which settled with EON prior to trial. We filed answers, affirmative defenses and counterclaims denying the plaintiff’s allegations and asserting that the plaintiff’s patents are invalid. A trial was held in June 2014. After the trial, the jury determined that we had infringed certain, but not all, of the claims under the EON Patents, and returned a verdict against us in the amount of $18.8 million. The court ruled there was insufficient evidence to support EON’s allegation of willful infringement and granted our motion to dismiss that claim. In June 2014, we filed post-trial motions with the court seeking, among other things, judgment as a matter of law to set aside the jury verdict, or in the alternative, a new trial. In its post-trial motions, EON sought pre-judgment interest and attorneys’ fees. Following post-trial motions, the court reduced the damage award to approximately $13.0 million, and in December 2014, entered a final judgment in that amount plus approximately $1.5 million in pre-judgment interest. The court subsequently revised the final judgment to include additional costs of about $0.2 million and entered an amended final judgment in December 2014. All of the EON Patents have expired and therefore EON is not seeking, and EON may not recover, any additional sums as royalties for our sales of products going forward. In December 2014, we filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. In order to stay the execution of the final judgment pending the appeal, in December 2014 we filed a surety bond in the amount of $17.6 million, which includes an additional 20% of the final judgment for post-judgment interest and expenses expected to be incurred during the appeal process, in accordance with court rules. The bond was issued by Zurich Insurance and is collateralized with a standby letter of credit in the amount of $13.0 million, the amount of the damage award, as described below in “ Customer Performance and Other Commitments We continue to believe that the evidence and the law do not support the jury’s findings of infringement, validity, and the award of damages, and intend to continue vigorously defending the action, including exercising all available appeals. However, given the inherent uncertainty in predicting the ultimate outcome of the appeals process, we believe it is reasonably possible that a material loss of up to $14.7 million, the amount of the amended final judgment, may result from these proceedings. In continuing to assess the impact of the jury verdict and the judgment on our financial statements, we will continue to evaluate the jury verdict, the court’s rulings on the post-trial motions and the likelihood of a successful appeal. TransData/OG&E Patent Litigation . In September 2011, TransData, Inc., or TransData, filed suit in United States District Court for the Western District of Oklahoma, against Oklahoma Gas & Electric Company (“OG&E”), alleging infringement of United States Patent Nos. 6,181,294, 6,462,713, and 6,903,699 by certain wireless communication-enabled meters, including General Electric Company meters with our wireless modules. We have agreed with General Electric Company to contribute to pay the defense of OG&E in connection with the TransData suit. An early claim construction hearing was held regarding one claim term in February 2013, and a hearing for the full claim construction was held in September 2013, on which the court issued an order in October 2013. In May 2014, General Electric Company filed reexamination requests on the TransData patents at issue with the U.S. Patent and Trademark Office (the “USPTO”). In August and September 2014, General Electric Company also petitioned the USPTO for inter partes review of each patent. In October 2014, OG&E filed a motion to stay the litigation pending the reexamination of the patents by the USPTO, which the court denied in January 2015. In March 2015, the USPTO issued decisions declining to institute the inter partes review. Additionally, the USPTO has indicated that all claims for which reexamination was requested are allowable without amendment. In August 2015, the court ruled that TransData is limited to alleging infringement by only one type of General Electric Company meter, and that any other General Electric Company meters used by OG&E are, as a matter of law, not infringing. OG&E filed a motion requesting a final judgment of non-infringement in October 2015. We believe that OG&E has meritorious defenses to TransData’s allegations, and that OG&E will continue to vigorously defend itself. TransData/Meter Manufacturer Patent Litigation. In September 2015, TransData filed separate suits in the Eastern District of Texas against meter manufacturers General Electric Company and GE Energy Management Services, Inc. (“GE”) and Landis+Gyr, Inc. and Landis+Gyr Technoogy, Inc. (“L+G”), alleging infringement of United States Patent Nos. 6,181,294, 6,462,713, and 6,903,699 by certain wireless communication-enabled meters, including meters with our wireless modules. GE and L+G have each requested indemnification from us for these claims under the terms of our master agreements with them. We have not agreed to indemnify GE, and we have not yet responded to L+G’s request. To our knowledge, no answers have yet been filed by GE or L+G. Linex Patent Litigation . In March 2013, Linex Technologies, Inc., a non-producing entity, or Linex, filed suit against us in United States District Court for the Southern District of Florida. Linex alleged that certain of our networking technology infringes United States Patent Nos. 6,493,377 and 7,167,503. We filed an answer in May 2013. In January 2014, the court granted the plaintiff’s request for a stay of the matter, pending reexamination of the patents at issue by the USPTO. In September 2014, Linex amended certain patent claims and canceled certain other patent claims based upon the USPTO’s completed reexaminations, and in October 2014, the court lifted the stay of the matter. In January 2015, Linex filed an amended complaint to incorporate facts related to the completed reexaminations, and we filed an answer responding to the complaint and raising additional defenses. In June 2015, the court stayed the action pending the USPTO’s completion of further ex parte reexaminations of the patents at issue, one of which has been completed. We believe that we have meritorious defenses to Linex’s allegations and intend to continue vigorously defending against the action. JSDQ Mesh Technologies Patent Litigation . In September 2015, JSDQ Mesh Technologies LLC, a non-producing entity, filed suit against us and our customer, Pepco Holdings, Inc., in United States District Court for the District of Delaware. The complaint alleges infringement of United States Patent Nos. 7,286,828, RE43675 and RE44607 by certain networking technology that we provide. We have agreed to indemnify, assume control of the defense and resolve the claim against Pepco Holdings. We and Pepco Holdings waived service of the complaint, and our answer is due in November 2015. We have not recorded any amounts for contingent losses associated with the matters described above based on its belief that losses, while reasonably possible, are not probable. Unless otherwise stated, we are currently unable to predict the final outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. We are directly involved with various unresolved legal actions and claims, and are indirectly involved with proceedings by administrative bodies such as public utility commissions, arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such legal actions and claims, individually or in the aggregate, would have a material effect on our consolidated financial statements. There are many uncertainties associated with any litigation or claim, and we cannot be certain that these actions or other third-party claims will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation matters, claims or settlements is probable, and a reasonable estimate of the loss associated with such events can be made, we will record the estimated loss at that time. Customer Performance and Other Commitments Certain customer agreements require us to obtain letters of credit or surety bonds in support of our obligations under such arrangements. These letters of credit or surety bonds typically provide a guarantee to the customer for future performance, which usually covers the deployment phase of a contract and may on occasion cover the operations and maintenance phase of service contracts. As of September 30, 2015 and December 31, 2014, we had a total of $21.0 million, including $13.0 million related to the EON patent litigation mentioned above, and $17.0 million, respectively, of standby letters of credit issued under the credit facility with a financial institution, of which $4.4 million (AUD$6.1 million) and $0.5 million (AUD$0.6 million), respectively, were denominated in Australian dollars. In accordance with the terms of our credit facility, increases or decreases in the exchange rate between the Australian dollar and the U.S. dollar will increase or decrease the amount available to us under the credit facility. As of September 30, 2015, we had a $20.3 million unsecured surety bond. The surety bond provides a financial guarantee to support performance obligations under certain customer agreements. In the event any such letters of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe there will be any claims against currently outstanding letters of credit or surety bonds. Indemnification Commitments Directors, Officers and Employees . In accordance with our bylaws and/or pursuant to indemnification agreements we have entered into with directors, officers and certain employees, we have indemnification obligations to our directors, officers and employees for claims brought against these persons arising out of certain events or occurrences while they are serving at our request in such a capacity. We maintain a director and officer liability insurance coverage to reduce our exposure to such obligations, and payments made under these agreements. To date, there have been no indemnification claims by these directors, officers and employees . Customers and Third Party Device Manufacturers . Refer to the discussion above under the heading “Legal Contingencies” for a description of our indemnification obligations. Our contracts with customers and third party device manufacturers typically provide indemnification for claims filed by third parties alleging that our products and services sold to the customer or manufacturer infringe or misappropriate any patent, copyright, trademark or other intellectual property right. In our customer contracts, we also typically provide an indemnification for third-party claims resulting from death, personal injury or property damage caused by the negligence or willful misconduct of our employees and agents in connection with the performance of certain contracts. Under our customer and third party device manufacturer indemnities, we typically agree to defend the utility customer or third party device manufacturer, as the case may be, from such claims, and pay any resulting costs, damages and attorneys’ fees awarded against the indemnified party with respect to such claims, provided that (a) the indemnified party promptly notifies us in writing of the claim, (b) the indemnified party provides reasonable assistance to us at our expense, and (c) we have sole control of the defense and all related settlement negotiations. Insurance . We maintain various insurance coverage policies, subject to policy limits, that enable us to recover a portion of any amounts paid by us in connection with our obligation to indemnify our customers and third party device manufacturers. However, because our maximum liability associated with such indemnification obligations generally is not stated explicitly in the related agreements, and further because many states prohibit limitations of liability for such indemnified claims, the maximum potential amount of future payments we could be required to make under these indemnification provisions could significantly exceed insurance policy limits. Historically, payments made by us under these indemnification provisions have not had a material effect on our results of operations, financial position or cash flows. |