| Commitments and Contingencies | Note 14. Commitments and
Contingencies
Lease Commitments
We have various operating leases for office space and
equipment.
Seattle, Washington
In March 2011, we entered into a lease agreement for office space
that houses our corporate headquarters in Seattle (as amended from
time to time, the “Seattle Lease”). Pursuant to the
terms of the Seattle Lease, we currently occupy a total of 155,042
square feet, and we are obligated to make escalating monthly lease
payments that began in December 2012 and continue through December
2024. In November 2014, we entered into a lease amendment
under which we will lease an additional 113,470 square feet of
office space. The Company has taken possession of a portion of the
additional office space and will continue to take possession as
space becomes available through 2017 under the same terms and
conditions.
San Francisco, California
In connection with our February 2015 acquisition of Trulia, Inc.
(“Trulia”), we assumed a lease agreement for office
space in San Francisco (as amended from time to time, the
“San Francisco Lease”), which houses Trulia’s
corporate headquarters and beginning in March 2015, also houses
Zillow’s personnel located in San Francisco. Pursuant to the
terms of the San Francisco Lease, we lease a total of 105,620
square feet, and we are obligated to make escalating monthly lease
payments that began in November 2014 and continue through September
2023.
In November 2012, we entered into an operating lease in San
Francisco, California for 18,353 square feet under which we are
obligated to make escalating monthly lease payments which began in
December 2012 and continue through November 2018. In March 2015, we
ceased use of this space in connection with our February 2015
acquisition of Trulia, and in May 2015, we sublet this office space
to another occupant. Pursuant to the terms of the operating lease
and since October 2015, we lease an additional 8,311 square feet of
office space under the same terms and conditions, which we sublet
to another occupant.
New York, New York
In February 2014, we entered into an operating lease in New York
(as amended from time to time, the “New York Lease”).
Pursuant to the terms of the New York Lease, we lease a total of
approximately 39,900 square feet, and we are obligated to make
escalating monthly lease payments that began in August 2014 and
continue through November 2024. In July 2015, we sublet
approximately 6,650 square feet of this office space to another
occupant.
Denver, Colorado
In connection with our February 2015 acquisition of Trulia, we
assumed a lease agreement for office space in Denver. Pursuant to
the terms of the lease, we lease a total of approximately 65,000
square feet, and we are obligated to make escalating monthly lease
payments that began in November 2014 and continue through October
2021.
Irvine, California
In April 2012, we entered into a lease agreement for office space
in Irvine (as amended from time to time, the “Irvine
Lease”). Pursuant to the terms of the Irvine Lease, we lease
a total of approximately 60,000 square feet under which we are
obligated to make escalating monthly lease payments which began in
August 2012 and continue through July 2022.
We lease additional office space in Chicago, Illinois, Cincinnati,
Ohio, Lincoln, Nebraska, and Vancouver, British Columbia. We
believe our facilities are sufficient for our current needs.
Future minimum payments for all operating leases as of
March 31, 2016 are as follows (in thousands):
Remainder of 2016 $ 13,343
2017 21,702
2018 23,222
2019 21,909
2020 22,439
All future years 80,953
Total future minimum lease payments $ 183,568
Rent expense for the three months ended March 31, 2016 and
2015 was $3.9 million and $3.4 million, respectively. Total minimum
rentals to be received in the future under noncancelable subleases
as of March 31, 2016 was $5.0 million.
Purchase Commitments
As of March 31, 2016, we had non-cancelable purchase
commitments for content related to our mobile applications and
websites totaling $86.8 million. The amounts due for this content
as of March 31, 2016 are as follows (in thousands):
Remainder of 2016 $ 21,499
2017 34,841
2018 14,000
2019 6,000
2020 6,000
2021 4,500
Total future purchase commitments $ 86,840
Letters of Credit
As of March 31, 2016, we have outstanding letters of credit of
approximately $5.2 million, $1.8 million, $1.1 million and $1.1
million, respectively, which secure our lease obligations in
connection with the operating leases of our San Francisco, Seattle,
New York and Denver office spaces.
Surety Bonds
In the course of business, we are required to provide financial
commitments in the form of surety bonds to third parties as a
guarantee of our performance on and our compliance with certain
obligations. If we were to fail to perform or comply with these
obligations, any draws upon surety bonds issued on our behalf would
then trigger our payment obligation to the surety bond issuer. We
have outstanding surety bonds issued for our benefit of
approximately $3.6 million and $3.4 million, respectively, as of
March 31, 2016 and December 31, 2015.
Legal Proceedings
We are involved in a number of legal proceedings concerning matters
arising in connection with the conduct of our business activities,
some of which are at preliminary stages and some of which seek an
indeterminate amount of damages. We regularly evaluate the status
of legal proceedings in which we are involved to assess whether a
loss is probable or there is a reasonable possibility that a loss
or additional loss may have been incurred to determine if accruals
are appropriate. We further evaluate each legal proceeding to
assess whether an estimate of possible loss or range of loss can be
made if accruals are not appropriate. For certain cases described
below, management is unable to provide a meaningful estimate of the
possible loss or range of possible loss because, among other
reasons, (i) the proceedings are in preliminary stages;
(ii) specific damages have not been sought; (iii) damages
sought are, in our view, unsupported and/or exaggerated;
(iv) there is uncertainty as to the outcome of pending appeals
or motions; (v) there are significant factual issues to be
resolved; and/or (vi) there are novel legal issues or
unsettled legal theories presented. For these cases, however,
management does not believe, based on currently available
information, that the outcomes of these proceedings will have a
material effect on our financial position, results of operations or
cash flow.
In September 2010, LendingTree, LLC (“LendingTree”)
filed a complaint against us for patent infringement in the U.S.
District Court for the Western District of North Carolina. The
complaint alleged, among other things, that our website technology
infringes two patents purporting to cover a “Method and
computer network for coordinating a loan over the internet.”
The complaint sought, among other things, a judgment that we
infringed certain patents held by LendingTree, an injunction
against the alleged infringing activities and an award for damages.
We denied the allegations and asserted defenses and counterclaims
seeking declarations that we are not infringing the patents and
that the patents are invalid. In March 2014, a federal jury found
that Zillow does not infringe the patents and that the patents
asserted by LendingTree are invalid. In April, 2014, LendingTree
filed two motions for judgment as a matter of law and for a new
trial, all of which we opposed. In October 2014, the Court issued
an order upholding the jury verdict and denying LendingTree’s
motions. In November 2014, LendingTree filed a notice of
appeal and, in September 2015, LendingTree filed its opening brief.
In December 2015, we filed a response brief to LendingTree’s
opening brief. A hearing regarding LendingTree’s appeal is
scheduled for June 2016. We have not recorded an accrual related to
this complaint as of March 31, 2016 or December 31, 2015,
as we do not believe a loss is probable or reasonably
estimable.
In March 2014, Move, Inc., the National Association of Realtors and
three related entities, filed a complaint against us and Errol
Samuelson, our Chief Industry Development Officer, in the Superior
Court of the State of Washington in King County, alleging, among
other things, that Zillow and Mr. Samuelson misappropriated
plaintiffs’ trade secrets in connection with
Mr. Samuelson joining Zillow in March 2014. The
plaintiffs seek, among other things, an injunction against the
alleged misappropriations and Mr. Samuelson working for us, as
well as significant monetary damages. In February 2015,
plaintiffs filed an amended complaint that, among other things,
added Curt Beardsley, our Vice President of MLS Partnerships, as a
defendant in the matter. In August 2015, Zillow filed an amended
answer and counterclaim against plaintiffs that alleged, among
other things, that plaintiffs violated the Washington Trade Secrets
Act and aided and abetted a breach of the duty of confidentiality
through the public filing of a document that included
Zillow’s confidential information and trade secrets. On
January 8, 2016, plaintiffs filed a motion seeking sanctions
against defendants for alleged evidence spoliation. Defendants have
each filed multiple motions for partial summary judgment against
plaintiffs regarding, among other things, certain of their claims
of alleged misappropriation of trade secrets. Hearings have been
held regarding defendants’ motions for summary judgment that
the court is currently taking under advisement. An evidentiary
hearing regarding plaintiffs’ spoliation motion was held in
April 2016 that the court is currently taking under advisement. The
plaintiffs recently indicated that they are seeking damages which,
if actually awarded, would have a material adverse effect on our
business. We believe the plaintiffs’ allegations are
without merit and their calculations of damages are baseless. We
deny the allegations of any wrongdoing and intend to vigorously
defend the claims in the lawsuit. The trial date is scheduled for
June 2016. We have not recorded an accrual related to these
complaints as of March 31, 2016 or December 31, 2015, as
we do not believe a loss is probable. There is a reasonable
possibility that a loss may be incurred; however, the possible loss
or range of loss is not estimable.
In August 2014, four purported class action lawsuits were filed by
plaintiffs against Trulia and its directors, Zillow, and Zebra
Holdco, Inc. in connection with Zillow’s proposed acquisition
of Trulia. One of those purported class actions, captioned Collier
et al. v. Trulia, Inc., et al., was brought in the Superior Court
of the State of California for the County of San Francisco, however
on October 7, 2014, plaintiff in the Collier action filed a
new complaint in the Delaware Court of Chancery alleging
substantially the same claims and seeking substantially the same
relief as the original complaint filed in California. On
October 8, 2014, plaintiff in the Collier action filed a
request for dismissal of the California case without prejudice. The
other three of the purported class action lawsuits, captioned Shue
et al. v. Trulia, Inc., et al., Sciabacucci et al. v. Trulia, Inc.,
et al., and Steinberg et al. v. Trulia, Inc. et al., were brought
in the Delaware Court of Chancery. All four lawsuits allege that
Trulia’s directors breached their fiduciary duties to Trulia
stockholders, and that the other defendants aided and abetted such
breaches, by seeking to sell Trulia through an allegedly unfair
process and for an unfair price and on unfair terms. All lawsuits
sought, among other things, equitable relief that would have
enjoined the consummation of Zillow’s proposed acquisition of
Trulia and attorneys’ fees and costs. The Delaware actions
also sought rescission of the Merger Agreement or rescissory
damages and orders directing the defendants to account for alleged
damages suffered by the plaintiffs and the purported class as a
result of the defendants’ alleged wrongdoing. On
September 24, 2014, plaintiff in the Sciabacucci action filed
(1) a motion for expedited proceedings, (2) a motion for
a preliminary injunction, (3) a request for production of
documents from defendants, and (4) notice of
depositions. On October 13, 2014, the Delaware Court of
Chancery issued an order consolidating all of the Delaware actions
into one matter captioned In re Trulia, Inc. Stockholder
Litigation. On October 13 and 14, 2014, the above-referenced
motions were refiled under the consolidated case number. On
November 14, 2014, plaintiffs again refiled their motion for a
preliminary injunction challenging the proposed acquisition. On
November 19, 2014, the parties entered into a Memorandum of
Understanding, documenting an agreement-in-principle for the
settlement of the consolidated litigation, pursuant to which Trulia
agreed to make certain supplemental disclosures in a Form 8-K. The
Memorandum of Understanding was filed with the Court of Chancery
that same day. Thereafter, the parties negotiated and agreed to a
stipulation of settlement, and after notice to the class, the Court
of Chancery held a settlement hearing on September 16, 2015
where the Court requested the parties to make further submission in
connection with the settlement. By an opinion dated
January 22, 2016, the Court denied approval of the settlement,
and on April 6, 2016, the Court dismissed the claims brought
in the consolidated lawsuit with prejudice.
In July 2015, two purported class action lawsuits were filed
against us and each of our directors in the Superior Court of the
State of Washington in King County, alleging, among other things,
that the directors breached their fiduciary duties in connection
with the approval of the issuance of non-voting Class C capital
stock as a dividend. The complaints seek, among other things,
injunctive relief and unspecified monetary damages. A hearing
on the plaintiffs’ motion seeking a preliminary injunction to
enjoin the August 2015 distribution of shares of our Class C
capital stock as a dividend to our Class A and Class B common
shareholders was held on August 5, 2015, and the court denied
plaintiffs’ motion for a preliminary injunction. Plaintiffs
filed a consolidated class action complaint on September 18,
2015 naming and seeking relief from only our co-founders as
defendants. On December 4, 2015, defendants filed a motion to
dismiss the consolidated class action complaint, and on
March 28, 2016, the consolidated class action complaint was
dismissed with prejudice.
In March 2015, the Wage and Hour Division of the U.S. Department of
Labor (“DOL”) notified the Company that it was
initiating a compliance review to determine the Company’s
compliance with one or more federal labor laws enforced by the DOL.
The Company understands that the scope of this review is limited to
the review of the Company’s compliance with certain wage and
hour laws with respect to Zillow, Inc. inside sales consultants
during a two-year period between 2013 and 2015. In October 2015,
the DOL orally informed us that the compliance review is ongoing
but that, based on its preliminary findings, it believes the
Company may have failed to pay overtime to such inside sales
consultants. The DOL has made no assessment of damages or
penalties, however, nor has it made a determination that we
violated one or more federal labor laws. We have cooperated and
continue to cooperate with the DOL in its compliance review. If the
DOL were to finally determine that we violated one or more federal
labor laws, we may be required to make certain payments of back
wages and other amounts to such inside sales consultants or take
other corrective actions, and may be subject to fines or penalties.
We have recorded an accrual for an immaterial amount as of
March 31, 2016 and December 31, 2015 related to
liabilities that may result from this compliance review. There is a
reasonable possibility that a loss in excess of amounts accrued may
be incurred; however, any additional possible loss or range of loss
is not reasonably estimable at this time because the DOL’s
review is ongoing, and we are unable to predict the outcome of the
review.
In November 2014, a former employee filed a putative class action
lawsuit against us in the United States District Court, Central
District of California, with the caption Ian Freeman v. Zillow,
Inc. The complaint alleges, among other things, claims that we
failed to provide meal and rest breaks, failed to pay overtime, and
failed to keep accurate records of employees’ hours worked.
After the court granted our two motions to dismiss certain claims,
plaintiff filed a second amended complaint that includes claims
under the Fair Labor Standards Act. We filed our answer to the
second amended complaint on June 16, 2015. On
November 20, 2015, plaintiff filed a motion for class
certification. A hearing was held on February 5, 2016
regarding the motion. On February 26, 2016, the court granted
the plaintiff’s motion for class certification. On
March 11, 2016, we filed with the Ninth Circuit Court of
Appeals a petition for permission to appeal the order granting
class certification. The trial date is scheduled for August 2016.
We have recorded an accrual for an immaterial amount as of
March 31, 2016 related to liabilities that may result from
this class action lawsuit. There is a reasonable possibility that a
loss in excess of amounts accrued may be incurred; however, any
additional possible loss or range of loss is not reasonably
estimable at this time.
In addition to the matters discussed above, from time to time, we
are involved in litigation and claims that arise in the ordinary
course of business. Although we cannot be certain of the outcome of
any litigation and claims, nor the amount of damages and exposure
that we could incur, we currently believe that the final
disposition of such matters will not have a material effect on our
financial position, results of operations or cash flow. Regardless
of the outcome, litigation can have an adverse impact on us because
of defense and settlement costs, diversion of management resources
and other factors.
Indemnifications
In the ordinary course of business, we enter into contractual
arrangements under which we agree to provide indemnification of
varying scope and terms to business partners and other parties with
respect to certain matters, including, but not limited to, losses
arising out of the breach of such agreements and out of
intellectual property infringement claims made by third parties. In
addition, we have agreements that indemnify certain issuers of
surety bonds against losses that they may incur as a result of
executing surety bonds on our behalf. For our indemnification
arrangements, payment may be conditional on the other party making
a claim pursuant to the procedures specified in the particular
contract. Further, our obligations under these agreements may be
limited in terms of time and/or amount, and in some instances, we
may have recourse against third parties for certain payments. In
addition, we have indemnification agreements with certain of our
directors and executive officers that require us, among other
things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or
officers. The terms of such obligations may vary. |
