| Commitments and Contingencies | Note 14. Commitments and Contingencies
Lease Commitments
We have entered into various non-cancelable operating lease
agreements for certain of our office space and equipment with
original lease periods expiring
between 2017 and 2024. We are committed to pay a
portion of the related operating expenses under certain of these
lease agreements. Certain of these arrangements have free rent
periods or escalating rent payment provisions, and we recognize
rent expense under such arrangements on a straight-line basis.
Operating lease expense for the three months ended
September 30, 2017 and 2016 was $5.7 million and $4.3 million,
respectively. Operating lease expense for the nine months ended
September 30, 2017 and 2016 was $15.8 million and $12.1
million, respectively.
Future minimum payments for all operating leases as of
September 30, 2017 are as follows (in thousands):
Remainder of 2017 $ 6,266
2018 25,510
2019 24,579
2020 25,006
2021 25,322
All future years 61,755
Total future minimum lease payments $ 168,438
Purchase Commitments
We have entered into various non-cancelable purchase commitments
for content related to our mobile applications and websites.
License agreement terms vary by vendor. In some instances, we
retain perpetual rights to this information after the contract
ends; in other instances, the information and data are licensed
only during the fixed term of the agreement. Additionally, certain
data license agreements provide for uneven payment amounts
throughout the contract term.
We capitalize payments made to third parties for data licenses that
we expect to provide future economic benefit through the recovery
of the costs of these arrangements via the generation of our
revenue and margins. For data license contracts that include uneven
payment amounts, we capitalize the payments as they are made as an
intangible asset and amortize the total contract value over the
estimated useful life. For contracts in which we have perpetual
rights to the data and expect to utilize the data beyond the life
of the contract, the total contract value is amortized on a
straight-line basis over the life of the contract plus two years,
which is equivalent to the estimated useful life of the asset. For
contracts in which we either do not have access to the data beyond
the contractual term or do not expect to utilize the data beyond
the life of the contract, the total contract value is amortized on
a straight-line basis over the term of the contract. We evaluate
data content contracts for potential capitalization at the
inception of the arrangement as well as each time periodic payments
to third parties are made.
The amortization period for the capitalized purchased content is
based on our best estimate of the useful life of the asset, which
ranges from approximately five to nine years. The capitalized
purchased data content is amortized on a straight-line basis as the
pattern of delivery of the economic benefits of the data cannot
reliably be determined because we do not have the ability to
reliably predict future traffic to our mobile applications and
websites.
Under certain other data agreements, the underlying data is
obtained on a subscription basis with consistent monthly or
quarterly recurring payment terms over the contractual period. Upon
the expiration of such arrangements, we no longer have the right to
access the related data, and therefore, the costs incurred under
such contracts are not capitalized and are expensed as payments are
made. We would immediately lose rights to data under these
arrangements if we were to cancel the subscription and/or cease
making payments under the subscription arrangements.
As of September 30, 2017, we had non-cancelable purchase
commitments for content related to our mobile applications and
websites totaling $144.4 million. The amounts due for this content
as of September 30, 2017 are as follows (in thousands):
Remainder of 2017 $ 8,265
2018 32,750
2019 33,500
2020 33,500
2021 32,000
2022 4,375
Total future purchase commitments $ 144,390
Letters of Credit
As of September 30, 2017, we have outstanding letters of
credit of approximately $5.2 million, $1.8 million, $1.5 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. Certain of the letters
of credit are unsecured obligations, and certain of the letters of
credit are secured by certificates of deposit held as collateral in
our name at a financial institution. The secured letters of credit
are classified as restricted cash in our consolidated balance
sheet.
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 $3.7 million and $3.6 million as of
September 30, 2017 and December 31, 2016,
respectively.
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 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.
As discussed below, on May 5, 2016, Zillow, Inc. agreed to
settle a class action lawsuit which alleged, 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. The settlement of the class action
lawsuit, which was approved by the court on October 3, 2017,
was contingent on Zillow, Inc.’s complete resolution of the
DOL compliance review. On November 28, 2016, Zillow, Inc.
entered into a settlement agreement with the DOL that resolved the
DOL’s compliance review. Under the terms of the settlement
agreement, Zillow, Inc. agreed that it will make the voluntary
payments contemplated by the class action lawsuit settlement and
establish and maintain certain procedures to promote future
compliance with the Fair Labor Standards Act. The settlement
agreement with the DOL does not require Zillow, Inc. to make any
payments which are in addition to those contemplated by the class
action lawsuit settlement. Zillow, Inc. has not admitted liability
with respect to either the DOL settlement or the class action
lawsuit settlement.
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 alleged, 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. On November 20, 2015,
plaintiff filed a motion for class certification. On
February 26, 2016, the court granted the plaintiff’s
motion for class certification. On May 5, 2016, the parties
agreed to settle the lawsuit, which was later memorialized in a
settlement agreement executed by the parties on December 2,
2016, with payment by Zillow, Inc. of up to $6.0 million. On
June 9, 2016, the Ninth Circuit Court of Appeals granted our
petition for permission to appeal the order granting class
certification. The settlement does not contain any admission of
liability, wrongdoing, or responsibility by any of the parties. On
April 10, 2017, the parties executed an amendment to the
settlement agreement providing that the settlement class includes
all current and former inside sales consultants employed by Zillow,
Inc. in (i) its California offices from November 19, 2010
through the date on which the court granted preliminary approval
and (ii) its Washington offices from March 1, 2013
through the date on which the court granted preliminary approval.
On May 26, 2017, the court granted preliminary approval of the
settlement of the class action lawsuit, and on October 3,
2017, the court granted final approval of the settlement of the
class action lawsuit. We made the voluntary payments contemplated
by the class action settlement agreement in the amount of $6.0
million in October 2017. We have recorded a liability related to
the settlement for $6.0 million as of September 30, 2017 and
December 31, 2016. We do not believe that any additional loss
will be incurred related to this matter given the court granted
final approval of the settlement of the class action lawsuit in
October 2017.
In July 2015, VHT, Inc. (“VHT”) filed a complaint
against us in the U.S. District Court for the Western District of
Washington alleging copyright infringement of VHT’s images on
the Zillow Digs site. In January 2016, VHT filed an amended
complaint alleging copyright infringement of VHT’s images on
the Zillow Digs site as well as the Zillow listing site. In
December 2016, the court granted a motion for partial summary
judgment that dismissed VHT’s claims with respect to the
Zillow listing site. A federal jury trial began on
January 23, 2017, and on February 9, 2017, the jury
returned a verdict finding that the Company had infringed
VHT’s copyrights in images displayed or saved to the Digs
site. The jury awarded VHT $79,875 in actual damages and
approximately $8.2 million in statutory damages. In March 2017, the
Company filed motions in the district court seeking judgment for
the Company on certain claims that are the subject of the verdict,
and for a new trial on others. On June 20, 2017, the judge
ruled and granted in part our motions, finding that VHT failed to
present sufficient evidence to prove direct copyright infringement
for a portion of the images, reducing the total damages to
approximately $4.1 million. On October 26, 2017, the Company
filed an appeal with the Ninth Circuit Court of Appeals seeking
review of the final judgment and certain prior rulings entered by
the district court. We did not record an accrual related to this
complaint as of December 31, 2016, as we did not believe a
loss was probable. We have recorded an estimated liability for
approximately $4.1 million as of September 30, 2017, which is
classified in general and administrative expenses in our condensed
consolidated statement of operations for the nine months ended
September 30, 2017. We do not believe there is a reasonable
possibility that a material loss in excess of amounts accrued may
be incurred.
In April 2017, we received a Civil Investigative Demand from the
Consumer Financial Protection Bureau (“CFPB”)
requesting information related to our March 2017 response to the
CFPB’s February 2017 Notice and Opportunity to Respond and
Advise (“NORA”) letter. The NORA letter notified us
that the CFPB’s Office of Enforcement was considering whether
to recommend that the CFPB take legal action against us, alleging
that we violated Section 8 of the Real Estate Settlement
Procedures Act (“RESPA”) and Section 1036 of the
Consumer Financial Protection Act (“CFPA”). This notice
stemmed from an inquiry that commenced in 2015 when we received and
responded to an initial Civil Investigative Demand from the CFPB.
We continue to cooperate with the CFPB in connection with requests
for information. Based on correspondence from the CFPB in August
2017, we understand that it has concluded its investigation. The
CFPB invited us to discuss a possible settlement and indicated that
it intends to pursue further action if those discussions do not
result in a settlement. We continue to believe that our acts and
practices are lawful and that our co-marketing program allows
lenders and agents to comply with RESPA, and we will vigorously
defend against any allegations to the contrary. Should the CFPB
commence an action against us, it may seek restitution,
disgorgement, civil monetary penalties, injunctive relief or other
corrective action. We cannot provide assurance that the CFPB will
not commence a legal action against us in this matter, nor are we
able to predict the likely outcome of any such action. As of
September 30, 2017, we have recorded an accrual for an
immaterial amount in connection with this matter. There is a
reasonable possibility that a loss in excess of amounts accrued may
be incurred; however, the possible loss or range of loss is not
estimable. We did not record an accrual related to this matter as
of December 31, 2016 because the possible loss or range of
loss was not estimable.
In August and September 2017, two purported class action lawsuits
were filed against us and certain of our executive officers,
alleging, among other things, violations of federal securities laws
on behalf of a class of those who purchased our common stock
between February 12, 2016 and August 8, 2017. One of
those purported class actions, captioned Vargosko v. Zillow Group,
Inc. et al, was brought in the U.S. District Court for the Central
District of California. The other purported class action lawsuit,
captioned Shotwell v. Zillow Group, Inc. et al, was brought in the
U.S. District Court for the Western District of Washington. The
complaints allege, among other things, that during the period
between February 12, 2016 and August 8, 2017, we issued
materially false and misleading statements regarding our business
practices. The complaints seek to recover, among other things,
alleged damages sustained by the purported class members as a
result of the alleged misconduct. We anticipate that a consolidated
amended complaint will be filed in the first quarter of 2018. We
intend to deny the allegations of wrongdoing and vigorously defend
the claims in these lawsuits. We have not recorded an accrual
related to these lawsuits as of September 30, 2017, as we do
not believe a loss is probable.
In October 2017, a shareholder derivative lawsuit was filed in the
U.S. District Court for the Western District of Washington against
certain of our executive officers and directors seeking unspecified
damages on behalf of the Company. The plaintiff in the derivative
suit (in which the Company is a nominal defendant) alleges, among
other things, that the defendants breached their fiduciary duties
in connection with oversight of public statements and legal
compliance, and that as a result of the breach of such fiduciary
duties, the Company was damaged, and that defendants were unjustly
enriched. The defendants intend to deny the allegations of
wrongdoing and vigorously defend the claims in the lawsuit. We have
not recorded an accrual related to this lawsuit as of
September 30, 2017, as we do not believe a loss is
probable.
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 such litigation or 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
business, 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. |
