Commitments and Contingencies | 3 Months Ended |
Sep. 28, 2014 |
Commitments and Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
Commitments and Contingencies |
Litigation |
Broadcom Patent Infringement Litigation |
During fiscal 2010, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit containing 300 claims against the Company alleging infringement of eleven patents. On April 3, 2012, United States District Court in the Central District of California (District Court) issued a permanent injunction (2012 Permanent Injunction) against further sale of products found to infringe U.S. Patent 7,058,150 (the ‘150 patent) and 7,471,691 (the ‘691 patent), but permitting sales of products manufactured outside the U.S. to customers located outside the U.S., design around efforts including modifications and design, development, and testing to eliminate infringement, and service and technical support for certain products. This injunction remains in place but the effects have been mitigated in a number of ways. First, with product redesigns. Second, with license agreements from Broadcom to our customers whose products were affected by the injunction. Third, Broadcom and the Company entered into a settlement agreement on July 3, 2012 which provided the Company with a worldwide limited license to the ‘691 patent, the ‘150 patent, and U.S. Patents 6,424,194; 7,486,124 and 7,724,057 [collectively, the ‘194 Patent family], for certain fields of use including Fibre Channel applications. Under this settlement agreement, the Company paid a lump sum of approximately $58.0 million in the first quarter of fiscal 2013. Fourth, the Company and Broadcom entered into a Dismissal and Standstill Agreement described below. |
Approximately $36.8 million of the $58.0 million payment was expensed in fiscal 2012. The remainder of approximately $21.2 million was recorded as prepaid license fees and is being amortized to cost of goods sold over the ten year license term in proportion to the estimated future revenues of such licensed technology. As of September 28, 2014, the unamortized prepaid license fee was approximately $12.1 million, of which approximately $3.6 million was recorded in prepaid expenses and other current assets and approximately $8.5 million was recorded in other assets. The Company recognized amortization expense related to such prepaid license fees of approximately $1.0 million during both the three months ended September 28, 2014 and September 29, 2013. |
Effective March 30, 2014, the Company and Broadcom entered into a Dismissal and Standstill Agreement (the "Dismissal Agreement") pursuant to which the Company and Broadcom agreed to dismiss, without prejudice, certain claims that had been scheduled for retrial in September 2014 and not to pursue certain other claims for one year. The claims subject to standstill relate to the SerDes Patents (defined below) based solely on the use, manufacture, sale or import of certain Emulex products that were named in the original lawsuit. SerDes Patents means U.S. Patent Nos. 6,424,194; 7,038,516; 7,125,169; 7,486,124; and 7,724,057, and any reissues, foreign counterparts, continuations, continuations-in-part, divisionals or reexaminations of such patents. The Dismissal Agreement does not prevent, after the expiration of the one year standstill, Broadcom from bringing an infringement claim seeking an injunction or damages with respect to infringement of the SerDes Patents relating to the Standstill Products. In the Dismissal Agreement, Emulex agreed to pay Broadcom, a non-refundable, non-cancelable dismissal and standstill fee for $5 million, of which approximately $3.8 million was included in Accrued and Other Current Liabilities as of September 28, 2014. |
Through September 28, 2014, the Company has incurred approximately $21.9 million of mitigation, product redesign and appeal related expenses, of which approximately $0.2 million and $2.5 million were recorded during the three months ended September 28, 2014 and September 29, 2013, respectively. The Company expects to incur incremental mitigation and appeal related expenses during fiscal 2015 up to approximately $0.3 million, to be recorded within operating expenses. In addition, the Company has agreed to participate in certain customer royalty obligations arising under license agreements with Broadcom with respect to the infringing products. Through September 28, 2014, the Company has recorded approximately $5.2 million in cost of sales related to such customer obligations, of which approximately $0.8 million and $0.5 million were recorded in cost of sales for the three months ended September 28, 2014 and September 29, 2013, respectively. The Company may incur additional amounts related to these obligations of approximately $5 million in future periods, all of which will reduce gross margins in the periods accrued. |
While the Company has contractual commitments from its suppliers concerning the defense and indemnification of certain Broadcom claims relating to certain technology provided by such suppliers, and is pursuing certain claims for reimbursement against certain of its suppliers, it cannot be certain that such defense and indemnification obligations will be honored by such suppliers or that any related legal proceedings will result in any material reimbursement to the Company. This lawsuit continues to present risks with respect to U.S. sales of certain Ethernet products that could have a material adverse affect on the Company’s business, financial condition, or results of operations, including loss of patent rights, monetary damages, potential reimbursement of customer indemnification liabilities or royalty obligations, and injunction against the sale of accused products. |
Shareholder Lawsuits |
On May 21, 2014, a derivative shareholder complaint was filed in the United States District Court in the Central District of California (Case No. 8:14-cv-0076-DOC-JCG) alleging damages incurred by Emulex and naming eight of the Company's eleven directors as defendants. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock and by the implementation of cost reductions. An amended federal complaint was filed on July 14, 2014 in which the original plaintiff was dropped from the complaint and a different plaintiff was added. On August 15, 2014, the Company filed a motion to dismiss the complaint, which is scheduled to be heard on November 24, 2014. Management is unable to determine whether any loss will occur or to estimate the range of such loss, therefore, no amount of loss has been accrued. |
On July 17, 2014, a derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Orange (Case No. 30-2014-00734802-CU-SL-CXC) alleging damages incurred by Emulex and naming eight of the Company's eleven directors as defendants. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock and by the implementation of cost reductions. On August 7, 2014, the parties filed a stipulation to stay the State Derivative Action pending the resolution of the motion to dismiss the Federal derivative action described in the preceding paragraph. Management is unable to determine whether any loss will occur or to estimate the range of such loss, therefore, no amount of loss has been accrued. |
In addition to the ongoing litigation discussed above, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the open matters will not have a material adverse affect on the Company’s consolidated financial position, results of operations or liquidity. |
Other Commitments and Contingencies |
The Company provides limited indemnification in selected circumstances within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to the Company’s product infringement of certain intellectual property, and in some limited cases against bodily injury or damage to real or tangible personal property caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. As of September 28, 2014, the Company has not incurred any significant costs related to contractual indemnification of its customers. |