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Litigation, Commitments and Contingencies
6 Months Ended
Jun. 30, 2012
Commitments and Contingencies Disclosure [Abstract]  
Litigation, Commitments and Contingencies
Litigation, Commitments and Contingencies
Litigation
We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Additionally, our businesses are subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from us, our competitors, suppliers and resellers. Consequently, as of June 30, 2012, we are unable to ascertain with certainty the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. While these matters could materially affect operating results depending upon the final resolution in future periods, it is our opinion that after final disposition, any monetary liability beyond that provided in the Condensed Consolidated Balance Sheet as of June 30, 2012 would not be material to our Condensed Consolidated Financial Statements.
On June 14, 2011, Trek 2000 International Ltd and certain of its affiliates (Trek) filed a complaint asking the International Trade Commission (ITC) to commence an investigation against us and various others. Trek alleged that Imation and others unlawfully import and sell into the United States certain USB portable storage devices that allegedly infringe several of Trek's U.S. patents. On August 15, 2011, we filed an answer to Trek's complaint, denying liability and asserting that Trek failed to meet certain requirements to bring its complaint to the ITC. A hearing with the ITC was scheduled for May 9, 2012. On May 8, 2012, Trek withdrew its complaint and terminated the investigation before the ITC.
On June 19, 2009 Advanced Research Corp. (ARC) sued Imation in Ramsey County District Court for breach of contract relating to a supply agreement under which we purchased our requirements for magnetic heads to write servo patterns on magnetic tape prior to sale of the finished cartridges, requesting the court to order that Imation pay damages and return the purchased heads to ARC. In September 2011 we agreed to a settlement of $2.0 million which was paid during the six months ended June 30, 2012.
Copyright Levies
In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copying levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which in turn distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the European Court of Justice (ECJ) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The ECJ stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The ECJ also stated that the indiscriminate application of the private copying levy to devices not made available to private users and clearly reserved for uses other than private copying is incompatible with the Directive. The ECJ ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by the Company) when sales of optical media are made to natural persons intending to make private copies. Based on this development, we began in 2010 withholding levy payments to various collecting societies. We continued to accrue a liability for levies arising from consumer sales. As of June 30, 2012 and December 31, 2011, we had recorded a liability of $24.0 million and $19.7 million, respectively.
Since the October 2010 ECJ ruling, quarterly we evaluated on a country-by-country basis whether: (i) levies should be accrued on current period of commercial and/or consumer channel sales; and, (ii) levies accrued, but unpaid, on prior period sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. If we determine a levy obligation is remote, then, in the period of such determination we discontinue accruing current period levies and reverse previously accrued but unpaid amounts by reducing cost of goods sold in the Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2012, we did not reverse any amounts into cost of goods sold for prior year obligations. For the three and six months ending June 30, 2011, cost of goods sold was reduced by $3.4 million and $5.5 million, respectively, for the reversal of prior year obligations that were determined to be remote.
We are subject to several pending or threatened legal actions by the individual European national levy collecting societies. Those actions generally seek payment of the commercial and consumer optical levies withheld by Imation. Imation has corresponding claims in those actions seeking reimbursement of levies improperly collected by those collecting societies. Although these actions are subject to the uncertainties inherent in the litigation process, based on the information presently available to us, management does not expect that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows.