Litigation, Commitments and Contingencies

Litigation

In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim. There have historically been no material losses related to such indemnifications. As of December 31, 2015 and 2014, estimated liability amounts associated with such indemnifications are inconsequential.

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 December 31, 2015, we are unable to reasonably estimate the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters could materially affect our financial condition, results of operations and cash flows.

On May 22, 2013, Imation was sued in U.S. District Court for the District of Delaware by five entities: One-Blue, LLC (One-Blue), which is an entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation. The plaintiffs alleged that Imation's sales of certain Blu-ray discs infringed six patents and sought unspecified damages, treble damages, and attorney's fees. The parties entered into a Settlement Agreement covering these U.S. patent claims for a nominal amount and, effective November 12, 2015, these claims were dismissed.

SpearPoint Capital Fund LP et al. v. Mark E. Lucas, et al. This shareholder derivative action was filed in Delaware Chancery Court on February 9, 2015. It names as defendants the Company and the members of its Board of Directors. Plaintiffs contend that the defendants paid excessive compensation to the directors. They seek damages for breaches of fiduciary duties, waste of corporate assets and unjust enrichment. They also seek corporate governance reforms related to the Company’s compensation practices. The Directors have responded to the complaint denying all the allegations; the Company, as the nominal defendant has responded denying the allegations as well. The parties are now engaged in discovery. Trial, should it be necessary, has been scheduled for June 2016.

Operating Leases

We incur rent expense under operating leases, which primarily relate to equipment and office space. Most long-term leases include one or more options to renew at the then fair rental value for a period of approximately one to three years. The following table sets forth the components of net rent expense for the years ended December 31:



	2015			2014			2013
	(In millions)
Minimum lease payments	$	8.1		$	7.8		$	8.5
Contingent rentals	0.1			1.6			3.8
Rental income	(8.2		)	(8.6		)	(8.4		)
Sublease income	—			—			(0.5		)
Total rental expense, net	$	—		$	0.8		$	3.4

Minimum lease payments and contingent rental expenses associated with agreements with warehouse providers are included as a component of cost of goods sold in our Consolidated Statements of Operations. The minimum lease payments under such arrangements were $0.6 million, $0.8 million and $0.9 million in 2015, 2014 and 2013, respectively. The contingent rental expenses under such arrangements were $0.7 million, $1.8 million and $2.8 million in 2015, 2014 and 2013, respectively.

The following table sets forth the minimum rental payments under operating leases with non-cancellable terms in excess of one year as of December 31, 2015. The Company will keep a small team and its headquarters in Minnesota in 2016, and those lease costs are included below. The amount for 2016 includes an estimate of the lease termination fees that we will have to pay in order to cancel certain leases upon the full wind-down of our legacy business.



	2016		2017		2018		2019		2020		Thereafter		Total
	(In millions)
Minimum lease payments	$	2.7	$	0.9	$	0.8	$	0.6	$	0.4	$	0.3	$	5.7

Environmental Matters

Our operations are subject to a wide range of federal, state and local environmental laws. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed and are adjusted accordingly. Compliance with environmental regulations has not had a material adverse effect on our financial results. We did not have any environmental accruals as of December 31, 2015.

In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright 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, are expected to 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 Court of Justice of the European Union (CJEU) 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 CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.

Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting societies related to commercial channel sales. Based on the CJEU's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 CJEU ruling, we began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to court rulings that are discussed below. As of December 31, 2015 and 2014, we had accrued liabilities of $5.1 million and $9.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.

Since the October 2010 CJEU ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) whether accrued, but unpaid, copyright levies on prior period consumer channel 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. See following for discussion of reversals of copyright levies in 2013.

Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the CJEU that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff's documentation and evidence for distinguishing between levies paid on commercial and consumer channel sales. During the second quarter of 2013, Imation reversed $13.6 million of Italian copyright levies (existing at the time of a 2013 Italian court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. Based on the ruling of this Italian court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was sufficient evidence that we may offset the ongoing levy liability with the Italian collecting society for Imation's sales in the consumer channel against the estimated $39.0 million we have overpaid for copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 CJEU ruling). We continued this practice of offsetting until December 2015. In December 2015, we settled our claim for reimbursement of the levies that Imation had paid for sales into its commercial channel with the Italian collecting society, S.I.A.E. The settlement was for $1.0 million and is recorded as a reduction in cost of sales.

France. As the case in Italy, Imation has overpaid levies related to sales into its commercial channel in an amount of $55.1 million. Likewise, Imation has been offsetting levy liability with the French collecting society for Imation's sales in the consumer channel against the $55.1 million we have overpaid for copyright levies in France (due to us paying levies on commercial channels sales prior to the October 21, 2010 CJEU ruling). During the fourth quarter of 2013, Imation reversed $9.5 million of French copyright levies (existing at the time of a 2013 French court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. To date, Imation has offset approximately $14.4 million.

We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $14.4 million of levies on consumer channel sales in France. However, such amounts are currently subjected to challenge in court and there is no certainty that our estimates would be upheld and supported. In December 2012, Imation filed a complaint against the French collection society , Copie France, for reimbursement of the $55.1 million in commercial channel levies that Imation had paid prior to October 2010. On December 8, 2015, there was a hearing in the Paris District Court. A ruling is expected during the first quarter of 2016.

Other Jurisdictions. During the first quarter of 2015, Imation reversed $2.8 million accrual for German copyright levies on optical products as the result of a favorable German court decision retroactively setting levy rates at a level much lower than the rates sought by the German collecting society. The reversal was recorded as a reduction of cost of sales. At December 31, 2015, the recovery of some or all of the copyright levies previously paid on commercial sales in EU jurisdictions other than Italy, France and Germany represents a gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency. We have an estimated $5.1 million of accrued but unpaid levies associated with consumer sales in EU jurisdictions other than Italy and France that we continue to carry on our books.

We are subject to several pending or threatened legal actions by the individual European national levy collecting societies in relation to private copyright levies under the Directive. 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. We are subject to threatened actions by certain customers of Imation seeking reimbursement of funds they allege relate to commercial levies that they claim they should not have paid. 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. We anticipate that additional court decisions may be rendered in 2016 that may directly or indirectly impact our levy exposure in specific European countries which could trigger a review of our levy exposure in those countries.

Accounts Payable

The Company is currently disputing trade payables with certain vendors associated with the legacy businesses. As of December 31, 2015, the Company has $26.0 million of trade payables recorded to these vendors, which is based on amounts billed to the Company, but not paid. The Company alleges historical nonperformance by these vendors and, accordingly, is disputing the amounts presently being claimed as being owed. To the extent the Company is able to settle this dispute for amounts lower than $26.0 million, it will record a gain at that time. As a part of this dispute, these vendors have taken action to seize approximately $5.3 million of the Company's cash, which is recorded as restricted cash on the Company's consolidated balance sheet as of December 31, 2015.