COMMITMENTS AND CONTINGENCIES - Note 4

12 Months Ended

Mar. 31, 2013

Notes to Financial Statements

COMMITMENTS AND CONTINGENCIES - Note 4

4. COMMITMENTS AND CONTINGENCIES

Guarantees

Indemnifications

In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters such as breaches of representations or covenants or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.

It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.

Product Warranties

The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in the Company's product warranty liability, which is included in cost of product revenues in the consolidated statements of income were as follows (in thousands):

		Years Ended March 31,
		2013		2012		2011
Balance at beginning of year	$	387	$	362	$	331
Accruals for warranties		611		496		446
Payments		(546)		(471)		(415)
Balance at end of year	$	452	$	387	$	362

Leases

The Company leases its headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months with a 3% increase each year thereafter, and requires us to pay property taxes, utilities and normal maintenance costs.

At March 31, 2013, future minimum annual lease payments under non-cancelable operating leases were as follows (in thousands):

Year Ending March 31,
2014	$	1,578
2015		1,625
2016		1,674
2017		1,724
2018 and Thereafter		4,698
Total	$	11,299

Rent expense for the years ended March 31, 2013, 2012 and 2011 was $1,195,000, $746,000 and $608,000, respectively.

Capital Leases

The Company has non-cancelable capital lease agreements for office equipment bearing interest at various rates. At March 31, 2013, future minimum annual lease payments under noncancelable capital leases were as follows (in thousands):

Year ending March 31:
2014	$	22
2015		21
2016		7
Total minimum payments		50
Less: Amount representing interest		(6)
		44
Less: Short-term portion of capital lease obligations		(18)
Long-term portion of capital lease obligations	$	26

Capital leases included in office equipment were $110,000 and $139,000 at March 31, 2013 and 2012, respectively. Total accumulated amortization was $69,000 and $46,000 at March 31, 2013 and 2012, respectively. Amortization expense for assets recorded under capital leases is included in depreciation expense.

Minimum Third Party Customer Support Commitments

In the third quarter of 2010, the Company amended its contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $430,000 effective April 1, 2010. The agreement requires a 150-day notice to terminate. At March 31, 2013, the total remaining obligation under the contract was $2.2 million.

Minimum Third Party Network Service Provider Commitments

The Company entered into contracts with multiple vendors for third party network service providers which expire on various dates in fiscal 2014 through 2016. At March 31, 2013, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:
2014	$	2,091
2015		1,579
2016		52
Total minimum payments	$	3,722

Legal Proceedings

The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can arise in the normal course of the Company's operations. Pending or future litigation could be costly, could cause the diversion of management's attention and could upon resolution, have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.

On February 22, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., along with 20 other defendants.  On August 17, 2011, the Company was dismissed without prejudice from this lawsuit under Rule 21 of the Federal Rules of Civil Procedure.  On August 17, 2011, the Company was sued again by Bear Creek Technologies, Inc. in the United States District Court for the District of Delaware. The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense.  Further, on November 28, 2012, the U.S. Patent & Trademark Office initiated a Reexamination proceeding with a Reexamination Declaration explaining that there is a substantial new question of patentability, based on four separate grounds, affecting each claim of the patent which is the basis for the complaint filed against the Company.  On March 26, 2013, the USPTO issued a first Office Action in the Reexamination, with all claims of the '722 patent being rejected on each of the four separate grounds raised in the Request for Reexamination.  There is a pending motion to stay the litigation based on the possibility that at least one of the rejections will be upheld.  The Company cannot estimate potential liability in this case at this early stage of litigation.  

On October 25, 2011, the Company was named a defendant in a lawsuit, Klausner Technologies, Inc. v. Oracle Corporation et al., along with 30 other defendants.  The lawsuit alleges infringement of a patent that is now believed to be expired.  On November 1, 2011, Klausner dismissed the Complaint voluntarily and filed new complaints separating the defendants, including a new Complaint against 8x8.  The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense, and has filed several motions consistent therewith including a motion to transfer and a motion to dismiss the complaint as filed on February 23, 2012.  On March 21, 2013, Chief Judge Davis granted 8x8's Motion to Change Venue, and has thereby ordered that this case be transferred to the US District Court for the Northern District of California on or after April 4, 2013.  This case been transferred accordingly.  The Company has not answered the complaint.  The Company cannot estimate potential liability in this case at this early stage of litigation. 

State and Municipal Taxes

From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of taxes. Four states currently are conducting tax audits of the Company's records. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.

Regulatory

VoIP communication services, like the Company's, are subject to less regulation at the federal level than traditional telecommunication services and states are preempted from regulating such services. Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC, and state regulatory agencies. The FCC initiated a notice of public rule-making in early 2004 to gather public comment on the appropriate regulatory environment for IP telephony which would include the services we offer. In November 2004, the FCC ruled that the VoIP service of a competitor and "similar" services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy telecommunication carrier regulations.

The effect of any future laws, regulations and the orders on the Company's operations, including, but not limited to, the 8x8 service, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding obligations increases the Company's costs of providing service that may or may not be recoverable from the Company's customers which could result in making the Company's services less competitive with traditional telecommunications services if the Company increases its retail prices or decreases the Company's profit margins if it attempts to absorb such costs.