COMMITMENTS AND CONTINGENCIES - Note 7

12 Months Ended

Mar. 31, 2015

Notes to Financial Statements

COMMITMENTS AND CONTINGENCIES - Note 7

7. 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,
		2015		2014		2013
Balance at beginning of year	$	660	$	452	$	387
Accruals for warranties		185		953		611
Settlements		(364)		(745)		(546)
Changes in estimate		(142)		-		-
Balance at end of year	$	339	$	660	$	452

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.

The Company leases its UK headquarters in Aylesbury UK under operating lease agreements that expires in March 2017. The lease was amended in September 2014 for additional space.  The lease has a base monthly rent of approximately $7,800 until March 2015, rising to approximately $8,800 thereafter, and requires us to pay property taxes, service charges, utilities and normal maintenance costs. The Company also leases office space in London UK under an operating lease agreement that expires in April 2019. The lease has a base monthly rent of approximately $6,700 until March 2016, rising to approximately $7,100 thereafter.

At March 31, 2015, future minimum annual lease payments under non-cancelable operating leases were as follows (in thousands):

Year ending March 31:
2016	$	1,913
2017		1,977
2018		1,872
2019		1,926
2020 and Thereafter		1,100
Total	$	8,788

Rent expense for the years ended March 31, 2015, 2014 and 2013 was $1.8 million, $1.5 million and $1.2 million, respectively.

Capital Leases

The Company has non-cancelable capital lease agreements for office equipment bearing interest at various rates. At March 31, 2015, future minimum annual lease payments under non-cancelable capital leases were as follows (in thousands):

Year ending March 31:
2016	$	29
Total minimum payments		29
Less: Amount representing interest		(4)
		25
Less: Short-term portion of capital lease obligations		(25)
Long-term portion of capital lease obligations	$	-

Capital leases included in office equipment were approximately $0.5 million and $0.6 million at March 31, 2015 and 2014, respectively. Total accumulated amortization was approximately $0.3 million and $0.4 million at March 31, 2015 and 2014, 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 $0.4 million effective April 1, 2010. The agreement requires a 150-day notice to terminate. At March 31, 2015, 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 which expire on various dates in fiscal 2016 through 2018. At March 31, 2015, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:
2016	$	3,014
2017		2,452
2018		891
Total minimum payments	$	6,357

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 suit was dismissed without prejudice as to the Company under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, Bear Creek Technologies, Inc. refiled its suit against the Company in the United States District Court for the District of Delaware. 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 and affecting each claim of the patent which is the basis for the complaint filed against us.  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.  On July 10, 2013, the Company filed an informational pleading in support of and joining a motion to stay the proceeding in the District Court; the District Court granted the motion on July 17, 2013, based on the possibility that at least one of the USPTO rejections will be upheld and considering the USPTO's conclusion that Bear Creek's patent suffers from a defective claim for priority.  On March 24, 2014, the USPTO issued another Office Action in which the rejections of the claims were maintained.  On August 15, 2014, the USPTO issued a Right of Appeal Notice, as the USPTO maintained all rejections of the patent claims.  On September 15, 2014, Bear Creek Technologies, Inc. filed a Notice of Appeal of this decision with the Patent Trial and Appeal Board. The case is currently on appeal. The Company believes that it has meritorious defenses to these claims and is presenting a vigorous defense, but we cannot estimate potential liability in this case at this early stage of litigation.

On March 31, 2014, the Company was named as a defendant in a lawsuit, CallWave Communications LLC (CallWave) v. 8x8, Inc.  CallWave also sued Fonality Inc. on March 31, 2014, and previously had sued other companies including Verizon, Google, T-Mobile, and AT&T. The Company answered the complaint and filed counterclaims in response thereto.  Thereafter, CallWave made numerous demands that 8x8 pay CallWave cash consideration for settling the suit. On April 21, 2015, the Company filed papers to present numerous counterclaims including patent misuse. On or about May 26, 2015, the parties concluded negotiations regarding CallWave’s cash-payment demands and agreed to settle all claims in the suit (and potential future claims) under confidential terms which await finalization by filing dismissal papers with the Court.  As part of the settlement, the Company agreed to pay CallWave in a manner which the Company recognized as general and administrative expense in the statements of income as of March 31, 2015, as the Company determined the settlement consideration to be commensurate with a loss contingency, and the amount was probable and estimable. At March 31, 2015, the Company accrued a loss contingency related to this litigation and to other patent-related issues in current other accrued liabilities in the consolidated balance sheets.

On December 31, 2014, the Company was named as a defendant in a lawsuit, Adaptive Data, LLC v. 8x8, Inc.  Adaptive Data, LLC also sued another 36 other defendants on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process has not yet been effected on the Company.

On April 15, 2015, the Company was named as a defendant in a lawsuit, UrgenSync, LLC v. 8x8, Inc.  UrgenSync, LLC also sued another 14 other defendants on the same day regarding the same patent asserted in the complaint filed against 8x8.

On April 16, 2015, the Company was named as a defendant in a lawsuit, Slocumb Law Firm v. 8x8, Inc. The Slocumb Law Firm alleges that it purchased certain business services from the Company that did not perform as advertised or expected, asserts causes of actions for fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On May 7, 2015, the Company filed a motion with the Alabama Federal Court seeking an order compelling the Slocumb Law Firm to arbitrate its claims against the Company in Santa Clara County, California pursuant to a clause mandating arbitration of disputes set forth in the terms and conditions to which Slocumb Law Firm agreed in connection with its purchase of business services from the Company. No briefing schedule or hearing date for the motion has been set as of this time. Discovery has not yet commenced in the case. The Company intends to vigorously defend against Slocumb Law Firm's claims.

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. Several jurisdictions 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.