COMMITMENTS AND CONTINGENCIES - Note 6

9 Months Ended

Dec. 31, 2016

Notes to Financial Statements

COMMITMENTS AND CONTINGENCIES - Note 6

6. COMMITMENTS AND CONTINGENCIES

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 also leases facilities for office space under non-cancelable operating leases for its various domestic and international locations.

The Company has entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at December 31, 2016 totaled $2.3 million with accumulated amortization of $0.8 million.

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 operations, were as follows (in thousands):

		Three Months Ended				Nine Months Ended
		December 31,				December 31,
		2016		2015		2016		2015
Balance at beginning of period	$	333	$	325	$	326	$	339
Accruals for warranties		24		88		251		263
Settlements		(26)		(70)		(201)		(223)
Adjustments		(41)		(21)		(86)		(57)
Balance at end of period	$	290	$	322	$	290	$	322

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 December 31, 2016, the total remaining obligation upon a termination of the contract was $2.2 million.

Minimum Third Party Network Service Provider Commitments

The Company has entered into contracts with multiple vendors for third party network service which expire on various dates in fiscal 2017 through 2020. At December 31, 2016, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:
Remaining 2017	$	478
2018		1,363
2019		132
2020		8
Total minimum payments	$	1,981

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 Bear Creek Technologies, Inc. (BCT) v. 8x8, Inc. et al., filed in the U.S. District Court for the District of Delaware (the Delaware Court), along with 20 other defendants.  Collectively this patent litigation is referred to as In re Bear Creek Technologies, Inc. (MDL No.: 2344).  In August 2011, the suit was dismissed without prejudice but then refiled in the Delaware Court against the Company. On November 28, 2012, the USPTO initiated and has since maintained a Reexamination Proceeding in which the claims of a patent (asserted against the Company) were rejected as being invalid based on four separate grounds.  In response to the USPTO invalidity rejections, the Company filed an informational pleading (on July 10, 2013) to join a motion to stay the proceeding in the Delaware Court, which this motion was granted on July 17, 2013. On May 5, 2015 and presumably in light of the Reexamination Proceeding, the Court administratively closed this case with leave to reopen if needed. The Reexamination Proceeding was appealed to the USPTO Patent Trial and Appeal Board ("PTO Board of Appeals"), which affirmed the rejection of all claims in a Decision (December 29, 2015), which is now on appeal before the Court of Appeals for the Federal Circuit.  The matter is briefed and oral argument before the Court of Appeals for the Federal Circuit is scheduled for March 13, 2017.

On November 14, 2016, the Company was named as a defendant in Serenitiva LLC v. 8x8, Inc. filed in U.S. District Court for the E.D. of Texas (Civil Action No. 6:16-cv-1290). Plaintiff Serenitiva LLC is suing the Company based on alleged infringement of U.S. Patent No. 6,865,268 by alleged Company activities in connection with the Company's Virtual Contact Center Agent Console (alleged as providing interactive, real-time call tracking and resolution management over a communications network). Plaintiff Serenitiva LLC also sued nine other defendants regarding the same patent asserted in the complaint filed against the Company. The Company is currently assessing factual and legal defenses to these claims and expect to present a vigorous defense. The Company has not answered the complaint yet and 8x8 cannot estimate potential liability in this case at this early stage of the litigation. Plaintiff Serenitiva and three of these other defendants have already settled/resolved their respective suits.

On December 2, 2016, the Company was named as a defendant in Paluxy Messaging LLC v. 8x8, Inc. filed in U.S. District Court for the E.D. of Texas, Tyler Division (Civil Action No. 6:16-cv-1346). Plaintiff Paluxy Messaging LLC is suing the Company based on alleged infringement U.S. Patent No. 8,411,829 by alleged activities in connection with the Company's use of a voicemail system (alleged in the complaint as providing a system for managing messages). Plaintiff Paluxy Messaging LLC also sued seven other defendants regarding the same patent asserted in the complaint filed against the Company. The Company is currently assessing factual and legal defenses to these claims and expect to present a vigorous defense. The Company has not answered the complaint yet and the Company cannot estimate potential liability in this case at this early stage of the litigation. Plaintiff Paluxy Messaging and three of these other defendants have already settled/resolved their respective suits.

On April 16, 2015, the Company was named as a defendant in Slocumb Law Firm v. 8x8, Inc. The Slocumb Law Firm has alleged that it purchased certain business services from the Company that did not perform as advertised or expected, and has asserted 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 U.S. District Court for the Middle District of Alabama, 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 the 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 sales, use, telecommunications, excise, and income 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. The Company adjusts its accrual when facts relating to specific exposures warrant such adjustment.

During the period ended December 31, 2016, the City of San Francisco levied an assessment for utility taxes against the Company. The Company plans to vigorously appeal the assessment. Based on historical experience of the Company, management has determined the probable loss relating to this exposure to be approximately $0.4 million, which was recorded in the consolidated financial statements as of December 31, 2016. Although the outcome cannot be predicted, the estimated reasonable additional loss is between $0 to $0.6 million.