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COMMITMENTS AND CONTINGENCIES - Note 8

12 Months Ended

Mar. 31, 2017

8. 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.

Operating Leases

The Company's operating lease obligations consist of the Company's principal facility and various leased facilities under operating lease agreements, which expire on various dates from fiscal 2018 through fiscal 2026. The Company leases its headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019.

At March 31, 2017, future minimum annual lease payments under non-cancelable operating leases were as follows (in thousands):

Year ending March 31:
2018	$	4,708
2019		5,596
2020		4,906
2021		2,435
2022 and Thereafter		6,908
Total	$	24,553

Rent expense for the years ended March 31, 2017, 2016 and 2015 was $5.1 million, $2.1 million and $1.8 million, respectively.

Capital Leases

The Company has non-cancelable capital lease agreements for office and computer equipment bearing interest at various rates. At March 31, 2017, future minimum annual lease payments under non-cancelable capital leases were as follows (in thousands):

Year ending March 31:
2018	$	981
2019		681
2020		169
2021		5
2022		5
Total minimum payments		1,841
Less: Amount representing interest		(116)
		1,725
Less: Short-term portion of capital lease obligations		(918)
Long-term portion of capital lease obligations	$	807

Capital leases included in computer and office equipment were approximately $2.7 million and $1.6 million at March 31, 2017 and 2016, respectively. Total accumulated amortization was approximately $1.0 million and $0.1 million at March 31, 2017 and 2016, respectively.

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. As the agreement requires a 150-day notice to terminate, the total remaining obligation under the contract was $2.2 million at March 31, 2017.

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 2017 through 2018. At March 31, 2017, future minimum annual payments under these third-party network service contracts were as follows (in thousands):

Year ending March 31:
2018	$	1,364
2019		133
2020		8
Total minimum payments	$	1,505

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 U.S. Patent and Trademark Office ("USPTO") initiated a Reexamination Proceeding through which the claims of the patent asserted against the Company were found to be invalid based on four separate grounds. During the Reexamination Proceeding, the Delaware Court granted the Company's motion to stay the proceeding (July 17, 2013) and administratively closed the case on May 5, 2015 with leave to reopen if needed. The outcome of the Reexamination Proceeding was first appealed to the USPTO Patent Trial and Appeal Board which affirmed the invalidity bases of all claims in a Decision dated Dec. 29, 2015 ("the Board Decision"). The Board Decision was then appealed to the United States Court of Appeals for the Federal Circuit ("Federal Circuit"), which also affirmed the invalidity bases of all claims as the Federal Circuit noted in a Judgment dated March 15, 2017. On April 21, 2017, the Federal Circuit issued a Mandate, which formally concluded the appeal and, absent any unforeseen circumstances, formally ended the Federal Circuit's jurisdiction of this matter, thereby for effecting finality of the Delaware Court's May 5, 2015 decision.

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 sued the Company based on alleged infringement of U.S. Patent No. 6,865,268 concerning alleged activities involving the Company's Virtual Contact Center Agent Console (Plaintiff Serenitiva sued nine other defendants, concurrently, based on the same patent). Pursuant to an agreement executed by both parties in mid-April 2017, the Company settled the suit prior to answering the complaint under the terms of a settlement agreement between us and the plaintiff. Under the terms of a settlement agreement between the plaintiff and the Company, 8x8 agreed to pay plaintiff an amount that was not material to our business, and the Company was granted a limited license to the patent. A Joint Motion to Dismiss was filed April 20, 2017, and an Order of Dismissal With Prejudice should be forthcoming from the Court.

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 sued the Company based on alleged infringement U.S. Patent No. 8,411,829 concerning alleged activities involving the Company's voicemail system (Plaintiff Paluxy Messaging sued seven other defendants, concurrently, based on the same patent). Based on the Company's subscription to certain patent risk management services, the Company settled the suit without needing to answer the complaint. Under the terms of a settlement agreement between the plaintiff and the Company, 8x8 agreed to pay plaintiff an amount that was not material to our business, and we were granted a limited license to the patent. An Order of Dismissal With Prejudice was issued March 13, 2017.

On April 16, 2015, the Company was named as a defendant in a lawsuit, Slocumb Law Firm v. 8x8, Inc., filed in the United States District Court for the Middle District of Alabama. 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 various causes of actions including fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On June 10, 2015, the United States Magistrate Judge issued a Report and Recommendation that the Court grant the Company's motion to stay the case and compel the Slocumb Law Firm to arbitrate its claims 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 The Court closed this case administratively when it granted the Company's motion to compel arbitration. Under the Company's standard business terms and conditions, as of March 31, 2017, the period to initiate arbitration has lapsed.

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.

For the fiscal year ended March 31, 2017, 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 $0.5 million. Although the outcome cannot be predicted, the estimated reasonable additional loss is between $0 to $0.5 million.