Note 11 - Commitments and Contingencies

9 Months Ended

Jul. 31, 2012

Commitments and Contingencies Disclosure [Text Block]

11. COMMITMENTS AND CONTINGENCIES

Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of July 31, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $6.8 million and $6.6 million, respectively.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  We have not recorded any loss accruals for these contingencies other than as we have considered reasonable for the matters noted below. Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation after the date of this Form 10-Q, except as may be required by applicable law, statute or regulation.

TableMAX – In April 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the “First Complaint”) against us in the United States District Court for the District of Nevada.  This case is a patent infringement claim alleging that our Table Master ® product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.  The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys’ fees, costs, increased damages and disbursements.  In August 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.  On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc., the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, (collectively “TableMAX”), filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint.  In August 2009, TableMAX filed an amended complaint (the “Second Complaint”), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master ® infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.  In August 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master ® product.  In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star ® products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star ® product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star ® product to only one of TableMAX's patents in suit.

The Court set the Markman hearing for December 2010.  In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings that were initiated at our request before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit.   Additionally, in June 2012 the USPTO granted our petitions to reexamine two of the patents that are the subject of the lawsuit, which patents were previously granted a Reexamination Certificate.  We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all of the reexamination proceedings will conclude in fiscal 2013 and thus the stay may be lifted in fiscal 2013. At present, the case remains stayed.  We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.

Macau Rapid Baccarat ® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Rapid Baccarat ® unit displayed by Shuffle Master Asia Limited (“SMAL”).  This seizure related to a claim by a Macau patent holder (the “Patent Holder”) of an  alleged patent infringement.  On October 27, 2009, the Public Prosecutors Office in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.  In November 2009, the Patent Holder appealed this finding to the Macau Courts – what is called “abertura de instrução” according to Macau Law. On or about January 20, 2010, over our objection, the judge considering the Patent Holder’s appeal found that his appeal was timely filed.

On or about February 2010, we filed an appeal (the “First SMAL Appeal”) to this decision.  On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal.   On June 2, 2010, the judge denied the Patent Holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.  The Patent Holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard.  In the event the Patent Holder’s appeal is successful, it is possible that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau.  The Company does not carry insurance with respect to this matter.  We believe that the claim is without merit and we intend to continue to defend this matter vigorously.

On May 4, 2012, the Patent Holder along with a company that we believe may be controlled by the Patent Holder (collectively, the "First Patent Litigants") requested that the Macau Court enjoin us and certain other exhibitors from infringing the First Patent Litigants' patents during the G2E Asia Gaming Show held May 22 through May 24.  On May 15, 2012, the Macau Court signed a written decision enjoining us and certain other exhibitors from infringing these patents, even though the court decision did not specifically identify which of our products at the G2E Asia Gaming Show would allegedly infringe such patents.  On May 22, 2012, we agreed with Macau Customs to cover our Rapid Table Games™ Multi Game product at the G2E Asia Gaming Show to avoid further legal proceedings.  On May 23, 2012, we received Court approval to post a bond of approximately $0.1 million in substitution of the injunction and to permit us to display the Rapid Table Games TM Multi Game product.  Notwithstanding that on May 23, 2012, we displayed the Rapid Table Games™ Multi Game product on the advice of our Macau counsel following the Macau Court allowing us to post a bond, we believe that Macau Public Prosecutors Office is investigating the timing of the lifting of the cover off of the Rapid Table Games TM Multi Game product and whether such action may give rise to any alleged criminal charges against SMAL, its directors,  and the Company (including its subsidiaries)  or its officers. On June 4, 2012, the First Patent Litigants and LT Game Limited (a company that we believe may be controlled by the Patent Holder) (collectively, the “Second Patent Litigants”) filed a writ of summons with the Court seeking monetary damages and other civil relief as a result of the alleged infringement of the First Patent Litigants’ patents by SMAL, and the Company at the G2E Asia Show.  As of June 4, 2012, the other exhibitors referenced above are not defendants in this matter.  As with the infringement claim discussed above, we believe that all of these claims are entirely without merit and we intend to continue to vigorously defend this matter.

On July 10, 2012, LT Game International Ltd. filed a complaint against us in the United States District Court for the District of Nevada. We believe that the plaintiff is controlled by the Patent Holder. In this complaint, LT Game International Ltd. makes various claims against the Company, including unfair competition and tortious interference with current and prospective business and contractual relations.  The complaint seeks injunctive relief and an unspecified amount of damages, including claims for reasonable attorneys’ fees and disbursements, costs, statutory damages under the Lanham Act, treble damages and profits.    On August 17, 2012, an amended complaint was filed with legal claims that are materially the same as the original complaint.  On September 4, 2012, we filed a motion to dismiss the amended complaint.  As with the Second Patent Litigants’ claims discussed above, we believe that this complaint is without merit and we intend to vigorously defend this matter.

Wright Matter – On November 7, 2009, Sam Wright was playing a Vegas Star ® craps machine at the Harrah’s Casino New Orleans.  Mr. Wright played a game that ended in a losing result.  After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine.  On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division.  The Louisiana State Police Gaming Division concluded  that there was no violation of state law, rule or internal control and Mr. Wright was unsuccessful.

In November 2010, Mr. Wright filed a Petition for Damages (the “Wright Complaint”) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming  the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s”) as defendants.  The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys’ fees and costs.  The Company could have had possible indemnity obligations to Harrah’s if a judgment had been entered.   In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.   On February 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah’s.  Effective May 8, 2012, the Wright Complaint and the Declaratory Relief Complaint were dismissed with prejudice.

Axis Surplus Insurance Company (“Axis”) was the Company’s insurance carrier with respect to the Wright Complaint.  In November 2011, we filed a Complaint for Declaratory Judgment (the “Declaratory Relief Complaint”) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy, that  (a) Axis provide full policy coverage and defense; (b) Axis pay all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis make all reasonable efforts to protect us from risk of excess judgment.  The Declaratory Relief Complaint was dismissed with prejudice as discussed above.

TCS South Africa- On August 20, 2012, we sued TCS John Huxley (PTY) LTD. (“TCS South Africa”) in the Court of the Commissioner of Patents for the Republic of South Africa.   The suit alleges that the “A Plus” card shuffler, which is being distributed by TCS South Africa, violates one of our patents.   We seek an enquiry into damages, an interdict against infringement of our patent, and delivery up of any infringing products.  We believe that we have a meritorious case and are vigorously pursuing this claim.