Note 9. Commitments and Contingencies

Leases

The Company’s corporate headquarters is located in Danvers, Massachusetts. This facility encompasses most of the Company’s U.S. operations, including research and development, manufacturing, sales and marketing and general and administrative departments. On August 12, 2016, the Company entered into a new lease agreement to expand its existing corporate headquarters which covers 163,560 square feet of space. The initial term of the lease agreement commenced on August 12, 2016 and terminates on August 31, 2026. The Company has options to extend the initial term for three separate periods of five years each. In connection with the entry into this new lease agreement, the Company terminated the previously existing lease for the facility dated February 24, 2014, as amended by the First Amendment to Lease dated April 30, 2015 and the Second Amendment to Lease effective January 1, 2016. The Company also terminated the purchase and sale agreement it had entered into to acquire the facility for $16.5 million in December 2015 when it entered into this new lease agreement in August 2016.

The lease agreement provides the Company with an exclusive option to purchase the building on or before August 31, 2022, subject to certain conditions set forth therein. In addition, the lease agreement grants the Company a one-time right of first offer to purchase the building from September 1, 2022 until August 31, 2026, if the lessor decides to sell the building or receives an offer to purchase the building from a third-party buyer.

The Danvers, Massachusetts building lease is being recorded as a capital lease. The payments under the lease are accounted for as interest and principal payments over 15 years.

A summary of future lease commitments related to the capital lease obligation is as follows:

	(in $000s)
2017, remaining portion	$	314
2018		1,311
2019		1,349
2020		1,349
2021		1,373
Thereafter		15,136
Total minimum lease payments		20,832
Less amounts representing interest		(4,312	)
Total lease obligations	$	16,520
Less current capital lease obligation		(770	)
Capital lease obligation, net of current portion	$	15,750

The Company’s European headquarters is located in Aachen, Germany and consists of approximately 33,000 square feet of space under an operating lease. In July 2013, the Company entered into a lease agreement to continue renting its existing space in Aachen, Germany through July 31, 2023. In October 2015, the Company entered into an amendment to this lease agreement to lease 9,000 square feet of additional space effective July 1, 2015. The Company also entered into another lease agreement in October 2015 to lease approximately 30,000 square feet of additional space adjacent to its Aachen facility from July 1, 2015 through June 30, 2016. This agreement also provided the Company with options to extend the lease through July 31, 2033. The Company exercised the first option under this agreement to extend the lease through June 30, 2017. The Aachen, Germany building lease is recorded as an operating lease with the related rent expense being recorded on a straight line basis over the lease term. The lease payments under these agreements are approximately 65,000€ (approximately U.S. $0.1 million at December 31, 2016 exchange rates) per month. The Aachen facility encompasses manufacturing, certain research and development activities and the European sales, marketing and general and administrative functions. In December 2016, the Company entered into a purchase and sale agreement to acquire its existing European headquarters in Aachen, Germany. Pursuant to the purchase and sale agreement, the Company expects, subject to closing conditions, to acquire the property for 11.0€ million (approximately $11.6 million at December 31, 2016 exchange rates) in the first half of calendar 2017.

The Company also entered into a lease agreement in October 2016 through September 2021 for an office in Tokyo, Japan which houses regulatory and training personnel as we prepare for commercial launch in Japan. The annual rent expense for this lease agreement is estimated to be $0.9 million.

License Agreements

In April 2014, the Company entered into an exclusive license agreement for the rights to certain optical sensor technologies in the field of cardio-circulatory assist devices. The Company made a $1.5 million upfront payment upon execution of the agreement and could make additional payments of up to $4.5 million upon the achievement of certain development milestones. The Company paid approximately $0.8 million in development milestones which are included with research and development expenses for the three and nine months ended December 31, 2016.

Litigation

From time to time, the Company is involved in legal and administrative proceedings and claims of various types. In some actions, the claimants seek damages, as well as other relief, which, if granted, would require significant expenditures. The Company records a liability in its condensed consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a loss is not probable or cannot be reasonably estimated, a liability is not recorded in its condensed consolidated financial statements.

On April 25, 2014, the Company received an administrative subpoena from the Boston regional office of the United States Department of Health and Human Services, or HHS, Office of Inspector General requesting materials relating to the Company’s reimbursement of employee expenses and remuneration to healthcare providers from July 2012 through December 2012, in connection with a civil investigation under the False Claims Act (the “FCA Investigation”). Subsequently, the Company received Civil Investigative Demands from the U.S. Attorney’s Office for the District of Massachusetts that collectively sought additional information relating to this matter for the time period of January 1, 2011 through September 14, 2016. The Company continues to cooperate fully with the government in this investigation. We are not able to predict what action, if any, might be taken in the future as a result of the investigation.

Thoratec Corporation (“Thoratec”) has challenged a number of Company owned patents in the European Patent Office or EPO, in Germany, and in the United Kingdom in connection with the launch of their HeartMate PHP medical device, or PHP, in Europe. These actions all relate to Thoratec’s ability to manufacture and sell their PHP product in Europe. These actions do not cover the Company’s ability to manufacture or sell its Impella products. Thoratec was acquired by St. Jude Medical, Inc. in October 2015, and St. Jude Medical, Inc. was acquired by Abbott Laboratories in January 2017.

In October 2012, Thoratec filed a notice of opposition in the EPO to a Company owned European patent covering a ‘pigtail’ feature on a blood pump. In October 2014, the EPO dismissed Thoratec’s opposition, and in December 2014, Thoratec filed a notice of appeal. The appeal was heard on January 20, 2017 by the EPO Board of Appeals. The Company prevailed at the Board of Appeals and succeeded in upholding the patent in an amended form. The approved amended claim covers the combination of a blood pump with a pigtail and an expanding suction basket and funnel feature. The Board of Appeals is the highest level at the EPO so there are no further challenges to this patent possible at the EPO by Thoratec.

In December 2014, Thoratec filed a nullity suit in German Federal Court against a German “pigtail” patent owned by the Company with a flexible extension feature, and auxiliary pigtail, basket and funnel features. The validity hearing was held in November 2016 and the German Federal Court found the patent invalid. The Company is appealing this decision.

In August 2015, Thoratec filed a nullity action in German Federal Court against two Company owned patents covering a “magnetic clutch” feature. These magnetic clutch patents were acquired by the Company in July 2014, in connection with its acquisition of ECP and AIS. The validity hearing for the magnetic clutch patents is scheduled for June 2017; the Court’s preliminary opinion is that the magnetic clutch claims are invalid.

In September 2015, the Company filed counterclaims in the magnetic clutch action in Germany asserting that the PHP product infringes the two magnetic clutch patents and the two pigtail patents. The infringement trial has been stayed, pending resolution of the German and EPO nullity actions.

In July 2015, Thoratec filed a nullity action in the High Court of Justice of England and Wales against the Company’s U.K. “magnetic clutch” patents acquired from ECP and AIS. In October 2015, Thoratec added a non-infringement claim seeking a declaration that their PHP product does not infringe the patents in the United Kingdom. Thoratec’s claims in the U.K. were heard at trial in early October 2016. While the English Court found on October 28, 2016, that the PHP would infringe a number of claims contained within the Company’s patents, the Court found those claims to be invalid because of obviousness or lack of novelty. The Company is in the process of appealing the Court’s decision. Under UK law, the successful party normally receives at least a portion of the legal costs that it reasonably and proportionately incurred. The Company is expecting that it will have to pay for at least a portion of Thoratec’s attorney/court costs. As a result, the Company recorded a contingent liability of $2.3 million at December 31, 2016 as an estimate of these Thoratec attorney fees that it may pay for this action, which is included with selling, general and administrative expenses for the three and nine months ended December 31, 2016.

In December 2015, the Company received a letter from Maquet Cardiovascular LLC, or Maquet, a subsidiary of the Getinge Group, and maker of the intra-aortic balloon pump, asserting that the Company’s Impella products infringe certain claims having guidewire, lumen and sensor features and which were in two Maquet patents and one pending patent application in the U.S. and elsewhere, and encouraged the Company to discuss taking a license from Maquet. In January 2016, the Company responded to Maquet stating that it believed that the cited claims were invalid and that its Impella products did not infringe the cited patents. In May 2016, Maquet sent an additional letter notifying the Company that the pending U.S. patent application had been issued as a U.S. patent and repeated their earlier assertion and encouraged the Company to discuss taking a license from Maquet. The three patents expire September 2020, December 2020 and October 2021. On May 19, 2016, the Company filed suit in U.S. District Court for the District of Massachusetts, or D. Mass., against Maquet seeking a declaratory judgment that the Company’s Impella products do not infringe Maquet’s cited patent rights.

On August 24, 2016, Maquet sent another letter to the Company identifying four new U.S. continuation patent filings with claims that Maquet alleges are infringed by the Company’s Impella products. Of the four U.S. continuation applications, one issued as a patent on January 17, 2017, one is scheduled to issue on February 7, 2017, one is allowed by the U.S. Patent Office, and one has not begun substantive prosecution. All of these filings that issue as US patents will expire in September 2020. On September 23, 2016, Maquet filed a response to the Company’s suit in D. Mass., including various counterclaims alleging that the Company’s Impella 2.5, Impella CP, Impella 5.0, and Impella RP heart pumps infringe certain claims of the three original issued U.S. patents. The case is in its early stages. A scheduling conference was held on January 30, 2017. The Markman hearing is scheduled for November 2017.

With the exception of the Thoratec attorney fees in the U.K. court hearing, the Company is unable to estimate a potential liability with respect to the legal matters noted above. There are numerous factors that make it difficult to meaningfully estimate possible loss or range of loss at this stage of the legal proceedings, including that the FCA Investigation and patent disputes with Thoratec and Maquet remain either in relatively early stages, or there are significant factual and legal issues to be resolved and information obtained or rulings made during any lawsuits or investigations could affect the methodology for calculation.