Commitments and Contingencies
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9 Months Ended |
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Oct. 31, 2011
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Commitments and Contingencies |
7. Commitments and Contingencies
ARRIS Litigation
On
July 31, 2009, ARRIS Group, Inc. (“ARRIS”) filed a
contempt motion in the U.S. District Court for the District of
Delaware against SeaChange International relating to U.S. Patent No
5,805,804 (the “804 patent”), a patent in which ARRIS
has an ownership interest. In its motion, ARRIS is seeking further
patent royalties and the enforcement of the permanent injunction
entered by the Court on April 6, 2006 against certain SeaChange
products. On August 3, 2009, SeaChange filed a complaint seeking a
declaratory judgment from the Court that its products do not
infringe the ‘804 patent and asserting certain equitable
defenses. On June 4, 2010, the Court entered an Order staying the
declaratory judgment action pending resolution of the contempt
proceeding. On September 2, 2011, the Court entered an Order in
which it concluded that a contempt proceeding is the appropriate
procedure for resolving the parties’ dispute and that further
factual and legal determinations would be necessary. The Order made
no determinations as to liability. No schedule has been set by the
Court for the additional proceedings. The Company believes that its
products do not infringe on the ‘804 patent and that it has
meritorious defenses against the suit, however, the ultimate
resolution of the matter is not reasonably estimable at this time,
but could result in a material liability for the
Company.
Indemnification and Warranties
SeaChange provides indemnification, to the extent permitted by law,
to its officers, directors, employees and agents for liabilities
arising from certain events or occurrences while the officer,
director, employee, or agent is or was serving at
SeaChange’s request in such capacity. With respect to
acquisitions, SeaChange provides indemnification to or assumes
indemnification obligations for the current and former directors,
officers and employees of the acquired companies in accordance with
the acquired companies’ bylaws and charter. As a matter of
practice, SeaChange has maintained directors' and officers’
liability insurance including coverage for directors and officers
of acquired companies.
SeaChange
enters into agreements in the ordinary course of business with
customers, resellers, distributors, integrators and suppliers. Most
of these agreements require SeaChange to defend and/or indemnify
the other party against intellectual property infringement claims
brought by a third party with respect to SeaChange’s
products. From time to time, SeaChange also indemnifies customers
and business partners for damages, losses and liabilities they may
suffer or incur relating to personal injury, personal property
damage, product liability, and environmental claims relating to the
use of SeaChange’s products and services or resulting from
the acts or omissions of SeaChange, its employees, authorized
agents or subcontractors. For example, SeaChange has received
requests from several of its customers for indemnification of
patent litigation claims asserted by Acacia Media Technologies, USA
Video Technology Corporation, Multimedia Patent Trust, Microsoft
Corporation, VTran Media Technologies and ActiveVideo Networks,
Inc. Management performed an analysis of these requests, evaluating
whether any potential losses were probable and
estimable.
SeaChange
warrants that its products, including software products, will
substantially perform in accordance with its standard published
specifications in effect at the time of delivery. Most warranties
have at least a one year duration that generally commence upon
installation. In addition, SeaChange provides maintenance support
to customers and therefore allocates a portion of the product
purchase price to the initial warranty period and recognizes
revenue on a straight line basis over that warranty period related
to both the warranty obligation and the maintenance support
agreement. When SeaChange receives revenue for extended warranties
beyond the standard duration, it is deferred and recognized on a
straight line basis over the contract period. Related costs are
expensed as incurred.
In
the ordinary course of business, SeaChange provides minimum
purchase guarantees to certain of its vendors to ensure continuity
of supply against the market demand. Although some of these
guarantees provide penalties for cancellations and/or modifications
to the purchase commitments as the market demand decreases, most of
the guarantees do not. Therefore, as the market demand decreases,
SeaChange re-evaluates the accounting implications of guarantees
and determines what charges, if any, should be
recorded.
With
respect to its agreements covering product, business or entity
divestitures and acquisitions, SeaChange provides certain
representations and warranties and agrees to indemnify and hold
such purchasers harmless against breaches of such representations,
warranties and covenants. With respect to its acquisitions,
SeaChange may, from time to time, assume the liability for certain
events or occurrences that took place prior to the date of
acquisition.
SeaChange
provides such guarantees and indemnification obligations after
considering the economics of the transaction and other factors
including, but not limited to, the liquidity and credit risk of the
other party in the transaction. SeaChange believes that the
likelihood is remote that any such arrangement could have a
material adverse effect on its financial position, results of
operation or liquidity. SeaChange records liabilities, as disclosed
above, for such guarantees based on the Company’s best
estimate of probable losses which considers amounts recoverable
under any recourse provisions.
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