Adobe 2012 Annual Report Download - page 116

116
Royalties
We have royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally
based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under
our cost of products revenue on our Consolidated Statements of Income, was approximately $29.6 million, $29.8 million and
$34.1 million in fiscal 2012, 2011 and 2010, respectively.
Indemnifications
In the ordinary course of business, we provide indemnifications of varying scope to customers against claims of intellectual
property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims
by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not
been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future
results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for
certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification
period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of
future payments we could be required to make under these indemnification agreements is unlimited; however, we have director
and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We
believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
Legal Proceedings
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights,
including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted
litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by
diverting the attention and energies of management and key technical personnel. Although we have successfully defended or
resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual
property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on
unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions
restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or
require us to satisfy indemnification commitments with our customers including contractual provisions under various license
arrangements and service agreements.
In addition to intellectual property disputes, such as those discussed above and others, we are subject to legal proceedings,
claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other
matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts
of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether
potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate
disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed
and discussed with our Audit Committee and our independent registered public accounting firm.
We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss
can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise
specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any
claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may
be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate
is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we
believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our
consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of
one or more of such proceedings, claims or investigations.
Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)