HP 2014 Annual Report Download - page 164

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Net Earnings Per Share (Continued)
(3) HP excludes options where the assumed proceeds exceed the average market price from the
calculation of diluted net EPS, because their effect would be anti-dilutive. The assumed proceeds
of an option include the sum of its exercise price, average unrecognized compensation cost and
excess tax benefits.
Note 15: Litigation and Contingencies
HP is involved in lawsuits, claims, investigations and proceedings, including those identified below,
consisting of IP, commercial, securities, employment, employee benefits and environmental matters that
arise in the ordinary course of business. HP accrues a liability when management believes that it is both
probable that a liability has been incurred and the amount of loss can be reasonably estimated. HP
believes it has recorded adequate provisions for any such matters and, as of October 31, 2014, it was
not reasonably possible that a material loss had been incurred in excess of the amounts recognized in
HP’s financial statements. HP reviews these matters at least quarterly and adjusts its accruals to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and
events pertaining to a particular case. Based on its experience, HP believes that any damage amounts
claimed in the specific matters discussed below are not a meaningful indicator of HP’s potential
liability. Litigation is inherently unpredictable. However, HP believes it has valid defenses with respect
to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially
affected in any particular period by the resolution of one or more of these contingencies.
Litigation, Proceedings and Investigations
Copyright Levies. As described below, proceedings are ongoing or have been concluded involving
HP in certain European Union (‘‘EU’’) member countries, including litigation in Germany, Belgium
and Austria, seeking to impose or modify levies upon equipment (such as multi-function devices
(‘‘MFDs’’), personal computers (‘‘PCs’’) and printers) and alleging that these devices enable producing
private copies of copyrighted materials. Descriptions of some of the ongoing proceedings are included
below. The levies are generally based upon the number of products sold and the per-product amounts
of the levies, which vary. Some EU member countries that do not yet have levies on digital devices are
expected to implement similar legislation to enable them to extend existing levy schemes, while some
other EU member countries have phased out levies or are expected to limit the scope of levy schemes
and applicability in the digital hardware environment, particularly with respect to sales to business
users. HP, other companies and various industry associations have opposed the extension of levies to
the digital environment and have advocated alternative models of compensation to rights holders.
VerwertungsGesellschaft Wort (‘‘VG Wort’’), a collection agency representing certain copyright
holders, instituted legal proceedings against HP in the Stuttgart Civil Court seeking to impose levies on
printers. On December 22, 2004, the court held that HP is liable for payments regarding all printers
using ASCII code sold in Germany but did not determine the amount payable per unit. HP appealed
this decision in January 2005 to the Stuttgart Court of Appeals. On May 11, 2005, the Stuttgart Court
of Appeals issued a decision confirming that levies are due. On June 6, 2005, HP filed an appeal to the
German Federal Supreme Court in Karlsruhe. On December 6, 2007, the German Federal Supreme
Court issued a judgment that printers are not subject to levies under existing law. VG Wort appealed
the decision by filing a claim with the German Federal Constitutional Court challenging the ruling that
printers are not subject to levies. On September 21, 2010, the Constitutional Court published a decision
holding that the German Federal Supreme Court erred by not referring questions on interpretation of
German copyright law to the Court of Justice of the European Union (‘‘CJEU’’) and therefore revoked
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