8x8 2010 Annual Report Download - page 62

Minimum Third Party Customer Support Commitments
In the third quarter of 2010, the Company amended its contract with one of its third party customer support vendors containing
a minimum monthly commitment of approximately $430,000 effective April 1, 2010. The agreement requires a 150-day notice
to terminate. At March 31, 2010, the total remaining obligation under the contract was $2.2 million.
Legal Proceedings
The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can
arise in the normal course of the Company’s operations. Pending or future litigation could be costly, could cause the diversion
of management’s attention and could upon resolution, have a material adverse effect on the Company’s business, results of
operations, financial condition and cash flows.
On January 27, 2010, the Company was named a defendant in a lawsuit, Nikki Meierdiercks et al. v. 8x8, Inc., filed by three
former employees in Santa Clara County Superior Court as a putative class action seeking damages and various penalties under
the California Labor Code for alleged unpaid overtime, meal breaks, rest breaks and alleged late wage payments and
unreimbursed business expenses. The Plaintiffs’ filed a First Amended Complaint on April 29, 2010 and the Company filed its
Answer to the First Amended Complaint on May 26, 2010. The Company has factual and legal defenses to these claims and is
presenting a vigorous defense. Plaintiffs have not made a specific monetary demand and the Company cannot estimate
potential liability in this case at this early stage of litigation.
In April 2009, the Company entered into a license and settlement agreement with a patent holder. The agreement requires the
Company to pay eight quarterly payments over the next two years. At March 31, 2010, future minimum annual payments
under the license and settlement agreement were as follows (in thousands):
Year ending March 31:
2011 $ 250
Total minimum payments 250
Less: Amount representing interest (5)
245
Less: Short-term portion of license fee (245)
Long-term portion of license fee obligation $ -
State and Municipal Taxes
For a period of time, the Company did not collect or remit state or municipal taxes (such as sales, excise, and ad valorem
taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services, although the Company
historically complied with the California sales tax and financial contributions to the 9-1-1 system and Universal Service Fund.
The Company has received inquiries or demands from a number of state and municipal taxing agencies seeking payment of
Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services.
Although the Company has consistently maintained that these Taxes do not apply to its service for a variety of reasons
depending on the statute or rule that establishes such obligations, a number of states have changed their statutes as part of
streamlined sales tax initiatives and, in response to these statutory changes, the Company has begun collecting and remitting
Taxes in those states. Some of these Taxes could apply to the Company retroactively, and three states currently are conducting
Tax audits of the Company's records. The Company has accrued a tax liability of $0.1 million at March 31, 2010 as its current
estimate of the potential tax exposure for any retroactive Tax assessment by numerous states and municipalities.
Regulatory
VoIP communication services, like ours are subject to less regulation at the federal level than traditional telecommunication
services and states are preempted from regulating such services. Many regulatory actions are underway or are being
contemplated by federal and state authorities, including the FCC, and state regulatory agencies. The FCC initiated a notice of
public rule-making in early 2004 to gather public comment on the appropriate regulatory environment for IP telephony which
would include the services we offer. In November 2004, the FCC ruled that the VoIP service of a competitor and "similar"
services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy telecommunication carrier
regulations.
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