Memorex 2013 Annual Report Download - page 19

are subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes
referred to as “patent trolls,” who may seek monetary settlements from us, our competitors, suppliers and resellers including
the One-Blue litigation described below. Consequently, as of December 31, 2013, we are unable to reasonably estimate the
ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is
reasonably possible that the ultimate resolution of these matters could materially affect our financial condition, results of
operations and cash flows.
On May 22, 2013, Imation was sued in U.S. District Court for the District of Delaware by five entities: One-Blue, LLC
(One-Blue), which is an entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-
Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation. The plaintiffs allege that
Imation’s sales of certain Blu-ray discs infringe six patents and seek unspecified damages, treble damages, and attorney’s
fees. On June 13, 2013, Imation filed an Answer, Affirmative Defenses, and Counterclaims, naming various defenses
including that plaintiffs are barred, in whole or in part, from any recovery or relief by their refusal to license the patents-in-suit
under fair, reasonable, and nondiscriminatory terms. Imation intends to vigorously defend the case. This matter is now in the
discovery phase for issues relating to determination of a fair, reasonable, and nondiscriminatory royalty rate. In addition,
Imation has a dispute with One-Blue regarding One-Blue’s refusal to license its Japanese Blu-ray patents under fair,
reasonable, and nondiscriminatory terms in Japan, where Imation’s sales of Blu-ray discs are substantially greater than in the
U.S. Imation Corporation Japan, Imation’s Japanese subsidiary, has sued One-Blue in Japan regarding its unlawful
interference with certain of our customer relationships. Imation has notified its manufacturers of their indemnity obligations
that it believes cover a portion of its liability, if any, to One-Blue and the other plaintiffs.
Copyright Levies
In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright
levy. The levies are intended to compensate copyright holders with “fair compensation” for the harm caused by private copies
made by natural persons of protected works under the European Copyright Directive, which became effective in 2002
(Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies
remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems
of EU member countries must comply with the Directive, but individual member countries are responsible for administering
their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making
activities. On October 21, 2010, the European Court of Justice (ECJ) ruled that fair compensation is an autonomous
European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The ECJ
stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private
copying. The ECJ also stated that the indiscriminate application of the private copying levy to devices not made available to
private users and clearly reserved for uses other than private copying is incompatible with the Directive. The ECJ ruling made
clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of
applicable products, including the Company) when sales of optical media are made to natural persons presumed to be
making private copies. Within this disclosure, we use the term “commercial channel sales” when referring to products
intended for uses other than private copying and “consumer channel sales” when referring to products intended for uses
including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to
various ongoing collecting societies related to commercial channel sales. Based on the ECJ’s October 2010 ruling and
subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and
should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 ECJ ruling, we
began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals (totaling
$7.8 million) for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability
for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to recent court
rulings that are discussed below. As of December 31, 2013 and 2012, we had accrued liabilities of $10.0 million and
$27.7 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.
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