Memorex 2013 Annual Report Download - page 20

Since the October 2010 ECJ ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be
accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior
period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and
considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as
well as throughout the EU. Cost of goods sold for the year ended December 31, 2011 was reduced by $7.8 million due to
reversal of prior year obligations that were determined to be remote. We did not reverse any amounts into cost of goods sold
for prior year obligations in 2012. See following for discussion of reversals of copyright levies in 2013.
Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to
which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the
ECJ that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff’s documentation and
evidence for distinguishing between levies paid on commercial and consumer channel sales. Based on the ruling of this Italian
court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was
sufficient evidence that we may offset with the Italian collecting society the estimated $39 million we have overpaid for
copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 ECJ ruling)
against the amounts owed to the Italian collecting society for unpaid levies on consumer channel sales. As such, our liability
for Italian copyright levies in the amount of $13.6 million (existing at the time of the of the second quarter 2013 Italian court
decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a
reduction of cost of sales during the second quarter of 2013. We did not record a receivable for the remaining estimated
$25.4 million that we believed was owed to us by the Italian collection society for our historical over payment on levies
associated with commercial channel sales as we are not assured of its collectability. Rather, going forward, such amount
began to be realized as a reduction to cost of goods sold upon the incurrence of (and for the same amount of) valid levies for
consumer channel sales. During the remainder of 2013 we have off-set an additional $2.6 million (within cost of sales) against
a similar amount of consumer channel levies incurred and, accordingly, we have an estimated $22.8 million of historical over
payments of levies on commercial channel sales remaining to set-off in future periods.
The Italian court required sufficient documentation and evidence to support the determination of levies between those
paid on commercial versus consumer channel sales. We believe that we have utilized a methodology, and have sufficient
documentation and evidence, to fully support our estimates that we have overpaid $39 million to the Italian collection society
of levies on commercial channel sales and that we have incurred (but not paid) $13.6 million of levies on consumer channel
sales in Italy. However, such amounts could be subject to challenge in court and there is no certainty that our estimates would
be upheld and supported. Additionally, due to the expected continued decline in our sales associated with optical media
products, we cannot be assured that we will ever be able to fully realize the estimated amounts owed to us by the Italian
collection society through offsetting such amounts against levies incurred on future consumer channel sales or other
measures.
France. During the fourth quarter of 2013, a French court issued a favorable ruling to Imation in a case brought against
Imation in the fourth quarter of 2011 by the French levy society, Societie Pour la Perception de la Remuneration de la Copie
Privee Audiovisuelle et Sonore (Copie France). Copie France had sought a judicial order in summary proceedings to compel
Imation to pay to Copie France $3.6 million in withheld copyright levies. Imation had withheld levies otherwise due on
consumer channel sales against previous levies paid on commercial channel sales. Imation argued that there was a serious
legal dispute as to whether the demanded sums were owed, in light of what Imation believed to be the inconsistency between
the French levy system and the Directive, as interpreted by ECJ case law. In June 2012, the Paris Court of First Instance had
rejected Copie France’s claims, ruling that Imation had raised serious issues about the validity of the French levy scheme.
Copie France appealed that order, and on November 19, 2013, the French appeals court rejected Copie France’s appeal.
Based on the rulings of the French courts, in combination with other applicable levy and law-making activities within the EU,
including France, we believe there is sufficient evidence that we may offset with Copie France the estimated $55.1 million we
have overpaid for copyright levies in France (due to us paying levies on commercial channel sales prior to the October 21,
2010 ECJ ruling) against the amounts owed to Copie France for unpaid levies on consumer channel sales. As such, our
liability for French copyright levies in the amount of $9.5 million (existing at the time of the of the fourth quarter 2013 French
court decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a
reduction of cost of sales during the fourth quarter of 2013. We did not record a receivable for the remaining estimated
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