Memorex 2013 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
though it is reasonably possible that the ultimate amount of expense relating to remediation actions and compliance with
applicable environmental laws could have a material impact on our results of operations.
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.
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
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