Memorex 2014 Annual Report Download - page 91

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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 court rulings that are discussed below. As of December 31,
2014 and 2013, we had accrued liabilities of $9.3 million and $10.0 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) whether 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. 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 $39.0 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 last half of 2013 we offset an additional $2.6 million (within cost of sales)
and in 2014 we offset $3.4 million (within cost of sales) against a similar amount of consumer channel levies
incurred and, accordingly, we have an estimated $19.4 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 $39.0 million to
the Italian collection society of levies on commercial channel sales and that we had incurred (but not paid) $19.6
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