iHeartMedia 2011 Annual Report Download - page 27

ITEM 3. LEGAL PROCEEDINGS
We currently are involved in certain legal proceedings arising in the ordinary course of business and, as required, have
accrued an estimate of the probable costs for the resolution of those claims for which the occurrence of loss is probable and the
amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an
analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results
of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our
strategies related to these proceedings. Additionally, due to the inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have a material adverse effect on our financial condition or results of
operations.
We and a subsidiary of ours are co-defendants with Live Nation (which was spun off as an independent company in
December 2005) in 22 putative class actions filed by different named plaintiffs in various district courts throughout the country
beginning in May 2006. These actions generally allege that the defendants monopolized or attempted to monopolize the market for
“live rock concerts” in violation of Section 2 of the Sherman Act. Plaintiffs claim that they paid higher ticket prices for defendants’
“rock concerts” as a result of defendants’ conduct. They seek damages in an undetermined amount. On April 17, 2006, the Judicial
Panel for Multidistrict Litigation centralized these class action proceedings in the Central District of California. The district court has
certified classes in five “template” cases involving five regional markets: Los Angeles, Boston, New York City, Chicago and Denver.
Discovery has closed, and dispositive motions have been filed.
In the Master Separation and Distribution Agreement between us and Live Nation that was entered into in connection with
the spin-off of Live Nation in December 2005, Live Nation agreed, among other things, to assume responsibility for legal actions
existing at the time of, or initiated after, the spin-off in which we are a defendant if such actions relate in any material respect to the
business of Live Nation. Pursuant to the Agreement, Live Nation also agreed to indemnify us with respect to all liabilities assumed by
Live Nation, including those pertaining to the claims discussed above.
On or about July 12, 2006 and April 12, 2007, two of our operating businesses (L&C Outdoor Ltda. (“L&C”) and
Publicidad Klimes São Paulo Ltda. (“Klimes”), respectively) in the São Paulo, Brazil market received notices of infraction from the
state taxing authority, seeking to impose a value added tax (“VAT”) on such businesses, retroactively for the period from
December 31, 2001 through January 31, 2006. The taxing authority contends that these businesses fall within the definition of
“communication services” and as such are subject to the VAT.
L&C and Klimes have filed separate petitions to challenge the imposition of this tax. L&C’s challenge in the
administrative courts was unsuccessful at the first level, but successful at the second administrative level. The state taxing authority
filed an appeal to the third and final administrative level, which required consideration by a full panel of 16 administrative law judges.
On September 27, 2010, L&C received an unfavorable ruling at this final administrative level, which concluded that the VAT applied.
On December 15, 2011, a Special Chamber of the administrative court considered the reasonableness of the amount of the penalty
assessed against L&C and significantly reduced the penalty. With the reduction, the amounts allegedly owed by L&C are
approximately $8.6 million in taxes, approximately $4.3 million in penalties and approximately $18.4 million in interest (as of
December 31, 2011 at an exchange rate of 0.534). On January 27, 2012, L&C filed a writ of mandamus in the 8th lower public
treasury court in São Paulo, State of São Paulo, appealing the administrative court’s decision that the VAT applies. On that same day,
L&C filed a motion for an injunction barring the taxing authority from collecting the tax, penalty and interest while the appeal is
pending. The court denied the motion on January 30, 2012. L&C filed a motion for reconsideration, and in early February 2012, the
court granted that motion and issued an injunction.
Klimes’ challenge was unsuccessful at the first level of the administrative courts, and denied at the second administrative
level on or about September 24, 2009. On January 5, 2011, the administrative law judges at the third administrative level published a
ruling that the VAT applies but significantly reduced the penalty assessed by the taxing authority. With the penalty reduction, the
amounts allegedly owed by Klimes are approximately $9.7 million in taxes, approximately $4.8 million in penalties and
approximately $20.1 million in interest (as of December 31, 2011 at an exchange rate of 0.534). In late February 2011, Klimes filed a
writ of mandamus in the 13th lower public treasury court in São Paulo, State of São Paulo, appealing the administrative court’s
decision that the VAT applies. On that same day, Klimes filed a motion for an injunction barring the taxing authority from collecting
the tax, penalty and interest while the appeal is pending. The court denied the motion in early April 2011. Klimes filed a motion for
reconsideration with the court and also appealed that ruling to the São Paulo State Higher Court, which affirmed in late April 2011.
On June 20, 2011, the 13th lower public treasury court in São Paulo reconsidered its prior ruling and granted Klimes an injunction
suspending any collection effort by the taxing authority until a decision on the merits is obtained at the first judicial level.
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