LITIGATION AND CONTINGENCIES	3 Months Ended
Mar. 31, 2014
LITIGATION AND CONTINGENCIES
LITIGATION AND CONTINGENCIES	LITIGATION AND CONTINGENCIES In addition to the matters specifically described below, the Company is involved in other legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on the Company’s business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately. The Company records reserves for claims and lawsuits when they are probable and reasonably estimable. Except as otherwise specifically noted, the Company currently cannot determine the ultimate resolution of the matters described below. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, the Company has not recognized in its condensed consolidated financial statements the potential liability that may result from these matters. Further, for such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made and an estimate of the reasonably possible loss cannot be made at this time. If one or more of these matters is determined against the Company, it could have a material adverse effect on the Company’s earnings, liquidity and financial condition. The Company continues to gather additional facts and information related to insurance billing and healthcare compliance issues and marketing and promotional practices in connection with these legal and administrative proceedings with the assistance of legal counsel. Department of Justice Investigation On December 31, 2013, the Company entered into a Deferred Prosecution Agreement (“DPA”) with the Department of Justice (the "DOJ"). The DPA resolves the ongoing investigation by the DOJ regarding allegations of securities and related fraud committed under a previous management team. In conjunction with the DPA, the DOJ concurrently filed a criminal information concerning a single-count of conspiracy to commit wire and securities fraud. The DPA is for a 24 month period and, subject to its successful completion, the DOJ agrees that the DPA will expire and that the DOJ will seek dismissal of the criminal information. Pursuant to the DPA, ArthroCare paid a $30 million fine during the first quarter of 2014 to the DOJ and agreed to maintain a compliance program meeting certain criteria specified in the DPA. ArthroCare also must report annually on the status of the Compliance Program to the DOJ. False Claims Act Investigation In the first quarter of 2012, the Company received a Civil Investigative Demand ("CID") from the DOJ, requesting information related to the marketing of its radio-frequency ablation devices, which could implicate the False Claims Act, 31 U.S.C. § 3729. On January 17, 2014, a representative of the DOJ confirmed to the Company that the CID related to a qui tam case, in which the DOJ elected not to intervene, had been dismissed by the United States District Court in the Eastern District of New York. The case, United States of America ex rel. Michael Scherl v. ArthroCare Corporation et al., 2:11-cv-00668-LDW-AKT (E.D.N.Y. Feb 10, 2011), had previously been filed under seal and alleged violations of the False Claims Act. Based on the confirmation from the DOJ, the Company believes that the CID matter is closed. Legal Proceedings Related to the Merger Shortly following the announcement of the Merger (see further discussion in Note 2 above), eight putative class action and/or derivative lawsuits were filed in the Court of Chancery of the State of Delaware (the “Court”) by alleged stockholders of ArthroCare against various combinations of the Company, the individual directors of the Company, Smith & Nephew, Merger Sub, Parent HoldCo, One Equity Partners LLC, One Equity Partners, ("OEP" and together with One Equity Partners LLC, the “OEP Entities”), J.P. Morgan Securities LLC (“J.P. Morgan Securities”), and JPMorgan Chase & Co. (together with its subsidiaries, “JPM”). By orders entered on February 25, March 14, and March 19, 2014, the Court consolidated these actions under the caption In re ArthroCare Corporation Stockholder Litigation , Consol. C.A. No. 9313-VCL (the “Consolidated Action”), and appointed co-lead plaintiffs and co-lead counsel. On March 18, 2014, co-lead plaintiffs filed a Verified Consolidated Class Action and Derivative Complaint (the “Complaint”) in the Consolidated Action. The Complaint generally alleges, among other things, that the directors of the Company breached their fiduciary duties to the Company’s stockholders and that Smith & Nephew, Merger Sub, Parent HoldCo, the OEP Entities, J.P. Morgan Securities, and JPMorgan Chase & Co. aided and abetted these fiduciary breaches. In support of these claims, the lawsuits generally allege, among other things, that the Merger consideration undervalues the Company, that the sales process leading up to the Merger was flawed and influenced by conflicts of interest, that JPM, J.P. Morgan Securities, and the OEP Entities facilitated the sale of the Company to Smith & Nephew in order to facilitate OEP’s exit from its investment in the Company, assist OEP and JPM in the spin-off of OEP out of JPM, and obtain for JPM and its affiliates fees for roles as financial adviser to Smith & Nephew in the Merger and in the transaction financing for the Merger, and that the Merger Agreement contains deal-protection provisions that unduly favor Smith & Nephew and deter potential superior proposals. The Complaint also alleges that the Merger violates 8 Del C. § 203 (“Section 203”). In support of this claim, the Complaint alleges that Smith & Nephew became an owner of 15% or more of the Company’s voting securities and an interested stockholder in the Company (as those terms are defined in Section 203) by engaging J.P. Morgan Securities and a JPM subsidiary as its financial adviser and loan underwriter, respectively, in connection with the Merger. In light of this allegation, the Complaint further alleges that because the Merger is not subject to approval of holders of 66 2 / 3 % of the Company’s outstanding shares (other than those shares deemed to be owned by Smith & Nephew), the Merger violates Section 203. The Complaint also alleges that the Merger violates, and that the Company failed to enforce, certain standstill provisions of the August 14, 2009 Securities Purchase Agreement, which was entered into with the Company at the time that the OEP Entities invested in the Company. The Complaint further alleges that the preliminary proxy statement filed by the Company on March 6, 2014 omits certain material information concerning, among other things, the process leading up to the Merger, the financial interests of, and roles in the Merger by, JPM and the OEP Entities, the inputs and analysis in Piper Jaffray & Co.’s fairness opinion analysis, and the role of Goldman Sachs & Co. The Consolidated Action seeks, among other things, a declaratory judgment, to enjoin the Merger, unspecified money damages, costs and attorneys’ and experts’ fees. On March 21, 2014, the Court scheduled a hearing for April 28-29, 2014 to hear co-lead plaintiffs’ motion to preliminarily enjoin the Merger and hear, on an expedited basis, the parties’ arguments on whether Section 203 applies to the Merger. On April 9, 2014, following expedited discovery, the parties to the Consolidated Action reached an agreement in principle providing for the settlement of all of the claims in the Consolidated Action on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the MOU, Smith & Nephew agreed to pay or cause to be paid on behalf of itself and all other defendants twelve million U.S. dollars (US$12,000,000) (the “Settlement Payment”) into an interest-bearing account established by co-lead counsel (the “Common Fund”). Co-lead counsel for plaintiffs and the class will retain an administrator (the “Administrator”) to oversee the administration and distribution of the Common Fund and the Settlement Payment. The Administrator’s costs and any other costs of administering the Settlement Payment (other than the reasonable costs of notice to class members) will be deducted from the Common Fund prior to distribution of the Settlement Payment. Following final Court approval of the settlement, the Administrator will distribute the Settlement Payment on a pro rata basis to all holders of record of shares of ArthroCare common stock as of the date the Merger closes, except no such payment shall be made to any defendant in the Consolidated Action or its respective affiliates for their own account(s), pursuant to further terms and conditions set forth in the MOU. In addition, pursuant to the MOU, defendants acknowledged that the pendency and prosecution of the Consolidated Action were causal factors underlying ArthroCare’s decision to include certain supplemental disclosures in the definitive proxy statement filed by ArthroCare with the SEC on April 3, 2014. Plaintiffs and plaintiffs’ counsel intend to petition the Court for an award of attorneys’ fees and expenses, to which defendants reserve all rights. The parties to the Consolidated Action have agreed that any such award will not be deducted from the Common Fund. The MOU further provides that, among other things, (a) the parties will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Court for review and approval; (b) the Stipulation will provide for dismissal of the Consolidated Action on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the Merger; and (d) the proposed settlement is conditioned on, among other things, consummation of the Merger, completion of confirmatory discovery, class certification, and final approval by the Court after notice to ArthroCare’s stockholders.

LITIGATION AND CONTINGENCIES

In addition to the matters specifically described below, the Company is involved in other legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on the Company’s business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.

The Company records reserves for claims and lawsuits when they are probable and reasonably estimable. Except as otherwise specifically noted, the Company currently cannot determine the ultimate resolution of the matters described below. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, the Company has not recognized in its condensed consolidated financial statements the potential liability that may result from these matters. Further, for such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made and an estimate of the reasonably possible loss cannot be made at this time. If one or more of these matters is determined against the Company, it could have a material adverse effect on the Company’s earnings, liquidity and financial condition.

The Company continues to gather additional facts and information related to insurance billing and healthcare compliance issues and marketing and promotional practices in connection with these legal and administrative proceedings with the assistance of legal counsel.

Department of Justice Investigation

On December 31, 2013, the Company entered into a Deferred Prosecution Agreement (“DPA”) with the Department of Justice (the "DOJ"). The DPA resolves the ongoing investigation by the DOJ regarding allegations of securities and related fraud committed under a previous management team.

In conjunction with the DPA, the DOJ concurrently filed a criminal information concerning a single-count of conspiracy to commit wire and securities fraud. The DPA is for a 24 month period and, subject to its successful completion, the DOJ agrees that the DPA will expire and that the DOJ will seek dismissal of the criminal information. Pursuant to the DPA, ArthroCare paid a $30 million fine during the first quarter of 2014 to the DOJ and agreed to maintain a compliance program meeting certain criteria specified in the DPA. ArthroCare also must report annually on the status of the Compliance Program to the DOJ.

False Claims Act Investigation

In the first quarter of 2012, the Company received a Civil Investigative Demand ("CID") from the DOJ, requesting information related to the marketing of its radio-frequency ablation devices, which could implicate the False Claims Act, 31 U.S.C. § 3729. On January 17, 2014, a representative of the DOJ confirmed to the Company that the CID related to a qui tam case, in which the DOJ elected not to intervene, had been dismissed by the United States District Court in the Eastern District of New York. The case, United States of America ex rel. Michael Scherl v. ArthroCare Corporation et al., 2:11-cv-00668-LDW-AKT (E.D.N.Y. Feb 10, 2011), had previously been filed under seal and alleged violations of the False Claims Act. Based on the confirmation from the DOJ, the Company believes that the CID matter is closed.

Legal Proceedings Related to the Merger

Shortly following the announcement of the Merger (see further discussion in Note 2 above), eight putative class action and/or derivative lawsuits were filed in the Court of Chancery of the State of Delaware (the “Court”) by alleged stockholders of ArthroCare against various combinations of the Company, the individual directors of the Company, Smith & Nephew, Merger Sub, Parent HoldCo, One Equity Partners LLC, One Equity Partners, ("OEP" and together with One Equity Partners LLC, the “OEP Entities”), J.P. Morgan Securities LLC (“J.P. Morgan Securities”), and JPMorgan Chase & Co. (together with its subsidiaries, “JPM”). By orders entered on February 25, March 14, and March 19, 2014, the Court consolidated these actions under the caption In re ArthroCare Corporation Stockholder Litigation , Consol. C.A. No. 9313-VCL (the “Consolidated Action”), and appointed co-lead plaintiffs and co-lead counsel.

On March 18, 2014, co-lead plaintiffs filed a Verified Consolidated Class Action and Derivative Complaint (the “Complaint”) in the Consolidated Action. The Complaint generally alleges, among other things, that the directors of the Company breached their fiduciary duties to the Company’s stockholders and that Smith & Nephew, Merger Sub, Parent HoldCo, the OEP Entities, J.P. Morgan Securities, and JPMorgan Chase & Co. aided and abetted these fiduciary breaches. In support of these claims, the lawsuits generally allege, among other things, that the Merger consideration undervalues the Company, that the sales process leading up to the Merger was flawed and influenced by conflicts of interest, that JPM, J.P. Morgan Securities, and the OEP Entities facilitated the sale of the Company to Smith & Nephew in order to facilitate OEP’s exit from its investment in the Company, assist OEP and JPM in the spin-off of OEP out of JPM, and obtain for JPM and its affiliates fees for roles as financial adviser to Smith & Nephew in the Merger and in the transaction financing for the Merger, and that the Merger Agreement contains deal-protection provisions that unduly favor Smith & Nephew and deter potential superior proposals.

The Complaint also alleges that the Merger violates 8 Del C. § 203 (“Section 203”). In support of this claim, the Complaint alleges that Smith & Nephew became an owner of 15% or more of the Company’s voting securities and an interested stockholder in the Company (as those terms are defined in Section 203) by engaging J.P. Morgan Securities and a JPM subsidiary as its financial adviser and loan underwriter, respectively, in connection with the Merger. In light of this allegation, the Complaint further alleges that because the Merger is not subject to approval of holders of 66 2 / 3 % of the Company’s outstanding shares (other than those shares deemed to be owned by Smith & Nephew), the Merger violates Section 203.

The Complaint also alleges that the Merger violates, and that the Company failed to enforce, certain standstill provisions of the August 14, 2009 Securities Purchase Agreement, which was entered into with the Company at the time that the OEP Entities invested in the Company. The Complaint further alleges that the preliminary proxy statement filed by the Company on March 6, 2014 omits certain material information concerning, among other things, the process leading up to the Merger, the financial interests of, and roles in the Merger by, JPM and the OEP Entities, the inputs and analysis in Piper Jaffray & Co.’s fairness opinion analysis, and the role of Goldman Sachs & Co. The Consolidated Action seeks, among other things, a declaratory judgment, to enjoin the Merger, unspecified money damages, costs and attorneys’ and experts’ fees.

On March 21, 2014, the Court scheduled a hearing for April 28-29, 2014 to hear co-lead plaintiffs’ motion to preliminarily enjoin the Merger and hear, on an expedited basis, the parties’ arguments on whether Section 203 applies to the Merger.

On April 9, 2014, following expedited discovery, the parties to the Consolidated Action reached an agreement in principle providing for the settlement of all of the claims in the Consolidated Action on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the MOU, Smith & Nephew agreed to pay or cause to be paid on behalf of itself and all other defendants twelve million U.S. dollars (US$12,000,000) (the “Settlement Payment”) into an interest-bearing account established by co-lead counsel (the “Common Fund”). Co-lead counsel for plaintiffs and the class will retain an administrator (the “Administrator”) to oversee the administration and distribution of the Common Fund and the Settlement Payment. The Administrator’s costs and any other costs of administering the Settlement Payment (other than the reasonable costs of notice to class members) will be deducted from the Common Fund prior to distribution of the Settlement Payment. Following final Court approval of the settlement, the Administrator will distribute the Settlement Payment on a pro rata basis to all holders of record of shares of ArthroCare common stock as of the date the Merger closes, except no such payment shall be made to any defendant in the Consolidated Action or its respective affiliates for their own account(s), pursuant to further terms and conditions set forth in the MOU. In addition, pursuant to the MOU, defendants acknowledged that the pendency and prosecution of the Consolidated Action were causal factors underlying ArthroCare’s decision to include certain supplemental disclosures in the definitive proxy statement filed by ArthroCare with the SEC on April 3, 2014. Plaintiffs and plaintiffs’ counsel intend to petition the Court for an award of attorneys’ fees and expenses, to which defendants reserve all rights. The parties to the Consolidated Action have agreed that any such award will not be deducted from the Common Fund.

The MOU further provides that, among other things, (a) the parties will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Court for review and approval; (b) the Stipulation will provide for dismissal of the Consolidated Action on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the Merger; and (d) the proposed settlement is conditioned on, among other things, consummation of the Merger, completion of confirmatory discovery, class certification, and final approval by the Court after notice to ArthroCare’s stockholders.