NOTE 11. COMMITMENTS AND CONTINGENCIES

Leases

We have a non-cancelable operating lease for our office building and we are obligated to make payments under non-cancelable operating leases for automobiles used by our sales force. Future minimum lease payments under our non-cancelable operating leases at March 31, 2017 were as follows (in thousands):


Year Ending December 31,	Lease Payments
2017 (remainder)	$	3,159
2018		3,573
2019		2,623
2020		1,986
2021		1,728
Thereafter		1,572
Total	$	14,641

In April 2012, the Company entered into an office and laboratory lease agreement to lease approximately 52,500 rentable square feet in Newark, California commencing on December 1, 2012. The Company occupied approximately 8,000 additional rentable square feet commencing in July 2015. The lease will expire on November 30, 2022. However, the Company has the right to renew the lease for one additional five year term, provided that written notice is made to the landlord no later than 12 months prior to the lease expiration.

The Company was allowed to control physical access to the premises upon signing the lease. Therefore, in accordance with the applicable accounting guidance, the lease term was deemed to have commenced in April 2012. Accordingly, the rent free periods and the escalating rent payments contained within the lease are being recognized on a straight-line basis from April 2012. The Company will pay approximately $9.1 million in aggregate rent over the remaining term of the lease for the above premises. Deferred rent was approximately $1.6 million as of March 31, 2017 and $1.6 million as of December 31, 2016. Rent expense relating to the office and laboratory lease agreement for the three months ended March 31, 2017 and March 31, 2016, was $0.1 million and $0.2 million, respectively.

The Company has an operating lease agreement with Enterprise FM Trust (Enterprise) for the lease of vehicles to be used by the Company's sales force, with the lease terms ranging from 18 to 36 months. The Company will pay approximately $5.5 million in aggregate rent over the remaining term of the lease for the vehicles. Rent expense relating to the lease of cars for the three months ended March 31, 2017 and March 31, 2016 was $0.8 million and $0.8 million, respectively.

Legal Matters

Depomed v. NUCYNTA and NUCYNTA ER ANDA Filers

Actavis & Alkem: In July 2013, Janssen Pharma filed patent infringement lawsuits in the U.S. District Court for the District of New Jersey (D.N.J.) against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market generic versions of NUCYNTA and NUCYNTA ER before the expiration of U.S. Reissue Patent No. 39,593 (the ’593 Patent), U.S. Patent No. 7,994,364 (the ’364 Patent) and, as to Actavis only, U.S. Patent No. 8,309,060 (the ’060 Patent). In December 2013, Janssen Pharma filed an additional complaint in the D.N.J. against Alkem asserting that U.S. Patent No. 8,536,130 (the ’130 Patent) relates to Alkem’s ANDA seeking approval to market a generic version of NUCYNTA ER. In August 2014, Janssen Pharma amended the complaint against Alkem to add additional dosage strengths.

Sandoz & Roxane: In October 2013, Janssen Pharma received a Paragraph IV Notice from Sandoz, Inc. (Sandoz) with respect to NUCYNTA related to the ’364 Patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (Roxane) with respect to NUCYNTA related to the ’364 and ’593 Patents. In response to those notices, Janssen Pharma filed an additional complaint in the D.N.J. against Roxane and Sandoz asserting the ’364 Patent against Sandoz and the ’364 and ’593 Patents against Roxane. In April 2014, Janssen Pharma and Sandoz entered into a joint stipulation of dismissal of the case against Sandoz, based on Sandoz's agreement not to market a generic version of NUCYNTA products prior to the expiration of the asserted patents. In June 2014, in response to a Paragraph IV Notice from Roxane with respect to NUCYNTA ER, Janssen Pharma filed an additional complaint in the U.S. District Court for the District of New Jersey asserting the ’364, ’593, and ’130 Patents against Roxane.

Watson: In July 2014, in response to a Paragraph IV Notice from Watson Laboratories, Inc. (Watson) with respect to the NUCYNTA oral solution product and the ’364 and ’593 Patents, Janssen Pharma filed a lawsuit in the D.N.J. asserting the ’364 and ’593 Patents against Watson.

In each of the foregoing actions, the ANDA filers counterclaimed for declaratory relief of noninfringement and patent invalidity. At the time that the actions were commenced, Janssen Pharma was the exclusive U.S. licensee of the patents referred to above. On April 2, 2015, the Company acquired the U.S. rights to the NUCYNTA ER and NUCYNTA from Janssen Pharma. As part of the acquisition, the Company became the exclusive U.S. licensee of the patents referred to above. The Company was added as a plaintiff to the pending cases and is actively litigating them.

In September 2015, the Company filed an additional complaint in the D.N.J. asserting the ’130 Patent against Actavis. The ’130 Patent issued in September 2013 and was timely listed in the Orange Book for NUCYNTA ER, but Actavis did not file a Paragraph IV Notice with respect to this patent. In its new lawsuit, the Company claims that Actavis will infringe or induce infringement of the ’130 Patent if its proposed generic products are approved. In response, Actavis counterclaimed for declaratory relief of noninfringement and patent invalidity, as well as an order requiring the Company to change the corrected use code listed in the Orange Book for the ’130 Patent.

In February 2016, Actavis, Actavis UT, Roxane and Alkem each stipulated to infringement of the ’593 and ’364 patents. A two-week bench trial on the validity of the three asserted patents and infringement of the ’130 Patent was commenced on March 9, 2016. Closing arguments took place on April 27, 2016. On September 30, 2016, the Court issued its final decision. The Court found that the ’593, ’364 Patent, and ’130 Patents are all valid and enforceable, that Alkem will induce infringement of the ’130 Patent, and that Roxane and Actavis will not infringe the ’130 Patent.

On November 3, 2016, Alkem filed an appeal in the United States Court of Appeals for the Federal Circuit appealing the Court’s finding that the ’364 and ’130 Patents are not invalid and that Alkem infringes the ’130 Patent. The Company moved to terminate Alkem’s appeal on the grounds that a final judgment had not yet been entered by the Court, and the Federal Circuit deactivated Alkem’s appeal on December 16, 2016. On April 11, 2017, the Court entered final judgment in favor of the Company on the validity and enforceability of all three patents, on infringement of the ’593 and ’364 Patents by all defendants, and on infringement of the ’130 Patent against Alkem. The judgment includes an injunction enjoining all three defendants from engaging in certain activities with tapentadol (the active ingredient in NUCYNTA), and ordering the effective date of any approval of Actavis, Actavis UT, and Roxane’s ANDAs, and Alkem’s ANDA for NUCYNTA IR to be no earlier than the expiry of the ’364 Patent (June 27, 2025), and the effective date of any approval of Alkem’s ANDA for NUCYNTA ER to be no early than the expiry of the ’130 Patent (September 22, 2028). The period of exclusivity with respect to all four defendants may in the future be extended with the award of pediatric exclusivity.

The Company expects that defendants will reactivate the previously filed appeal now that final judgment has been entered. The Company is considering a cross-appeal with regard to the Court’s finding that Roxane and Actavis will not infringe the claims of the ’130 Patent.

‘364 Patent Inter Partes Review Petition

On January 15, 2016, Rosellini Scientific, LLC (with nXn Partners, LLC as an additional real party in interest) (Rosellini) filed with the Patent Trial and Appeal Board (PTAB) a petition to request an inter partes review (an IPR) of the ’364 Patent. On April 27, 2016, Grünenthal, the owner of the ’364 Patent, filed its Patent Owner Preliminary Response. An IPR is a proceeding that became available in September 2012 in accordance with the America Invents Act (the AIA). In an IPR, a petitioner may request that the PTAB reconsider the validity of issued patent claims on the basis of prior art in the form of printed publications and other patents. Any patent claim the PTAB determines to be unpatentable is stricken from the challenged patent. Any party may appeal final written decisions of the PTAB to the U.S. Court of Appeals for the Federal Circuit, but the PTAB’s decisions denying institution of an IPR are non-appealable. Accordingly, if the PTAB finds a challenged claim patentable, or declines to institute an IPR as to a challenged claim, the IPR petitioner is estopped from asserting in a patent infringement lawsuit that these claims are invalid on any ground the petitioner raised or reasonably could have raised in the IPR. On July 18, 2016, the PTAB declined to institute the IPR petition filed by Rosellini with respect to the ’364 Patent with respect to all patent claims subject of the petition.

Depomed v. Purdue

The Company has sued Purdue Pharma L.P (Purdue) for patent infringement in a lawsuit filed in January 2013 in the U.S. District Court for the District of New Jersey. The lawsuit arises from Purdue’s commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the U.S. and alleges infringement of U.S. Patent Nos. 6,340,475 (the ‘475 Patent) and 6,635,280 (the ‘280 Patent), which expired in September 2016.

On September 28, 2015, the district court stayed the Purdue lawsuit pending the decision of the U.S. Court of Appeals for the Federal Circuit (CAFC) in Purdue’s appeal of the PTAB’s Final Written Decisions described below. On June 30, 2016, the district court lifted the stay based on the CAFC’s opinion and judgment affirming the PTAB’s Final Written Decisions confirming the patentability of the patent claims of the ‘475 and ‘280 Patents Purdue had challenged. The parties filed opening Markman briefs on June 3, 2016 and their responsive Markman briefs in July 2016. On July 22, 2016, the parties submitted a proposed schedule for the Markman hearing. The Markham hearing was held on November 2, 2016 and on April 6, 2017, the Court issued a Markman order which is available on the docket. On June 10, 2016, the Company filed a motion for leave to file a second amended Complaint to plead willful infringement and remove claims of infringement related to U.S. Patent No. 6,723,340 (the ‘340 Patent) and 8,329,215 (the ‘215 Patent). On June 21, 2016, Purdue filed an opposition to the Company’s motion for leave to plead willful infringement, but did not oppose removing claims related to the ‘340 and ‘215 Patents. On June 28, 2016, the Company filed a reply brief to its motion for leave. On January 31, 2017, the Court granted the Company’s motion for leave to plead willful infringement.

On June 1, 2016, Purdue filed a motion for leave to amend its invalidity contentions to add allegations of indefiniteness and confirm that certain invalidity defenses remained in the case post-IPR proceedings. On June 21, 2016 the Company filed an opposition to Purdue’s motion for leave and a cross-motion to strike Purdue’s invalidity contentions. On November 4, 2016, the Court granted Purdue’s motion for leave to amend its invalidity contentions, and denied the Company’s cross-motion to strike. On October 28, 2016, Purdue moved for leave to amend its answer to add a counterclaim of unenforceability and affirmative defenses of inequitable conduct and unclean hands. On November 7, 2016, Depomed filed its opposition to Purdue’s motion for leave to amend its Answer. On November 14, 2016, Purdue filed a reply to its motion for leave to amend its Answer.

On February 1, 2017, Depomed filed a Second Amended Complaint pleading willful infringement. On February 15, 2017, Purdue answered Depomed’s Second Amended Complaint asserting counterclaims of non-infringement, invalidity and unenforceability. On March 6, 2017, Depomed moved to dismiss Purdue’s counterclaim of inequitable conduct and moved to strike affirmative defenses of inequitable conduct, unclean hands, and patent misuse. On March 20, 2017, Purdue filed an opposition to Depomed’s motion, and on March 27, 2017, Depomed filed a reply brief. The Court has not yet issued a ruling on Depomed’s motion to dismiss and motion to strike. On April 17, 2017, the Court issued an order finding Purdue’s motion to amend its Answer was moot. On April 18, 2017, the Court issued an order setting the close of fact discovery no earlier than May 19, 2017, depending on how it rules on Depomed’s motion to dismiss and motion to strike. Expert discovery is to be scheduled one month after the close of fact discovery after which dispositive motions may be filed and a final pretrial conference will be held. No trial date has been set by the Court, though the Company expects a trial may be scheduled at the end of 2017 or early 2018.

In response to petitions filed by Purdue, the PTAB instituted IPRs of certain of the claims asserted in the Company’s lawsuit against Purdue. In the IPRs initiated by Purdue, in July 2014, the PTAB declined to institute an IPR as to two claims of the ‘475 patent and two claims of the ‘280 Patent. The PTAB instituted an IPR as to the other 15 claims of the ‘475 Patent and as to the other ten claims of the ‘280 Patent asserted against Purdue. In July 2015, the PTAB issued Final Written Decisions confirming the patentability of all claims at issue. In March 2016, following Purdue’s appeal of the PTAB’s decisions, the CAFC affirmed the PTAB’s Final Written Decisions.

Depomed v. Horizon Pharma plc and Horizon Pharma, Inc.

In August 2015, Horizon Pharma plc and Horizon Pharma, Inc. (together, Horizon) filed suit in the Superior Court for the State of California against the Company and the members of the Company’s Board of Directors, alleging that bylaw amendments and a Rights Agreement the Company adopted in July 2015 violate the California Corporations Code and are unenforceable, and that the Board's actions in adopting them constituted a breach of fiduciary duty. Horizon moved for a preliminary injunction to invalidate the bylaw amendments and Rights Agreement. The court denied the motion on November 19, 2015.

Also in August 2015, the Company filed suit in the Superior Court for the State of California against Horizon, alleging a breach of contract and other violations of California law based on Horizon’s alleged possession and misuse of confidential information it obtained from Janssen Pharma under a confidentiality agreement (the Confidentiality Agreement) that Horizon entered into in connection with its attempt to acquire the U.S. rights to NUCYNTA, which we acquired from Janssen in April 2015.

On April 22, 2016, the Company and Horizon mutually agreed to settle each party’s respective claims. The primary terms of the settlement are confidential, and neither side has admitted any liability. As part of the settlement, Horizon has agreed to continue to maintain the confidentiality of any confidential information relating to NUCYNTA that it received from Janssen Pharma and it and its affiliates will not use any such confidential information. In addition, the parties agreed that through January 1, 2020, Horizon will not initiate another unsolicited takeover of the Company.

Depomed v. Strides Pharma Inc. and Strides Pharma Global Pte Limited

On May 5, 2017, the Company filed suit in the U.S. District Court for the District of New Jersey against Strides Pharma Inc. and Strides Pharma Global Pte Limited (collectively, Strides) based on Strides’ filing of an ANDA to market a generic version of ZIPSOR prior to the expiration of U.S. Patent Nos. 7,662,858; 7,884,095; 7,939,518; 8,110,606; 8,623,920; and 9,561,200 (the patents-in-suit). By letter dated March 27, 2017, Strides informed the Company that it had filed an ANDA for a generic version of ZIPSOR with Paragraph IV certifications against each of the patents-in-suit. The Company’s filing of the complaint against Strides resulted in an automatic 30-month stay of FDA approval of Strides’ ANDA, lasting until September 2019.

Previously, in July 2013, the Company filed suit against Banner Pharmacaps Inc. (Banner) and Watson Laboratories, Inc. (Watson) based on Banner’s filing of an ANDA for a generic version of ZIPSOR. The Company and the defendants reached a settlement of the case that permits Watson to begin selling their generic version of ZIPSOR on March 24, 2022, or earlier under certain circumstances. The Company believes that Banner and Watson may be entitled to 180-day exclusivity with respect to generic ZIPSOR.

General

The Company cannot reasonably predict the outcome of the pending legal proceedings described above, nor can the Company estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings or the amount of any gain in the event we prevail in litigation involving a claim for damages. As such, the Company is not currently able to estimate the impact of the above litigation on its financial position or results of operations.

The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of its business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth above, the Company is not currently involved in any matters that it believes may have a material adverse effect on its business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.