Commitments and Contingencies

Operating Leases

The Company leases certain facilities and certain equipment under various operating agreements expiring through March 2021. In connection with its facilities lease agreements, the Company has signed unconditional, irrevocable letters of credit totaling $0.2 million as security for the leases.

The following table presents the composition of net rent expense included on the Consolidated Statements of Income (in thousands):



	Fiscal Year Ended
	October 26, 2013			October 27, 2012			October 29, 2011
Rent expense	$	26,199		$	25,867		$	26,576
Less: Sublease income	(6,834		)	(6,606		)	(5,643		)
	$	19,365		$	19,261		$	20,933

Future minimum lease payments under all non-cancellable operating leases as of October 26, 2013, excluding the contractual sublease income of $22.7 million, are as follows (in thousands):



Fiscal Year	Operating Leases
2014	$	22,253
2015	17,040
2016	15,313
2017	6,889
2018	2,884
Thereafter	5,876
Total minimum lease payments	$	70,255

Capital Lease Obligations

Future minimum lease payments under all non-cancellable capital leases as of October 26, 2013, are as follows (in thousands):



Fiscal Year	Capital Leases
2014	$	3,215
2015	1,329
2016	326
2017	—
Total minimum lease payments	4,870
Less: Amount representing interest	(270		)
Present value of net minimum lease payments	$	4,600

Product Warranties

The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the fiscal years ended October 26, 2013, and October 27, 2012 (in thousands):



	Fiscal Year Ended
	October 26, 2013			October 27, 2012
Beginning balance	$	14,453		$	11,298
Liabilities accrued for warranties issued during the period	4,969			5,929
Warranty claims paid and used during the period	(8,213		)	(575		)
Changes in liability for pre-existing warranties during the period	(2,577		)	(2,199		)
Ending balance	$	8,632		$	14,453

In addition, the Company has standard defense and indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s product, alone or potentially in combination with others, infringing upon any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of October 26, 2013, Brocade was not aware of any events or circumstances that have resulted in a material customer contract-related indemnification liability to the Company.

Manufacturing and Purchase Commitments

Brocade has manufacturing arrangements with CMs under which Brocade provides twelve-month product forecasts and places purchase orders at the time of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancellable, the terms of the agreements require Brocade to purchase all inventory components not returnable to, usable by, or sold to other customers of the CMs.

As of October 26, 2013, the Company’s aggregate commitment to the CMs for inventory components used in the manufacture of Brocade products was $186.6 million, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of $4.4 million. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to use in normal ongoing operations within the next twelve months.

Income Taxes

The Company is subject to several ongoing income tax audits. For additional discussion, see Note 15, “Income Taxes,” of the Notes to Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.

Legal Proceedings

Stockholder Litigation

In March 2012, a stockholder filed a complaint in the Santa Clara County Superior Court captioned Stephen Knee vs. Brocade Communications Systems, Inc., et al. alleging that the proposal in Brocade’s proxy for its 2012 annual meeting of stockholders seeking additional shares for the 2009 Stock Plan pool was misleading and incomplete; the plaintiff claimed the right to enjoin the stockholders’ vote. The parties subsequently agreed to settle the matter. The Court granted final approval of the settlement on December 14, 2012, and a final judgment was then entered on December 19, 2012. Brocade completed the payment of attorney fees and expenses to plaintiff’s counsel in an amount immaterial to Brocade in accordance with the settlement and the final judgment.

Intellectual Property Litigation

On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against Foundry Networks, Inc. (now known as Foundry Networks, LLC) (“Foundry”) and Extreme Networks, Inc. (“Extreme”) in the United States District Court for the District of Massachusetts alleging that certain of Foundry’s products infringed six of Enterasys’ patents and seeking injunctive relief, as well as unspecified damages. The Court severed the claims against Extreme from the claims against Foundry for trial, and Enterasys subsequently added Brocade as a defendant. On May 1, 2013, the Court entered an order of dismissal with prejudice pursuant to a settlement and patent cross-license agreement reached by the parties on April 19, 2013. As a result of this agreement, Brocade recorded a charge to “Cost of revenues, product” in the Consolidated Statements of Income for the fiscal year ended October 26, 2013, in relation to the portion of the cross license agreement and settlement payment attributable to prior periods. The portion of the cross license agreement and settlement payment attributable to future periods is recorded within “Prepaid expenses and other current assets,” and the related amortization is recorded as a charge to “Cost of revenues, product.”

On September 6, 2006, ChriMar Systems, Inc. (“ChriMar”) filed a lawsuit against Foundry in the United States District Court for the Eastern District of Michigan alleging that certain of Foundry’s products infringe one of ChriMar’s patents and seeking injunctive relief, as well as unspecified damages. On August 1, 2012, the Court issued an order granting summary judgment in favor of Brocade and dismissed the case. ChriMar subsequently appealed the District Court’s ruling to the Federal Circuit Court of Appeals. On April 4, 2013, the Federal Circuit Court of Appeals affirmed the District Court ruling in favor of Brocade and dismissed the case.

On August 4, 2010, Brocade and Foundry (collectively and for this paragraph only, “Brocade”) filed a lawsuit against A10 Networks, Inc. (“A10”), A10’s founder and other individuals in the United States District Court for the Northern District of California. On October 29, 2010, Brocade filed an amended complaint. In the amended complaint, Brocade alleged that A10 and the individual defendants misappropriated Brocade’s trade secrets, infringed Brocade’s copyrighted works, interfered with existing contracts between Brocade and its employees, whereby certain of Brocade’s current and ex-employees breached contracts, and breached their fiduciary duties and duties of loyalty to Brocade, and that certain of A10’s products infringed 13 of Brocade’s patents. Brocade sought injunctive relief, as well as monetary damages. On May 16, 2011, A10 filed an answer and counterclaim alleging that certain of Brocade’s products infringe a patent recently acquired by A10 and seeking injunctive relief, as well as unspecified damages. In addition, A10 filed petitions with the USPTO to have each of the 13 patents reexamined, in view of prior art that A10 alleges invalidates the patents. The petitions were granted, and reexaminations of the patents are in progress. On January 6, 2012 the Court granted Brocade’s summary judgment motion of non-infringement of the A10 patent. The trial on Brocade’s claims against A10 and the individual defendants commenced on July 16, 2012. On August 6, 2012, the jury found A10 responsible for intellectual property infringement and unfair competition, and awarded damages to Brocade. On January 11, 2013, the Court issued an order that affirmed the jury’s finding of A10’s liability for patent and copyright infringement, trade secret misappropriation, and unfair competition due to A10’s interference with the employment contract of a Foundry Networks employee beginning in 2007. The Court also confirmed the jury’s award of $60.0 million to Brocade in damages for copyright infringement. The Court did, however, vacate the jury’s award of damages for patent infringement, and its award of punitive damages for A10’s and Lee Chen’s interference with the employment contract of the Foundry employee, and the Court ordered a new trial to redetermine the amount of any such damages. On January 11, 2013, the Court also issued a permanent injunction prohibiting A10 from shipping any A10 products that infringe Brocade’s patents. On January 23, 2013, the Court issued a permanent injunction prohibiting A10 from further use of the misappropriated trade secrets. On February 8, 2013, A10 filed a Notice of Appeal of the permanent injunctions. A10 also asked the Court to stay both of the injunctions pending appeal. On February 12, 2013, the Court denied A10’s request to stay the injunctions. A retrial on the sole issue of the amount of patent damages to be awarded to Brocade for A10’s infringement was set for May 20, 2013. On May 20, 2013, before the start of the retrial, Brocade and A10 reached an agreement to settle all matters between the parties including the lawsuit A10 filed against Brocade on September 9, 2011. On June 7, 2013, judgment was entered in favor of Brocade against A10 for the amount of $75.0 million (as further described in Note 14, “Other Income (Loss), net”). Pursuant to that judgment, A10 paid Brocade $5.0 million on June 25, 2013, and on July 22, 2013, the parties signed a $70.0 million, six-month convertible promissory note at 8%. That promissory note was then paid in full on September 30, 2013, including $70.0 million in principal and approximately $1.1 million in interest paid by A10 to Brocade.

General

From time to time, the Company is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including claims of alleged infringement of patents and/or other intellectual property rights and commercial and employment contract disputes. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized.