9. Commitments and Contingencies

a. Operating and capital lease obligations

The Company has entered into operating leases for various office space, storage facilities and equipment. Rent expense under all operating leases, including both cancelable and non-cancelable leases, was $1.5 million, $1.4 million and $1.8 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Included in property and equipment in the consolidated balance sheet as of December 31, 2013, is approximately $103,000 of office equipment the Company acquired under a capital lease during 2012. The leased equipment has an original cost of approximately $147,000 and associated accumulated amortization of approximately $44,000 as of December 31, 2013. The Company’s capital lease obligation as of December 31, 2013, was approximately $103,000 and bears an interest rate of 6.2%.

Future minimum lease payments under non-cancelable leases at December 31, 2013, are as follows (dollars in thousands):


	Operating		Capital
2014	$	374	$	38
2015		172		38
2016		89		22
2017		54		—
2018		—		—
Thereafter		—		—

Total minimum lease payments	$	689		98

Less: Amount representing interest				5

Capital lease obligation			$	103

b. Purchase commitments

The Company routinely enters into cancelable purchase orders with many of its key vendors. Based on the strategic relationships with many of these vendors, the Company’s ability to cancel these purchase orders and maintain a favorable relationship would be limited. As of December 31, 2013, the Company has $11.9 million of open purchase orders.

c. Litigation

Product Litigation

The Company is currently named as a defendant in 16 lawsuits in which the plaintiffs allege either wrongful death or personal injury in situations in which a TASER CEW was used (or present) by law enforcement officers in connection with arrests or during training exercises. In addition, two other product litigation matters in which the Company is involved are currently on appeal. While the facts vary from case to case, the product liability claims are typically based on an alleged product defect resulting in injury or death, usually involving a failure to warn, and the plaintiffs are seeking monetary damages. The information throughout this note is current through the filing date of this Annual Report on Form 10-K.

As a general rule, it is the Company’s policy not to settle suspect injury or death cases. Exceptions are sometimes made where the settlement is strategically beneficial to the Company. Also, on occasion, the Company’s insurance company has settled such lawsuits over the Company’s objection where the risk is over the Company’s liability insurance deductibles. Due to the confidentiality of our litigation strategy and the confidentiality agreements that are executed in the event of a settlement, the Company does not identify or comment on which specific lawsuits have been settled or the amount of any settlement.

In 2009, the Company implemented new risk management strategies, including revisions to product warnings and training to better protect both the Company and its customers from litigation based on ‘failure to warn’ theories – which comprise the vast majority of the cases against the Company. These risk management strategies have been highly effective in reducing the rate and exposure from litigation post-2009. From the third quarter of 2011 to the fourth quarter of 2013, product liability cases have been reduced from 55 active to 16 active cases, with one new lawsuit filed in the fourth quarter of 2013.

Management believes that pre-2009 cases have a different risk profile than cases which have occurred since the risk management procedures were introduced in 2009. Therefore, the Company necessarily treats certain pre-2009 cases as exceptions to the Company’s general no settlement policy in order to reduce caseload, legal costs and exposure. In November 2013, the Company agreed to settle two pre-2009 product liability lawsuits, where the Company had litigation exposure in excess of insurance coverage and the risk of potential high jury verdicts, for a combined total of $2.3 million. The costs of these settlements will be covered by insurance. The Company intends to continue its successful practice of aggressively defending and generally not settling litigation except in very limited and unusual circumstances as described above.

Turner (NC) lawsuit

The Turner (NC) lawsuit was tried in July 2011 and resulted in a jury verdict of $10.0 million against the Company. The Company filed post-trial motions seeking judgment as a matter of law notwithstanding the verdict and in the alternative, a new trial or alternatively, a remittitur of the jury award. Based on this verdict, the Company recorded litigation judgment expense of $3.3 million in 2011. During March 2012, the Federal District Court for the Western District of North Carolina granted the Company’s motion for remittitur and ordered the reduction of the original jury award from $10.0 million to approximately $4.4 million after offsets. On April 20, 2012, the court issued an order which adjusted the award to $5.5 million. On May 4, 2012, the court issued another order which entered judgment in the amount of $5.5 million plus costs and post-judgment interest. Based on this action by the court, the Company reversed a portion of the previously accrued litigation judgment during the year ended December 31, 2012, which resulted in a benefit of $2.2 million during the twelve months ended December 31, 2012, and leaving a reserve of $1.1 million on the Company’s balance sheet as of December 31, 2012.

The Company appealed this verdict. On November 11, 2013, the U.S. Court of Appeals for the Fourth Circuit issued its opinion affirming the district court’s judgment upholding the jury verdict imposing liability on the Company for its negligence and vacating the district court’s judgment with respect to the remitted award of compensatory damages. The Court of Appeals remanded the case to the district court for a new trial limited to the issue of damages. As such, the appellate bond previously required, was subsequently released. The Company subsequently requested a rehearing en banc which was denied by the Court of Appeals. The remanded issues are currently pending in the Federal District Court for the Western District of North Carolina. As of December 31, 2013, the Company’s reserve related to this case was reduced to zero. Although there is approximately $2.6 million of insurance coverage remaining for the 2008 policy year, which includes the Turner lawsuit, the outcome of any litigation is inherently uncertain. Should legal costs and other litigation activities related to the 2008 policy year exceed the remaining insurance coverage, the Company would incur additional expense, which could be material.

With respect to each of the pending lawsuits, the following table lists the name of plaintiff, the date the Company was served with process, the jurisdiction in which the case is pending, the type of claim and the status of the matter.


	Month
Plaintiff	Served		Jurisdiction	Claim Type	Status
Grable		Aug-08	6th Judicial Circuit Court, Pinellas County, FL	Training Injury	Discovery Phase
Koon		Dec-08	17th Judicial Circuit Court, Broward County, FL	Training Injury	Discovery Phase
Derbyshire		Nov-09	Ontario, Canada Superior Court of Justice	Officer Injury	Discovery Phase
Thompson		Mar-10	11th Judicial Circuit Court, Miami-Dade County, FL	Suspect Injury During Arrest	Discovery Phase
Doan		Apr-10	The Queens Bench Alberta, Red Deer Judicial Dist.	Wrongful Death	Discovery Phase
Shymko		Dec-10	The Queens Bench, Winnipeg Centre, Manitoba	Wrongful Death	Pleading Phase
Juran		Dec-10	Hennepin County District Court, 4th Judicial District	Officer Injury	Discovery Phase
Wilson		May-11	US District Court, ED MO	Wrongful Death	Discovery Phase; trial scheduled for November 2014
Ramsey		Jan-12	17th Judicial Circuit Court, Broward County, FL	Wrongful Death	Discovery Phase
Mitchell		Apr-12	US District Court, ED MI	Wrongful Death	Discovery Phase,; trial scheduled June 2014
Firman		Apr-12	Ontario, Canada Superior Court of Justice	Wrongful Death	Pleading Phase
Ricks		May-12	US District Court, WD LA	Wrongful Death	Motion Phase
Miller		Jan-13	New Castle County Superior Court, DE	Wrongful Death	Discovery Phase
Salgado		Feb-13	US District Court, SD FL	Wrongful Death	Pleading Phase
Slade		Dec-13	US District Court, ED TX	Wrongful Death	Pleading Phase
Turner		Feb-10	US District Court, ED NC	Wrongful Death	Appeal fully briefed; Oral argument held September 2013; remanded to trial on damages only.

In addition, other product litigation matters in which the Company is involved that are currently on appeal are listed below:


	Month
Plaintiff	Served		Jurisdiction	Claim Type	Status
Bachtel		Aug-11	14th Judicial Circuit Court, Randolph County, MO	Wrongful Death	Appeal fully briefed; Oral Argument held on January 14, 2014.
Glowczenski		Oct-04	US District Court, ED NY	Wrongful Death	Notice of Appeal filed September 2013; Opening Brief was filed January 2014; Answering Brief is due April 2014.

Cases that were dismissed or judgment entered during the fourth quarter of 2013 and through the filing date of this Annual Report on Form 10-K are listed in the table below. Cases that were dismissed or judgment entered in prior fiscal quarters are not included in this table.


	Month
Plaintiff	Served		Jurisdiction	Claim Type	Status
Armstrong		Apr-13	US District Court, MD NC	Wrongful Death	Voluntary Dismissal
Barnes		Apr-13	US District Court, WD PA	Wrongful Death	Voluntary Dismissal
Athetis		May-09	Superior Court, AZ	Wrongful Death	Motion for Summary Judgment
Duensing		Feb-12	US District Court, NV	Suspect Injury During Arrest	Motion to Dismiss
Rich		Feb-10	US District Court, NV	Wrongful Death	Voluntary Dismissal
Peppler		Apr-09	5th Judicial Court for Sumter CO, FL	Training Injury	Voluntary Dismissal
Wingard		Oct-12	US District Court, WD PA	Wrongful Death	Voluntary Dismissal
Manjares		Nov-12	US District Court, ED WA	Suspect Injury During Arrest	Voluntary Dismissal

The claims, and in some instances the defense, of each of these lawsuits have been submitted to the Company’s insurance carriers that maintained insurance coverage during the applicable periods. The Company continues to maintain product liability insurance coverage with varying limits and deductibles. The following table provides information regarding the Company’s product liability insurance. Remaining insurance coverage is based on information received from the Company’s insurance provider (in millions).


Policy Year	Policy Start Date		Policy End Date		Insurance Coverage		Deductible Amount		Defense Costs Covered		Remaining Insurance Coverage		Active Cases and Cases on Appeal
2004		12/01/03		12/01/04	$	2.0	$	0.1		N	$	2.0	Glowczenski
2005		12/01/04		12/01/05		10.0		0.3		Y		7.0	n/a
2006		12/01/05		12/01/06		10.0		0.3		Y		3.7	n/a
2007		12/01/06		12/01/07		10.0		0.3		Y		8.0	n/a
2008		12/01/07		12/15/08		10.0		0.5		Y		2.6	Grable, Koon, Turner
2009		12/15/08		12/15/09		10.0		1.0		N		10.0	Derbyshire
2010		12/15/09		12/15/10		10.0		1.0		N		10.0	Thompson, Shymko, Doan, Juran
2011		12/15/10		12/15/11		10.0		1.0		N		10.0	Wilson, Bachtel
Jan—Jun 2012		12/15/11		06/25/12		7.0		1.0		N		7.0	Ramsey, Mitchell, Firman, Ricks
Jul—Dec 2012		06/25/12		12/15/12		12.0		1.0		N		12.0	n/a
2013		12/15/12		12/15/13		12.0		1.0		N		12.0	Miller, Salgado
2014		12/15/13		12/15/14		12.0		4.0		N		12.0	Slade

Other Litigation

In January 2011, the Company was served with a complaint in the matter of GEOTAG, Inc. v. TASER International, et. al. that was filed in the U.S. District Court for the Eastern District of Texas, Marshall Division, which alleges that a dealer geographical locator feature on TASER’s website infringes upon plaintiff’s US Patent No. 5,930,474. The complaint seeks a judgment of infringement, a permanent injunction against infringement, an award for damages, costs, expenses and prejudgment and post-judgment interest, and an award for enhanced damages and attorneys’ fees. TASER licensed this locator feature from a third party and has denied liability for infringement.

In July 2011, the Company filed a complaint against Karbon Arms, LLC for infringement of TASER’s U.S. Patent Nos. 7,800,885 and 7,782,592 in U.S. District Court for the District of Delaware seeking damages, injunctive relief and an award of attorneys’ fees. Karbon Arms filed a counterclaim on July 18, 2011, alleging invalidity and non-infringement of four of TASER’s patents, tortious interference with prospective contractual relations and false advertising under the Lanham Act. TASER thereafter filed counter-counterclaims for infringement of U.S. Patent Nos. 7,602,597 and 6,999,295. On January 10, 2014, a Judgment and Permanent Injunction were entered against Karbon Arms, LLC. This Judgment confirms that Karbon Arm’s accused products infringe the asserted claims of U.S. Patent Nos. 6,999,295; 7,782,592; and 7,800,885 and that these three patents are valid and enforceable. The Judgment also awarded TASER the sum of $2.4 million in damages. The Company has not recorded a receivable as of December 31, 2013 due to the uncertainty of collectability. Should the Company receive the funds from the award, a gain will be recognized at that time.

In February 2012, the Company was served with a complaint in the matter of AA & Saba Consultants, Inc. v. TASER International, Inc. that was filed in the Superior Court for the County of Maricopa, Arizona, which alleges that the Company breached a contract by unilaterally terminating a distributor agreement between the Company and plaintiff without good cause. The complaint seeks an award for damages, costs, expenses and attorneys’ fees. TASER filed a counterclaim for breach of contract and fraud. During 2012, the Company made a settlement offer of $0.8 million to plaintiff which was recorded as an expense in SG&A. The offer was not accepted and thereafter was withdrawn. On February 28, 2014, the jury returned a verdict of $3.3 million against the Company. Judgment had not been entered at the time of this filing and the judgment is subject to an award of attorney’s fees. The Company believes the verdict is not supported by the evidence and intends to appeal. The Company recorded an additional $2.6 million of expense in the fourth quarter of 2013 in the litigation judgment line item on the income statement. Should the plaintiff be awarded reimbursement of legal fees, additional expense will be recorded by the Company.

General

From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against the Company. The Company does not expect these lawsuits to individually, or in the aggregate, materially affect our business, results of operations or financial condition. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts provided by insurance coverage and will not have a material adverse effect on our business, operating results or financial condition.

d. Employment Agreements

The Company has employment agreements with certain key executives. The Company may terminate the agreements with or without cause. Should the Company terminate the agreements without cause, or upon a change of control of the Company or death of the employee, the employee, or family of the employee, are entitled to additional compensation. Under these circumstances, these officers and employees may receive the amounts remaining under their contracts upon termination, which would total $0.8 million in the aggregate at December 31, 2013.