Commitments and contingencies

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and contingencies

Commitments and contingencies

Litigation

From time to time, the Company is subject to various claims and legal proceedings, either asserted or unasserted, that arise in the ordinary course of business. The Company accrues for legal contingencies if the Company can estimate the potential liability and if the Company believes it is probable that the case will be ruled against it. If a legal claim for which the Company did not accrue is resolved against it, the Company would record the expense in the period in which the ruling was made. The Company believes that the likelihood of an ultimate amount of liability, if any, for any pending claims of any type (alone or combined) will materially affect the Company’s financial position, results of operations or cash flows is remote. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could have a material negative impact on the Company’s financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.

In January 2010, Finisar Corporation, or Finisar (acquired by II-VI, Inc. in September 2019), filed a complaint in the U.S. District Court for the Northern District of California, or the Court, against Source Photonics, Inc., MRV Communications, Inc., Oplink Communications, Inc. and the Company, or collectively, the co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents. In 2010 the Company filed an answer to the complaint and counterclaims, asserting two claims of patent infringement and additional claims. The Court dismissed without prejudice all co-defendants (including the Company) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each defendant. This dismissal does not prevent Finisar from bringing a new similar lawsuit against the Company. In 2011 the Company and Finisar agreed to suspend their respective claims and in 2012 the Company and Finisar further agreed to toll their respective claims. While there has been no action on this matter since 2012, the Company is currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

In December 2016, the Company was served with a lawsuit filed by Lestina International Ltd. (“Lestina”), in Santa Clara County, CA. The lawsuit is regarding a dispute of approximately $3.0 million related to purchase orders for the Company’s Low Speed Transceiver Products that was soon thereafter sold by the Company to APAT OE in January 2017. The purchase orders in question were included in the asset sale and were assumed liabilities by the purchaser of the business. The parties engaged in extensive negotiations and in January 2019, the parties agreed to a proposed settlement which was placed on the record of the Superior Court of Santa Clara County agreeing that NeoPhotonics Dongguan Co., Ltd. (“NeoDongguan”) (a wholly-owned subsidiary of the Company located in China) would pay to Lestina a total of $2.2 million. These payments were completed in two installments paid in February and June 2019. Upon Lestina's receipt of the final payment in June 2019, Lestina shipped to NeoDongguan the remaining parts from the original purchase orders.

In April 2018, APAT OE filed a lawsuit in the Qianhai Court in Shenzhen, China against NeoPhotonics (China) Co., Ltd. (a wholly-owned subsidiary of the Company located in China) and NeoPhotonics Dongguan Co. Ltd. (collectively "NeoChina") and NeoPhotonics Corporation with a claim of approximately $20.0 million. The lawsuit relates to the sale of the low speed transceiver business to APAT OE from NeoChina. APAT OE claims that the business has been losing money and that APAT OE was not given all of the information about the business they purchased prior to signing the Asset Purchase Agreement. In May 2018, counsel on behalf of NeoChina filed a motion objecting to the jurisdiction, claiming that the proper jurisdiction for any dispute between these parties is the Shenzhen Court of International Arbitration (or the "Arbitration Court") and the proper parties to this dispute are NeoChina and APAT OE, pursuant to the Asset Purchase Agreement signed by APAT OE and NeoChina (or the "APA"). In June 2018 a hearing was held in the Qianhai Court in Shenzhen, China and in August 2018 the Court ruled in favor of APAT OE. In October 2018, a hearing was held in the Intermediate Court of Shenzhen (or the "Intermediate Court") on an appeal which was filed by NeoChina and in November 2018 the Intermediate Court ruled in favor of NeoChina and dismissed in totality the litigation against NeoChina, ruling that arbitration was the proper forum for such dispute resolution between the parties. The litigation continued against NeoPhotonics Corporation in Qianhai Court and Intermediate Court, where NeoPhotonics Corporation claims that there is no existing contract between APAT OE and

NeoPhotonics Corporation and therefore there is no basis for litigation. In December 2019, NeoPhotonics Corporation received a notice that the case against NeoPhotonics Corporation had been dismissed in the Qianhai Court in Shenzhen, China. APAT OE has appealed this decision to the Shenzhen Intermediate Court. The Company is unable to predict the outcome of this matter and is not currently aware of the precise amount of the ongoing claim by APAT against NeoPhotonics Corporation in this lawsuit.

In December 2018, APAT OE filed claims through two lawsuits against NeoChina, NeoPhotonics Corporation Limited Hong Kong (or NeoHK), Novel Centennial Limited BVI (or NeoBVI) and NeoPhotonics Corporation (collectively the "defendants") in the Intermediate Court in addition to a pre-trial preservation order. On the same day the Court issued the order to preserve approximately $29.0 million of NeoChina assets, which is the approximate amount of the revised claims by APAT OE against all defendants in the first of the two lawsuits filed in December 2018. In January 2019, there was an additional pre-trial preservation order to preserve approximately $3.8 million of NeoChina assets. The temporary pre-trial preservation order was made simultaneously to the filing of the two lawsuits, but the defendants were not served or aware of the lawsuit until later in January 2019. In the first lawsuit, the legal claims are the same as the ones APAT OE filed in April 2018 in Qianhai Court in Shenzhen, China (as described above). The difference is that instead of distributing claims in separate cases, APAT OE has combined its claims to one single case and added the additional defendants of NeoHK and NeoBVI and increased the claimed damages to approximately $29.0 million. In the second lawsuit, the claims are new and related to the alleged new issues related to a contract manufacturer located in the Philippines and claiming damages in the amount of RMB 50.9 million (approximately $7.6 million). APAT OE claims that the defendants have interfered with APAT OE’s ability to sign an engagement agreement with the contract manufacturer. The defendants believe this dispute is related to and should be under the jurisdiction that was agreed to in the APA, and therefore should be properly transferred to the Shenzhen Court of International Arbitration.

On April 30, 2020, the Shenzhen Intermediate Court ruled in both lawsuits that the Court has no jurisdiction over disputes between Neo China and APAT OE and that any disputes between those parties should be transferred to the Shenzhen Court of International Arbitration. Additionally, the Court ruled that because there is no arbitration award against Neo China, the Court has no jurisdiction over NeoHK, NeoBVI, or NeoPhotonics Corporation. These rulings are subject to appeal by APAT OE and the Company is unable to predict the outcome of this matter.

In February 2019, NeoChina filed a case in the Qianhai Court in Shenzhen, China against APAT OE and Zhejiang Merchants Property Insurance Company for losses and damages caused to NeoChina from APAT OE’s previously granted property preservation. The claim was for approximately RMB 350,000 (approximately $52,000) in damages and legal fees and was heard in May 2019. In December 2019 NeoChina received a final judgment in favor of the defendants.

APAT Arbitration

In June 2017, APAT OE filed an arbitration claim in the Shenzhen Court of International Arbitration (or the Arbitration Court) against NeoChina (collectively both of the Company’s China subsidiaries), claiming that approximately $1.5 million of the inventory that was sold to APAT OE by NeoChina in an Asset Purchase Agreement executed between the parties on December 14, 2016 was aged inventory and of no value. The arbitration was heard in the Arbitration Court in August 2017. In October 2017, NeoChina was informed that it was successful in the defense of the dispute and was also successful in its counterclaim against APAT OE. NeoChina was awarded approximately RMB 700,000 (approximately $110,000) in compensatory damages and attorney fees as well as having the approximately $1.5 million claim against it rejected in its entirety.

In April 2018, APAT OE filed a Notice of Judicial Review of the arbitration judgment in the Shenzhen Intermediate Court in Shenzhen, China. The case was heard in May 2018, and NeoChina was successful in disputing the Judicial Review, which means that the arbitration judgment against APAT OE and in favor of NeoChina stands.

In July 2018, NeoChina applied together to the Shenzhen Intermediate Court for enforcement of the previous arbitration ruling because APAT OE had refused to perform the arbitral award. In October 2018, the Court enforced the award, officially closing this arbitration matter.

In July 2018, NeoChina filed an arbitration claim against APAT OE in the Arbitration Court claiming approximately $12.0 million in damages as related to liability under the APA. NeoChina also was granted a property preservation of APAT OE’s bank accounts. In February 2019 NeoChina applied to the Arbitration Court to reduce the claim to $7.1 million according to the evidence of confirmation requests received by NeoChina. In August 2019, NeoChina applied to the Arbitration Court to modify the claim to $8.1 million subject to the supplementary evidence of NeoChina. On March 31, 2020, the Arbitration Court ruled in favor of NeoChina and awarded NeoChina 54,607,000 RMB (approximately $7.7 million). On April 27, 2020, NeoChina filed an enforcement action in the Intermediate People's Court of Shenzhen Municipality to enforce this arbitration award.

In November 2018, APAT OE filed an additional arbitration claim against NeoChina claiming approximately $7.8 million for liability under the APA. In March 2019, NeoChina filed a response and counterclaim against APAT OE including a claim for attorney fees in the amount of RMB 810,000 (approximately $121,000). This matter was heard in the same hearing as the NeoChina arbitration claim referenced above. On March 31, 2020, the Arbitration Court ruled in NeoChina's' favor and awarded 846,000 RMB (approximately $119,000) for attorney's fees and arbitration fees. On April 27, 2020, NeoChina filed an enforcement action in the Intermediate People's Court of Shenzhen Municipality to enforce this arbitration award.

Indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and provides for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.