12. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases copiers, parking spaces, buildings, a warehouse, and office space under operating lease and site license arrangements, some of which contain renewal options. Building, warehouse, and office space leases range from 12 to 89 months. Certain leases also contain lease renewal options.

The following table summarizes future minimum operating lease payments for the remaining nine months of 2013 and the years thereafter (in thousands):

Periods Ending December 31,
2013-remaining	$	1,716
2014	5,850
2015	4,791
2016	4,429
2017	4,136
Thereafter	3,923
	$	24,845

Rent expense was $1.7 million and $2.2 million for the three months ended September 30, 2013 and 2012, respectively. Rent expense was $5.3 million and $7.3 million for the nine months ended September 30, 2013 and 2012, respectively. On April 4, 2013, the Company announced its decision to exit all remaining U.S. kiosk locations; which was completed prior to June 30, 2013. The Company recognized lease termination penalties of $0.8 million during the three months ended June 30, 2013. The Company continues to operate a limited number of international kiosk locations.

The Company accounts for its leases under the provisions of ASC topic 840, Accounting for Leases (“ASC 840”), and subsequent amendments, which require that leases be evaluated and classified as operating leases or capital leases for financial reporting purposes. Certain operating leases contain rent escalation clauses; the rent expense of such leases is recorded on a straight-line basis over the initial term of the lease with the difference between the rent paid and the straight-line rent recorded as either a deferred rent asset or liability depending on the calculation. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction to rent expense. The deferred rent liability was $0.5 million at September 30, 2013. The deferred rent asset was $20,000 at September 30, 2013. The deferred rent asset is classified in prepaid and other assets as all associated leases have less than one year remaining on their term.

Rosetta Stone Japan partially abandoned its facility in March 2013 as a result of excess office space. The Company estimated its liability under operating lease agreements and accrued exit costs in accordance with ASC 420, Exit or Disposal Cost Obligation, as the Company has no future economic benefit from the abandoned space and the lease does not terminate until February 28, 2015. Accrued exit costs associated with the partial abandonment were charged to lease abandonment expense in March 2013. The following table summarizes the accrued exit costs (in thousands):

	September 30,
	2013

Accrued exit costs, beginning of period	$	—
Costs incurred and charged to expense	770
Principal reductions	(237		)
Accrued exit costs, end of period	$	533

Accrued exit cost liability:
Short-term	$	381
Long-term	152
Total	$	533

Litigation

In April 2010, a purported class action lawsuit was filed against the Company in the Superior Court of the State of California, County of Alameda for damages, injunctive relief and restitution in the matter of Michael Pierce, Patrick Gould, individually and on behalf of all others similarly situated v. Rosetta Stone Ltd. and DOES 1 to 50. The complaint alleges that plaintiffs and other persons similarly situated who are or were employed as salaried managers by the Company in its retail locations in California are due unpaid wages and other relief for the Company’s violations of state wage and hour laws. Plaintiffs moved to amend their complaint to include a nationwide class in January 2011. In March 2011, the case was removed to the United States District Court for the Northern District of California. In November 2011, the parties agreed to the mediator’s proposed settlement terms, and as a result, as of September 30, 2011, the Company reserved $0.6 million for the proposed settlement amount. The Company disputed the plaintiffs’ claims and it has not admitted any wrongdoing with respect to the case. In September 2013, the court entered a final order directing payment of the $0.6 million settlement amount and in October 2013 the Company paid this amount in final settlement of the lawsuit.

In June 2011, Rosetta Stone GmbH was served with a writ filed by Langenscheidt KG (“Langenscheidt”) in the District Court of Cologne, Germany alleging trademark infringement due to Rosetta Stone GmbH’s use of the color yellow on its packaging of its language-learning software and the advertising thereof in Germany. In January 2012, the District Court of Cologne ordered an injunction of Rosetta Stone GmbH’s use of the color yellow in packaging, on its website and in television commercials and declared Rosetta Stone liable for damages, attorneys’ fees and costs to Langenscheidt. No dollar amounts have been specified yet for the award of damages by the District Court of Cologne. In its decision, the District Court of Cologne also ordered the destruction of Rosetta Stone GmbH’s product and packaging which utilized the color yellow and which was deemed to have infringed Langenscheidt’s trademark. Langenscheidt has not posted the necessary bond to immediately enforce that decision. Rosetta Stone GmbH has continued to vigorously defend this matter through an appeal to the Court of Appeals in Cologne. The Court of Appeals in Cologne affirmed the decision in November of 2012 and Rosetta Stone GmbH moved to have a further appeal heard before the German Federal Supreme Court. The German Federal Supreme Court now has allowed a further appeal on grounds of law. The Company also commenced a separate proceeding for the cancellation of Langenscheidt’s German trademark registration of yellow as an abstract color mark. In June 2012, the German Patent and Trademark Office rendered a decision in the cancellation proceeding denying Rosetta Stone’s request to cancel Langenscheidt’s German trademark registration. The Company appealed that decision and a hearing on the appeal was held in April 2013 before the German Federal Patent Court. On August 5, 2013, the Company received a decision from the Federal Patent Court rejecting the Company’s appeal but allowing a further appeal on grounds of law to the German Federal Supreme Court. The Company is proceeding to pursue a further appeal to the German Federal Supreme Court. The Company cannot predict the timing and ultimate outcome of this matter, however the Company believes the range of possible loss is immaterial to the consolidated financial statements. Even if the plaintiff is unsuccessful in its claims against the Company, the Company will incur legal fees and other costs in the defense of these claims and appeals.

From time to time, the Company has been subject to various claims and legal actions in the ordinary course of its business. The Company is not currently involved in any legal proceeding the ultimate outcome of which, in its judgment based on information currently available, would have a material impact on its business, financial condition or results of operations.