Note 14—Commitments and Contingencies

Legal Proceedings

Regulatory Enforcement

On January 11, 2017, the Company entered into the Consent Decree with the FCC settling the FCC’s investigation regarding Straight Path Spectrum’s spectrum licenses on the terms specified therein. Material terms of the Consent Decree include the following:

The FCC agreed to terminate its investigation.

Straight Path Spectrum agreed to surrender 93 of its 828 39 GHz economic area spectrum licenses to the FCC, as well as 103 rectangular service area licenses that the Company does not believe were material assets of the Company.

Straight Path Spectrum keeps all of its 28 GHz spectrum licenses.

Straight Path Spectrum is barred from entering into any new leases of its spectrum.

The Company agreed to pay the Initial Civil Penalty of $15 million in four installments as follows - $4 million on or before February 11, 2017; $4 million on or before April 11, 2017; $3.5 million on or before July 11, 2017; and $3.5 million on or before October 11, 2017.

The Company agreed to submit to the FCC an application for approval of a sale of its remaining 39 GHz and 28 GHz spectrum licenses on or before January 11, 2018 and pay the FCC 20% of the proceeds from such the sale(s).

If the Company does not submit to the FCC an application for approval of a sale of its remaining spectrum licenses on or before January 11, 2018, the Company will pay an additional penalty of $85 million or surrender its remaining spectrum licenses.

We recorded the Initial Civil Penalty of $15 million in Fiscal 2017. The associated expense was classified as “civil penalty – FCC consent decree” on the consolidated statement of operations in the third quarter of Fiscal 2017. All of the installments of the Initial Civil Penalty totaling $15 million were paid.

As discussed in Note 2, we entered into the Verizon Merger Agreement. If the Merger is consummated, the fee owed per Item 6 above will be paid by Verizon as part of the Merger.

On June 1, 2017, the Company and Verizon submitted applications to the FCC seeking consent to transfer control of the Company’s spectrum licenses to Verizon. The transfer of control applications was referenced on an FCC Public Notice on July 21, 2017, and the FCC established a pleading cycle, allowing interested parties to comment on why the transaction should be approved or denied. Petitions to deny the application were due on August 11, 2017, oppositions to those petitions due on August 18, 2017 and replies to those oppositions were due on August 25, 2017.

Three parties – the Competitive Carriers Association, Public Knowledge and New America’s Open Technology Institute, and U.S. Telepacific – filed petitions to deny the transaction, change its recommendation of the Merger and terminate the Verizon Merger Agreement in connection therewith. The petitioning parties argued that approval of the transaction would result in excessive spectrum aggregation in local markets, undermine competition in 5G mobile broadband by precluding others from acquiring 5G spectrum, improperly benefit Straight Path in violation of the FCC Consent Decree, and terminate existing spectrum leases. In response, the Company and Verizon argued that approval of this transaction will advance 5G leadership. We and Verizon explained that the transaction will not create any competitive issues, and, once Verizon acquires the spectrum, it will remain below the FCC’s spectrum threshold for competitive review across the vast majority of markets. We and Verizon argued that opponents of the transaction cannot use the transaction to challenge the Consent Decree, review of this transaction must be limited to the transaction, and that the terms of the Consent Decree are final and are the result of the FCC’s deliberate and sound policy choices. We and Verizon clarified that Verizon will honor our contractual obligations under existing spectrum leases with third parties. In their replies, the parties opposing the transaction maintained their prior arguments, and also argued that the FCC should auction the Company’s spectrum licenses instead of approving the transaction and that the transaction is not in the public interest.

On September 7, 2017, and September 21, 2017, Hammer Fiber Optics (“Hammer”) filed ex parte letters noting a number of meetings with staff from the FCC’s Wireless Telecommunications Bureau (“WTB”) and Office of Engineering and Technology, and meetings with Chairman Ajit Pai’s, Commissioner Mignon Clyburn’s, and Commissioner Brendan Carr’s legal advisors. In the letters, Hammer discussed the relevance of the transaction with respect to the service it is providing, and also stated that it did not object to Verizon’s acquisition of our LMDS spectrum.

On October 23, 2017, October 24, 2017 and November 9, 2017, the Competitive Carriers Association filed ex parte letters, noting meetings with staff from the WTB and Chairman Ajit Pai’s and Commissioner Brendan Carr’s legal advisors, and supplementing its prior filings in the transaction. In the letters, the Competitive Carriers Association reiterated its prior arguments regarding spectrum aggregation in local markets, 5G mobile broadband competition, and the Consent Decree.

We believe that the submission to the FCC by us and Verizon of an application to transfer control of our spectrum licenses to Verizon satisfies the requirement under the Consent Decree as described in Item 6 above. However, if the Merger is not completed for any reason, there is no guarantee that the FCC would not seek to require us to pay the $85 million penalty or seek the forfeiture of the Company’s remaining spectrum licenses. If the penalty is imposed by the FCC, there is no guarantee that we will be able to obtain sufficient financing to pay the additional $85 million or repay the remaining amount due of the $17.5 million loan from the Lenders. A failure by the Company to comply with these requirements could lead to a default by the Company under the Consent Decree, loss of our remaining spectrum licenses, either of which will have a material adverse effect on our financial condition and results of operations.

Shareholder Litigation

On July 5, 2017, JDS1 LLC, a putative Straight Path stockholder, filed a class action and derivative complaint in the Delaware Court of Chancery captioned JDS1, LLC v. IDT Corp. , C.A. No. 2017-0486-SG. The complaint named Straight Path’s board of directors, Howard Jonas, IDT, and The Patrick Henry Trust (the “Trust”) as defendants. The Company was named as a nominal defendant. Plaintiff alleged, among other things, that Straight Path’s directors, Howard Jonas, and the Trust breached their fiduciary duties in connection with the sale of certain of the Company’s IP assets and by resolving a possible claim for indemnification that the Company held against IDT (the “Settlement”) for inadequate consideration and that IDT aided and abetted that breach. Plaintiff moved for expedited proceedings. On July 11, 2017, another putative Straight Path stockholder, the Arbitrage Fund, filed a class action complaint in the same court naming Howard Jonas, IDT, and the Trust as defendants, captioned The Arbitrage Fund v. Jonas , C.A. No. 2017-0502-SG. On July 24, 2017, the Court denied Plaintiff JDS1’s motion for expedited proceedings and consolidated the two cases under the caption In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG, with the JDS1 complaint designated as the operative pleading. Plaintiffs subsequently agreed to voluntarily dismiss defendants K. Chris Todd, William F. Weld and Fred S. Zeidman without prejudice. On August 14, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated complaint. The Company, named as a nominal defendant, filed a statement in response to the complaint. On August 29, 2017, Plaintiffs filed a consolidated amended class action and derivative complaint alleging, among other things, that Howard Jonas, the Trust, and Davidi Jonas breached their fiduciary duties in connection with the settlement and that IDT aided and abetted that breach. On September 13, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated amended complaint. On September 22, 2017, we filed a statement concerning the consolidated amended complaint. On November 2, 2017, the Delaware Court of Chancery heard oral argument on defendants’ motions to dismiss. On November 20, 2017, the court issued an opinion holding that the action was not yet ripe for adjudication and staying the action until the Merger closes or is terminated and upon motion of a party to the action.

On November 13, 2015, a putative shareholder class action was filed in the federal district court for the District of New Jersey against Straight Path Communications Inc., and Jonas and Rand (the “individual defendants”). The case is captioned Zacharia v. Straight Path Communications, Inc. et al. , No. 2:15-cv-08051-JMV-MF, and is purportedly brought on behalf of all those who purchased or otherwise acquired the Company’s common stock between October 29, 2013, and November 5, 2015. The complaint alleges violations of (i) Section 10(b) of the Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 of the Exchange Act against the Company for materially false and misleading statements that were designed to influence the market relating to the Company’s finances and business prospects; and (ii) Section 20(a) of the Exchange Act against the individual defendants for wrongful acts by controlling persons. The allegations center on the claim that the Company made materially false and misleading statements in its public filings and conference calls during the relevant class period concerning the Company’s spectrum licenses and the prospects for its spectrum business. The complaint seeks certification of a class, unspecified damages, fees, and costs. The case was reassigned to Judge John Michael Vasquez on March 3, 2016. On April 11, 2016, the court entered an order appointing Charles Frischer as lead plaintiff and approving lead plaintiff’s selection of Glancy Prongay & Murray LLP as lead counsel and Schnader Harrison Segal & Lewis LLP as liaison counsel. On June 17, 2016, lead plaintiff filed his amended class action complaint, which alleges the same claims described above. The defendants filed a joint motion to dismiss the complaint on August 17, 2016; the plaintiff opposed that motion on September 30, 2016, and the defendants filed their reply brief in further support of their motion to dismiss on October 31, 2016.

On March 7, 2017, the Company and lead plaintiff in Zacharia action entered into a binding memorandum of understanding to settle the putative shareholder class action and dismiss the claims that were filed against the defendants in that action. Under the agreed terms, the Company will provide for a $2.25 million initial payment (the “Initial Payment”) and a $7.2 million additional payment (the “Additional Payment”). The Initial Payment will be paid into an escrow account within 15 days following preliminary court approval of the settlement, and will be fully covered by insurance policies maintained by the Company. The Additional Payment of $7.2 million will be paid within 60 days after the closing of a transaction to sell the Company’s spectrum licenses as specified in the Consent Decree with the FCC, or, in the event that the Company pays the non-transfer penalty specified in the Consent Decree, within 60 days after that payment is paid. In any event, the Additional Payment will be payable no later than December 31, 2018. The parties executed a formal settlement agreement on October 10, 2017, and a motion for preliminary approval of the settlement agreement is pending before the court.

On January 29, 2016, a shareholder derivative action captioned Hofer v. Jonas et al, No. 2:16-cv-00541-JMV-MF, was filed in the federal district court for the District of New Jersey against Howard Jonas, Davidi Jonas, Jonathan Rand, and the Company’s current independent directors William F. Weld, K. Chris Todd, and Fred S. Zeidman. Although the Company is named as a nominal defendant, the Company’s bylaws generally require the Company to indemnify its current and former directors and officers who are named as defendants in these types of lawsuits. The allegations are substantially similar to those set forth in the Zacharia complaint discussed above. The complaint alleges that the defendants engaged in (i) breach of fiduciary duties owed to the Company by making misrepresentations and omissions about the Company and failing to correct the Company’s public statements; (ii) abuse of control of the Company; (iii) gross mismanagement of the Company; and (iv) unjust enrichment. The complaint seeks unspecified damages, fees, and costs, as well as injunctive relief. On April 26, 2016, the case was reassigned to Judge John Michael Vasquez. On June 9, 2016, the court entered a stipulation previously agreed to by the parties that, among other things, stays the case on terms specified therein.

Settlement of Claims with IDT and Sale of Straight Path IP Group

On April 9, 2017, the Company and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the “Mutual Release”). For further discussion, please see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group.

PTPMS

On May 29, 2012, the Company acquired certain licenses from PTPMS under an asset purchase agreement (the “PTPMS agreement”). On October 5, 2017, PTPMS filed a declaratory judgment action against the Company in the Superior Court of New Jersey, Law Division: Union County captioned PTPMS Communications, LLC v. Straight Path Communications Inc. The action seeks, among other things, a declaration judgment that the Company’s Merger with Verizon triggers an obligation to pay to PTPMS a profit share from the sale of licenses acquired from PTPMS (and that if the Company does not pay such profit share, then the transfer to Verizon of the licenses acquired from PTMPS is void), and a declaration determining the amount of such profit share. The Company and PTPMS are in discussions and any settlement remains subject to entering into a definitive agreement.

Other Legal

In addition to the foregoing, the Company may from time to time be subject to other legal proceedings that arise in the ordinary course of business.

FCC License Renewal

Our spectrum licenses in the LMDS and 39 GHz bands have historically been granted for ten-year terms. On April 20, 2016, and based on our submission of a renewal application and substantial service demonstration, the FCC granted our application to renew our LMDS BTA license for the LMDS A1 band (27.5 – 28.35 GHz) that covers parts of the New York City BTA for a ten-year period, until February 1, 2026. We have 15 other LMDS A1 licenses; nine of these licenses currently have a renewal date of August 10, 2018, and six of these licenses have a renewal date of September 21, 2018. However, following the adoption of the Upper Microwave Flexible Use (“UMFU”) Report and Order, we are only required to submit an application for renewal at those deadlines; we are not required to submit a substantial service demonstration for these licenses until the next build-out date specified in the UFMU Report and Order, which is June 1, 2024. That deadline was confirmed by the FCC in its Order on Reconsideration adopted on November 16, 2017.

Of the 15 BTAs in which we hold LMDS A2 band (29.1 – 29.25 GHz) and A3 band (31.075 – 31.225 GHz) spectrum, nine licenses currently have a renewal deadline of August 10, 2018 and six of these licenses currently have a renewal deadline of September 21, 2018. Of our 117 LMDS B band (31.0 – 31.075 GHz and 31.225 – 31.300 GHz) spectrum, five licenses currently have a renewal and substantial service deadline of August 10, 2018 and 112 licenses currently have a renewal and substantial service deadline of September 21, 2018. On August 3, 2017, the FCC adopted new rules governing the process by which licensees may seek renewal of their authorizations. Pursuant to those new rules, we believe that incumbent LMDS licensees that have already renewed their authorizations once (as we have) will not be required to demonstrate substantial service at renewal. Therefore, while we will be required to renew our authorizations for LMDS A2, A3 and B Blocks in 2018, no substantial service demonstration will be required until 2023.

The UMFU Report and Order substantial service deadline of June 1, 2024 also applies to our 735 39 GHz licenses, which currently have a renewal deadline of October 18, 2020.

For further discussion, please see “Regulatory Enforcement” above in this Note 14 to the Consolidated Financial Statements.

Other Commitments and Contingencies

The Former SPSI CEO is entitled to receive payments from future revenues generated from the leasing, licensing or sale of rights in certain of Straight Path Spectrum’s wireless spectrum licenses. Those payments are to be made out of 50% of the covered revenue and are in a maximum aggregate amount of $3.25 million. The payments arise under the June 2013 settlement of certain claims and disputes with the Former SPSI CEO and parties related to the Former SPSI CEO.

Approximately $22,000 and $17,000 was incurred to the Former SPSI CEO for this obligation for Fiscal 2018 and Fiscal 2017, respectively.

For a further discussion, see Note 2 – Verizon Merger Agreement above.