6. Commitments and Contingencies

Operating Leases

As of December 31, 2016, the Company sub‑leases office facilities under non‑cancelable operating lease agreements. The Company occupies approximately 88,000 square feet of laboratory and office space at our corporate headquarters in San Carlos, California pursuant to two separate subleases. One sublease covers approximately 61,000 square feet (the “First Space”), and the other sublease covers approximately 27,000 square feet (the “Second Space”). In connection with the sublease for the First Space in January 2013 and the Second Space in March 2014, the Company executed two letters of credit in favor of the lessors for $0.8 million and $0.3 million, respectively.

In October 2016, the Company amended the lease agreement that it directly entered into with the landlord of our First Space and Second Space (as described above) to include a sublease of additional office space to accommodate its growth and consolidate its operations in California at one location. The additional sublease covers approximately 48,000 square feet of office space and consists of two phases. The first phase began in October 2016 and covers approximately 16,000 square feet of office space at a base rent of $60,730 per month. The second phase began in January 2017, which covers approximately 32,000 square feet of office space at a base rent of $121,460 per month. The term of this sublease is approximately eighty-four months, with the same expiration date as the First Space and Second Space, which is in October 2023.

In April 2015, the Company entered into a sub-lease agreement for additional office space in Redwood City, California. The additional space carried a base rent of $0.1 million per month. The lease period began in June 2015 and terminated in August 2016 with no option to extend the lease. In addition, the Company paid a security deposit of $0.1 million.

In September 2015, the Company’s subsidiary entered into a long-term lease agreement for laboratory and office space totaling approximately 94,000 square feet in Austin, Texas. The lease term is 132 months beginning in December 2015 with monthly payments beginning in December 2016, increasing from $0.1 million to $0.2 million. Pursuant to the terms of the lease, the subsidiary has paid a security deposit of $0.4 million, and the landlord has allotted the subsidiary an allowance for leasehold improvements of up to $7.8 million. As of December 31, 2016, a total of $5.4 million of the allowance has been reimbursed by the landlord.

The future annual minimum lease payments under all non-cancelable operating leases as of December 31, 2016 are as follows:


	Operating Leases
	(in thousands)
Year ending December 31:
2017	$	6,914
2018		6,914
2019		6,413
2020		6,313
2021		6,313
2022 and thereafter		15,622
Total future minimum lease payments	$	48,489

Rent expense for the years ended December 31, 2016, 2015 and 2014 was $5.4 million, $2.7 million and $1.5 million, respectively. The Company is also required to pay its share of facility operating expenses with respect to the facilities in which it operates.

Legal Proceedings

From time to time, the Company is involved in disputes, litigation, and other legal actions. The Company is aggressively defending its current litigation matters, and while there can be no assurances and the outcome of these matters is currently not determinable, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position. There are many uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges.

In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If this were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, if any, which could result in the need to record or adjust a liability and record additional expenses. During the periods presented, the Company has not recorded any accrual for loss contingencies associated with such legal proceedings, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable.

On each of February 17, 2016, March 10, 2016, March 28, 2016 and April 4, 2016, purported class action lawsuits were filed in the Superior Court of the State of California for the County of San Mateo (the “San Mateo Superior Court”), against the Company, its directors and certain of its officers and 5% stockholders and their affiliates, and each of the underwriters of the Company’s July 1, 2015 initial public offering (the "IPO"). The complaints assert claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended. The complaints allege, among other things, that the Registration Statement and Prospectus for the Company’s IPO contained materially false or misleading statements, and/or omitted material information that was required to be disclosed, about the Company’s business and prospects. Among other relief, the complaints seek class certification, unspecified compensatory damages, rescission, attorneys' fees, and costs. The Company removed these actions to the United States District Court for the Northern District of California, and the actions were subsequently remanded back to the San Mateo Superior Court. The Company has appealed the remand and moved to stay, or put a hold on, discovery pending the appeal. The Company has also filed a demurrer, or a request for dismissal as a matter of law, in the San Mateo Superior Court, which has not yet been heard. The Company intends to defend the matter vigorously, but cannot provide any assurance as to the ultimate outcome or that an adverse resolution would not have a material adverse effect on its financial condition and results of operations. In light of, among other things, the early stage of the litigations, the Company is unable to predict the outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

On March 4, 2016, a lawsuit was filed against the Company in the Superior Court of the State of California for the County of San Diego, by a patient alleging that Natera failed to perform a test that was ordered. The complaint seeks compensatory damages. This matter is in the discovery stage. The Company intends to vigorously defend against the claims in this lawsuit, and assert any counterclaims that may be available to it. The Company cannot provide any assurance as to the ultimate outcome or that an adverse resolution of this lawsuit would not have a material adverse effect on its financial condition and results of operations. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

On December 12, 2015, the Company received a civil investigative demand from the United States Department of Justice in connection with what the Company understands to be a qui tam action related to the billing of some of its testing, brought by a former employee. The Company has produced documents in response to the demand. An adverse ruling in this proceeding could require the Company to pay treble damages, civil penalties, and attorneys’ fees, costs and expenses, which could materially and adversely affect its business, financial condition and results of operations. The Company has only received a civil investigative demand and has not been served with a complaint; accordingly, the Company is unable to predict the outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

On December 9, 2016, the Company filed a lawsuit against Bio-Reference Laboratories, Inc. (“Bio-Reference”) in the U.S. District Court for the Southern District of New York alleging that Bio-Reference breached a licensing and joint development agreement (the “Licensing Agreement”) between Bio-Reference and Natera, misappropriated trade secrets, and converted confidential information. The Company also filed a motion for a temporary restraining order and preliminary injunction enjoining Bio-Reference from launching a nationwide marketing campaign of its product in violation of the Licensing Agreement. On December 10, 2016, the Company’s motion for a temporary restraining order was denied, and the Court ordered both parties to submit proposed hearing dates with respect to our motion for a preliminary injunction. The Company and Bio-Reference have resolved the matter as of February 2017.

Director and Officer Indemnifications

As permitted under Delaware law, and as set forth in the Company’s Certificate of Incorporation and its Bylaws, the Company indemnifies its directors, executive officers, other officers, employees and other agents for certain events or occurrences that may arise while in such capacity. The maximum potential amount of future payments the Company could be required to make under this indemnification is unlimited; however, the Company has insurance policies that may limit its exposure and may enable it to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, the Company believes any obligations under this indemnification would not be material, other than an initial $1.5 million for securities related claims an $0.3 million for commercial general liability claims. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case the Company may incur substantial liabilities as a result of these indemnification obligations.

Third-Party Payer Reimbursement Audits

In November 2014, a third-party payer sought information as part of an investigative audit of claims which it had paid for certain genetic testing. The Company complied with their request and provided responsive information. In a letter dated June 2, 2015, the third-party payer alleged that it had overpaid $1.9 million to the Company, which it claimed was an overpayment reflecting the difference between what it paid to the Company and what it contended it should have paid based on its fee schedule and coverage determinations. In August 2015, the Company reached an agreement for a settlement payment of $1.2 million as part of a complete settlement of this matter. This charge was recorded against revenue in the second quarter of 2015.

In March 2017, a third-party payer alleged that it had overpaid the Company, and has demanded recoupment of the alleged overpayments. The Company disagrees with the contentions.

Contractual Commitments

As of December 31, 2016, the Company has non‑cancelable contractual commitments with a supplier for approximately $5.1 million and other material supplier commitments for approximately $3.4 million for inventory material used in the laboratory testing process.

As of December 31, 2016, the Company has a non-cancelable license agreement with a vendor for approximately $3.0 million. This represents binding and remaining commitments with the vendor through December 31, 2019.