Legal Proceedings and Other Matters

Pre-Acquisition Contingencies Related to TCS Intellectual Property

TCS is a party to a number of legal proceedings and a contract dispute, in each case, relating to customers seeking indemnification under contractual arrangements for claims and other costs associated with defending lawsuits alleging infringement of patents through the customers' use of TCS’s products and services, including in combination with products and services of other vendors. In some cases, TCS has agreed to assume the defense of lawsuits and in other situations, TCS did not believe that its technology was infringing or that certain customers were entitled to indemnification.

These intellectual property legal proceedings and contract disputes are described further below:

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In December 2009, Vehicle IP, LLC ("Vehicle IP") filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware, seeking monetary damages, fees and expenses and other relief from, among others, our customer Verizon Wireless ("Verizon"), based on the VZ Navigator product, and TCS is defending Verizon against Vehicle IP. In 2013, the District Court granted the defendants’ motion for summary judgment on the basis that the products in question did not infringe plaintiff’s patent. Plaintiff appealed that decision and, in 2014, the U.S. Court of Appeals for the Federal Circuit reversed the district court's claim construction, overturned the district court's grant of summary judgment of noninfringement, and remanded the case for further proceedings. Fact discovery and expert discovery has closed. Trial regarding the validity of Vehicle IP's patent is scheduled to begin in February 2017. Trial regarding Vehicle IP's claims of infringement against Verizon and TCS has been scheduled to begin in July 2017, after a trial of Vehicle IP's claims against the other defendants in the case.

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In August 2014, TracBeam, LLC ("TracBeam") brought a patent infringement lawsuit in the U.S. District Court for the Eastern District of Texas seeking monetary damages, fees and expenses and other relief from, among others, TCS’s customers T-Mobile US, Inc. and T-Mobile USA, Inc. (together, "T-Mobile"), based on the defendants’ E9-1-1 service and locator products, and TCS is defending T-Mobile against TracBeam. In August 2015, T-Mobile and a co-defendant filed petitions for Inter Partes Review ("IPR") challenging TracBeam’s patents before the Patent Trial and Appeal Board which instituted trial on some of the claims in the litigation, while denying institution on others. TracBeam subsequently disclaimed those claims that were subject to these IPR trials and as a result, in November 2016, the Patent Trial and Appeal Board issued adverse judgments in all pending IPR trials. The disclaimed claims are precluded from being asserted in any current or future lawsuit. In the district court case, fact and expert discovery is complete, with trial scheduled for January 2017. In connection with this case, we have made a demand for indemnification from a third party for a portion of the potential liability.

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In 2012, CallWave Communication LLC ("CallWave") brought a patent infringement lawsuit in the U.S. District Court for the District of Delaware seeking monetary damages, fees and expenses and other relief from, among others, Verizon Wireless and certain of its affiliates (collectively, "Verizon"), based on Verizon's VZ Family Locator and VZ Navigator, and TCS has agreed to indemnify Verizon with respect to one of the asserted patents of plaintiff that implicates a TCS product. In August 2016, the court agreed to stay the proceedings of the case against Verizon in connection with the one asserted patent pending negotiation of a settlement agreement among TCS, Verizon and CallWave. On September 15, 2016, the court granted a motion for judgment on the pleadings, finding that the asserted claims of the patent are invalid because they relate to unpatentable subject matter. CallWave has informed us that it will appeal the court's order.

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In August 2015, IP Cube Partners Co. Ltd. ("IP Cube") brought a lawsuit in the U.S. District Court for the Southern District of New York seeking damages based on TCS’s alleged breach of contract and fraudulent representation in connection with the sale by TCS to IP Cube in 2012 of two patents. In July 2016, the parties reached a settlement in principal related to this matter and the case was dismissed with prejudice by court order on September 7, 2016.

Our Condensed Consolidated Balance Sheet as of October 31, 2016 includes a $26,992,000 liability, which represents the remaining preliminary estimated fair value for pre-acquisition contingencies related to the above TCS intellectual property legal proceedings and contractual obligations. The preliminary estimated fair value was determined using unobservable Level 3 inputs and based on discounted cash flows that reflect significant management estimates and assumptions, including: (i) possible outcomes for each case; (ii) timing of each possible outcome; (iii) probability of each possible outcome; (iv) estimated settlement and damages payments for each possible outcome; (v) potential legal fees to reach each outcome; and (vi) a discount rate reflecting the credit risk of the Company. The preliminary estimated fair value reflects market participant assumptions, as required by FASB ASC 805 “Business Combinations,” and does not reflect our settlement position or amounts we actually may pay if an unfavorable resolution occurs. Ongoing legal expenses associated with defending these legacy TCS intellectual property legal proceedings and contract disputes and their ultimate resolution could vary and have a material adverse effect on our future consolidated results of operations, financial position, or cash flows.

Other Proceedings

A family in Mississippi sued Verizon Wireless in June 2016 and TCS in July 2016 in the U.S. District Court for the Southern District of Mississippi, for compensatory damages in the amount of $20,000,000 and punitive damages in the amount of $25,000,000 resulting from the family’s allegations that their 911 calls were improperly routed during an emergency. Both TCS and Verizon have filed answers denying the allegations in the plaintiffs’ complaint. Verizon has also filed a motion to compel arbitration and stay the case. This motion was granted by the court on November 14, 2016. While Verizon has requested to be indemnified by TCS, Verizon also informed us that it believes TCS has properly carried out its duties. TCS maintains certain insurance and, in November 2016, its insurance carrier informed us that, subject to its reservation of rights, we are entitled to certain coverage and defense costs. We believe these claims lack merit and intend to vigorously defend ourselves in this matter.

In October 2014, we disclosed to the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) that we learned during a self-assessment of our export transactions that a shipment of modems sent to a Canadian customer by Comtech EF Data was incorporated into a communication system, the ultimate end user of which was the Sudan Civil Aviation Authority. The sales value of this equipment was approximately $288,000. OFAC regulations prohibit U.S. persons from doing business directly or indirectly with Sudan. In late 2015, OFAC issued an administrative subpoena seeking further information about the disclosed transaction. We have responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon who may have rerouted the modems from Lebanon to Sudan without the required U.S. licensing authorization. We are not able to predict when OFAC will complete its review, nor whether it will take any action against us, which could include civil and criminal penalties. If OFAC determines that we have violated U.S. trade sanctions, we may suffer reputational harm. Even though we take precautions to avoid engaging in transactions that may violate U.S. trade sanctions, those measures may not be effective in every instance.

There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.