Commitments and Contingencies

Leases

The Company leases certain facilities and equipment under long-term non-cancelable operating lease agreements, expiring at various dates through 2019. Rent expense for the Company under operating leases, including month-to-month rentals, totaled approximately $7.8 million, $5.0 million and $5.2 million in fiscal years 2014, 2013 and 2012, respectively. The Company records rent expense on a straight-line basis based on contractual lease payments. Allowances from lessors for tenant improvements have been included in the straight-line rent expense for the applicable locations.

Future minimum non-cancelable operating lease commitments are as follows (in thousands):




	Operating Leases
Fiscal year:
2015	$	6,388
2016	5,204
2017	3,382
2018	2,735
2019	1,497
Thereafter	104
Total minimum lease payments	$	19,310

Litigation

Broadcom Patent Infringement Litigation

On September 14, 2009, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California (District Court). The original complaint alleged infringement by the Company of ten Broadcom patents covering certain data and storage networking technologies. On January 11, 2010, the Court set a trial date of September 20, 2011. On February 23, 2010, Broadcom filed a first amended complaint adding allegations of infringement for one additional Broadcom patent. The first amended complaint sought unspecified damages and injunctive relief. On March 25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint alleging that it believed that the Broadcom patents at issue were invalid or not infringed, or both. In addition, the Company asserted counterclaims for declaratory judgment of invalidity and non-infringement against each of the Broadcom patents at issue, and sought award of attorneys’ fees, costs, and expenses.

On May 26, 2010, Broadcom filed a separate patent infringement lawsuit against the Company in the District Court. The 2010 lawsuit alleged infringement of a Broadcom patent covering certain data and storage networking technologies by certain Emulex products. Broadcom sought a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs.

On June 30, 2010, the Court consolidated the 2009 and 2010 patent cases into a single case. On October 14, 2010, the Court issued an order on the parties’ joint stipulation dismissing three patents from the case. On November 1, 2010, the Court issued an order allowing Broadcom to make infringement assertions against additional Emulex products. In a Court ruling dated December 17, 2010, the Court provided interpretations of certain terms contained in the claims of the patents being asserted by Broadcom. In February and May 2011, the Court issued separate orders on the parties’ joint stipulations collectively dismissing two patents from the case (leaving seven patents in the case). The Court heard the parties’ respective motions for summary judgment and subsequently issued a ruling on August 3, 2011 barring Broadcom’s claim for infringement on one patent, leaving six patents in the case. On August 25, 2011, the Company met with a mediator and representatives of Broadcom concerning potential settlement of the case. On September 2, 2011, the parties submitted a joint summary of the mediation proceedings in which they stated that the mediation proceedings continued for a full day, but the parties were unable to reach a settlement agreement.

After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by Emulex, and the jury rendered an advisory verdict on October 12, 2011 to the Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents (U.S. Patent 7,471,691) [the ‘691 Patent] and (U.S. Patents 6,424,194; 7,486,124 and 7,724,057) [collectively, the ‘194 Patent family], for which no unanimous verdict was reached. On December 15, 2011, the Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the Court issued an additional JMOL that the ‘691 patent had been infringed by Emulex. The ‘150 patent, particularly Claim 8 considered at the trial, pertains to the use of multiple lanes of phase interpolators, and products that utilize clock and data recovery (CDR) circuits in SerDes modules on an application specific integrated circuit (ASIC). The ‘691 patent, particularly Claim 7 considered at the trial, pertains to fibre channel arbitrated loop switch crossbars and scoreboards, and products that utilize specialized ASICs used in storage arrays and pass-through modules. The Company has filed an appeal for both the ‘150 patent and ‘691 patent infringement findings with the U.S. Court of Appeals for the Federal Court (Appeals Court), which affirmed the jury's and District Court's findings.

On March 16, 2012, the Court issued a decision concerning injunctive relief for the ‘150 and the ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The affected products for the ‘150 patent include the BE2, BE3, XE201, and SOC 442 ASICs, products containing them, and products not colorably different from them. The affected products for the ‘691 patent include the SOC 320, SOC 422, and SOC 442 ASICs, products containing them, and products not colorably different from them. The sunset period allows the Company to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and when certain firm orders had been placed. The decision further provided for the Company to pay a royalty of nine percent on all sales of such products made during the sunset period, and also provided that foreign sales (outside the U.S.) are beyond the scope of the suit. On April 3, 2012, the Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and ‘691 patents, further describe the prohibited activities, contain sunset provision terms including royalty rates and computations, limit the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permit design around efforts including modifications and design, development, and testing to eliminate infringement, and permit service and technical support for certain products.

On May 30, 2012, the Court issued an order requiring the parties to submit the Appendix to the 2012 Permanent Injunction, and excluded from the sunset provision any customer who is a distributor and not an OEM, with distributor exceptions for needs of an end user affecting health of the public, public safety, and governmental agencies engaged in the national defense. The May 30, 2012, order provided that, not later than 90 days from the date of that order, Broadcom may move the Court for exclusion of certain device/customer product combinations from the Appendix. An Appendix was filed by Emulex and Broadcom with the Court under seal on June 10, 2012.

On July 3, 2012, Broadcom and the Company entered into a Patent License and Release Agreement (Settlement Agreement) pursuant to which both parties agreed to settle and release certain claims related to patent infringement litigation in exchange for a lump sum payment of $58.0 million. The Settlement Agreement provided for certain amendments to the 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. The Company also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent and related families for certain fields of use including Fibre Channel applications. The fields of use licensed to Emulex are related, in part, to the Emulex XE201 (Lancer) ASICs, that are capable of Fibre Channel and Ethernet, 16Gbps Fibre Channel HBAs, Fibre Channel SOCs and other Fibre Channel products. On July 18, 2012, pursuant to the Settlement Agreement, the Court issued an amended Permanent Injunction with an amended appendix, and approved a stipulation to dismiss certain allegations in the lawsuit. The amended Permanent Injunction provides for a Sunset Provision under which the injunction is stayed until April 11, 2013, subject to limitations. The current Permanent Injunction permits major OEMs to obtain continued supply beyond the sunset period, providing them time to re-qualify products resulting from the design around efforts.

During the first quarter of fiscal 2013, the Company made the payment of $58.0 million to Broadcom pursuant to the Settlement Agreement, approximately $36.8 million of which was expensed in fiscal 2012. The remainder of approximately $21.2 million was recorded as prepaid license fees and is being amortized to cost of goods sold over the 10 year license term in proportion to the estimated future revenues of such licensed technology. As of June 29, 2014, the unamortized prepaid license fee was approximately $13.1 million, of which approximately $3.8 million was recorded in prepaid expenses and other current assets and approximately $9.3 million was recorded in other assets. The Company recognized approximately $4.0 million and $4.1 million of amortization expense related to such prepaid license fees expenses during fiscal 2014 and 2013, respectively.

While the Company has contractual commitments from its suppliers concerning the defense and indemnification of certain Broadcom claims relating to certain technology provided by such suppliers, it cannot be certain that such defense and indemnification obligations will be honored by such suppliers. This lawsuit continues to present risks with respect to U.S. sales of certain Ethernet products that could have a material adverse effect on the Company’s business, financial condition, or results of operations, including loss of patent rights, monetary damages, potential reimbursement of customer indemnification liabilities or royalty obligations, and injunction against the sale of accused products. The Company continues to present a vigorous defense against this ongoing lawsuit, as well as the previous infringement verdicts, damages and judgments.

Through June 29, 2014, the Company has incurred approximately $21.7 million of mitigation, product redesign and appeal related expenses, of which approximately $4.5 million, $8.6 million and $3.6 million were recorded in fiscal 2014, 2013 and 2012, respectively and the Company expects to incur incremental mitigation, product redesign, and appeal related expenses during fiscal 2015 up to $1 million, all recorded within operating expenses. Engineering and development costs included expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of the affected products, and to implement the end of life processes in the U.S. for certain other affected products. Sales and marketing costs included expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. In addition, the Company has agreed to participate in certain customer royalty obligations arising under licensing agreements with Broadcom with respect to the infringing products. Through June 29, 2014, the Company has recorded approximately $4.4 million in cost of sales related to such customer obligations, of which approximately $3.4 million and $0.9 million related to such payments were recorded to cost of sales in fiscal 2014 and 2013, respectively. The Company may incur additional amounts related to these obligations of approximately $5 million in future periods, all of which will reduce gross margins in the periods accrued.

Effective March 30, 2014, the Company and Broadcom entered into a Dismissal and Standstill Agreement (the "Dismissal Agreement") pursuant to which the Company and Broadcom entered into certain understandings with respect to outstanding claims relating to and arising out of the patent infringement suit identified as Broadcom Corporation v. Emulex Corporation, Civil Action No. 8:09-cv-01058 (C.D.Cal.) brought by Broadcom against Emulex.

Pursuant to the terms of the Dismissal Agreement, Emulex has agreed to pay Broadcom, a non-refundable, non-cancelable dismissal and standstill fee for $5 million reflected in the accompanying financial statements in General and Administrative expense for the twelve months ended June 29, 2014, of which approximately $3.8 million was included in Accrued and Other Current Liabilities as of June 29, 2014.

Pursuant to the terms of the Dismissal Agreement, both parties agreed to dismiss, without prejudice, the unresolved claims by Broadcom, which were to be considered in a retrial scheduled for September 2014 (the "Dismissal Claims"). Emulex and Broadcom jointly submitted a request for Order on Joint Stipulation to Dismiss Claims Without Prejudice and Vacate Trial Date to the relevant court, and the court issued such Order on Joint Stipulation to Dismiss Claims Without Prejudice and Vacate Trial Date on April 2, 2014.

Broadcom agreed for a period of one year from entering into the Dismissal Agreement to provide advance notice to Emulex of future patent assertions and to participate in good faith dispute resolution procedures; and agreed to a one-year standstill in making any claims against Emulex, its subsidiaries or customers, or any third party suppliers of serializer/deserializer (SerDes) function blocks to Emulex. The standstill applies only to the extent the Broadcom claims would allege infringement on the SerDes Patents (as defined below) based solely on the use, manufacture, sale or import of certain Emulex products that were accused in the suit (Standstill Products). For purposes of the Dismissal Agreement, SerDes Patents means (i) U.S. Patent Nos. 6,424,194; 7,038,516; 7,125,169; 7,486,124; and 7,724,057, and any reissues, foreign counterparts, continuations, continuations-in-part, divisionals or reexaminations of the patents listed in clause (i) to the Dismissal Agreement. The Dismissal Agreement does not prevent, after the expiration of the one year standstill, Broadcom from bringing an infringement claim seeking an injunction or damages with respect to infringement of the SerDes Patents relating to the Standstill Products.

Shareholder Lawsuits

On May 21, 2014, a derivative shareholder complaint was filed in the United States District Court in the Central District of California (Case No. 8:14-cv-0076-DOC-JCG) alleging damages by Emulex and eight of the Company's eleven directors. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock and by the implementation of cost reductions. An amended federal complaint was filed on July 14, 2014 in which the original plaintiff was dropped from the complaint and a different plaintiff was added. On August 15, 2014, the Company filed a motion to dismiss the complaint, which is scheduled to be heard on November 10, 2014. Management is unable to determine whether any loss will occur or to estimate the range of such loss. Therefore, no amount of loss has been accrued.

On July 17, 2014, a derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Orange (Case No. 30-2014-00734802-CU-SL-CXC) alleging damages by Emulex and eight of the Company's eleven directors. The lawsuit alleges that Emulex was damaged by expenses for the repurchases of Emulex stock and by the implementation of cost reductions. On August 7, 2014, the parties filed a stipulation to stay the State Derivative Action pending the resolution of the motion to dismiss the Federal Derivative Action. A status conference in the State Derivative Action is scheduled for September 17, 2014. Management is unable to determine whether any loss will occur or to estimate the range of such loss. Therefore, no amount of loss has been accrued.

In addition to the ongoing litigation discussed above, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the open matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Other Commitments and Contingencies

In addition, the Company provides limited indemnification in selected circumstances within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to the Company’s product infringement of certain intellectual property, and in some limited cases against bodily injury or damage to real or tangible personal property caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. As of June 29, 2014, the Company has not incurred any significant costs related to indemnification of its customers.