Note 13. Commitments and Contingencies

Product warranty

Changes in our Accrued warranty liability are as follows:


	December 31,
	2011			2010
	(In thousands)
Balance, beginning of period	$	34,947		$	19,611
Warranties issued		48,458			53,404
Settlements		(44,287	)		(35,024	)
Net changes in liability for pre-existing warranties, including expirations		(5,003	)		(3,044	)

Balance, end of period		34,115			34,947
Less: long-term portion		(5,859	)		(5,435	)

Accrued warranty, current	$	28,256		$	29,512

Standby Letters of Credit

We provide standby letters of credit to certain parties as required for certain transactions we initiate during the ordinary course of business. As of December 31, 2011, the maximum potential amount of future payments that we could be required to make under these letters of credit was $7.9 million. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements.

Lease Commitments

We have non-cancelable operating leases for various facilities and other assets. Rent expense for the years ended December 31, 2011, 2010, and 2009 was $3.6 million, $3.0 million, and $3.4 million, respectively, net of sublease income of $1.2 million for 2011 and $1.1 million for 2010 and 2009. However, net rent expense for the years ended December 31, 2011, 2010 and 2009 excludes sublease income of $6.7 million, $6.5 million and $6.3 million, respectively, in excess of our minimum lease payments. Certain of the operating leases contain provisions which permit us to renew the leases at the end of their respective lease terms.

The following is a table summarizing future minimum lease payments under all non-cancelable operating leases, with initial or remaining terms in excess of one year. The table excludes $21.8 million of sublease income in excess of our future minimum lease payments.


	Years Ending December 31,												Sublease Income			Net Total
	2012		2013		2014		2015		2016		Thereafter		Sublease Income			Net Total
	(Dollars in thousands)
Non-cancelable operating leases	$	7,932	$	6,848	$	6,324	$	4,816	$	4,356	$	3,570	$	(10,322	)	$	23,524

Purchase and Other Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components. Our minimum obligation as of December 31, 2011 under these arrangements was $9.0 million. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We have made adequate provision for potential exposure related to inventory on orders that may go unused. As of December 31, 2011 we had $10.7 million in other non-inventory related commitments.

Merger Termination Fees

If the Merger is not completed, depending upon the reasons for not completing the Merger, including whether we have received or entered into a competing takeover proposal, we may be required to pay Lam Research a termination fee of $80 million or $120 million depending on the termination event.

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages of up to $200 million (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition, and breach of warranty.

The Superior Court dismissed Linear's claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began before a jury on January 19, 2010, in the Superior Court. Novellus prevailed on these claims at trial, which ended on February 26, 2010. Linear filed two motions, one seeking entry of a judgment in its favor notwithstanding the jury's verdict, and the other seeking a new trial, both of which the Superior Court denied. Linear paid us the entire amount awarded and subsequently filed an appeal. On November 22, 2011, the Court of Appeals unanimously affirmed the trial court's decision including the award of attorney's fees and costs to Novellus. On December 7, 2011, Linear filed a Petition for Rehearing with the Court of Appeals, which on December 19, 2011 the Court of Appeals denied. On January 3, 2012, Linear filed a Petition for Review with the Supreme Court of California. On January 20, 2011, Novellus filed an opposition to Linear's petition. The $5.6 million in attorney's fees and other costs awarded to Novellus by the California Superior Court in August, 2010 was recognized as a gain in fourth quarter 2011 Selling, general and administrative expense due to management's assessment that it was probable that the Supreme Court would not overturn the Appeals Court's decision. On February 15, 2012 the Supreme Court of California denied Linear's Petition for Review allowing the trial court's decision, including the award of attorney's fees and costs to Novellus, to stand.

Other Litigation

We are either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our business, financial condition, and results of operations.

Litigation Related to Proposed Merger with Lam Research

On December 15, 2011, a purported class action lawsuit was filed in California Superior Court for the County of Santa Clara (State Court), by Marla Skroch, an alleged Novellus shareholder who seeks to represent a class comprised of Novellus shareholders. The complaint in this action (the Skroch complaint), names as defendants Novellus, the members of Novellus' Board of Directors, and Lam Research. The Skroch complaint alleges that the director defendants breached fiduciary duties allegedly owed to Novellus' shareholders by entering into the Merger Agreement; that Lam Research and Novellus aided and abetted the alleged breaches of fiduciary duty; and that if the transaction is allowed to proceed, the shareholders will suffer damages because their shares will be acquired for less than their actual value. The plaintiff seeks an order in the State Court certifying the action as a class action; rescinding the transaction and/or preliminarily enjoining the defendants from consummating the transaction, and/or awarding attorneys' fees and costs.

On December 19, 2011 a second purported class action was filed in the State Court by Michael Resing, an alleged Novellus shareholder, who seeks to represent the same purported class. The complaint in this action (the Resing complaint) names as defendants the members of Novellus' Board of Directors, Novellus, Lam Research and the Merger subsidiary. The allegations contained in the Resing complaint are largely similar to the allegations contained in the Skroch complaint, except that the Resing complaint also alleges that BLMS aided and abetted alleged breaches of fiduciary duty by the director defendants. The plaintiff seeks similar relief to that sought by the Skroch complaint.

On December 20, 2011 and December 28, 2011, two additional purported class action lawsuits were filed by the State Court by Louisiana Municipal Police Employees' Retirement System ("LMPERS") and Nanette Ramsay, alleged Novellus shareholders that seek to represent the same purported class. The complaints in these actions names as defendants the same parties named in the Resing complaint. The allegations and relief sought in these complaints are largely similar to the allegations and relief sought in each of the preceding complaints, except that the LMPERS complaint alleges that Novellus breached fiduciary duties allegedly owed to Novellus' shareholders, rather than aiding and abetting the alleged breaches of fiduciary duty. Both the LMPERS complaint and the Ramsay complaint also seek damages.

Attorneys for the parties in the four actions filed in the State Court have agreed, and the State Court has ordered, that these actions be consolidated into one action titled In re Novellus Systems, Inc. Litigation. On February 10, 2010, the Superior Court appointed LMPERS as lead plaintiff.

On January 5, 2012, a purported class action lawsuit was filed in the United States District Court by Sunil Nagpal, an alleged Novellus shareholder, who seeks to represent the same purported class. The complaint in this action names as defendants the same parties as the complaints in the Resing, LMPERS and Ramsay actions, as well as one former Novellus director, and the allegations and relief sought in this complaint are largely similar to the allegations and relief sought in each of the preceding complaints.

While the outcome of these cases cannot be predicted with certainty, we do not believe that the ultimate disposition of these matters will have a material adverse effect on our business, financial condition, operating results or cash flows.

Guarantee Arrangements

We have guarantee arrangements on behalf of certain of our consolidated subsidiaries for short-term borrowings and operating leases. In the event of default on these arrangements, we would have a maximum exposure of $20.8 million as of December 31, 2011. We also had guarantee arrangements outstanding with financial institutions for loans to non-executive employees of $0.4 million as of December 31, 2011.