Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies {1}

Commitments and Contingencies Disclosure [Text Block]

We establish contingent liabilities when a particular contingency is both probable and estimable. For the contingencies noted below we have accrued amounts considered probable and estimable. The Company is not aware of any pending claims or assessments, other than as described below, which may have a material adverse impact on the Company’s financial position or results of operations.

Under the terms of employment agreements entered into with two employees, among other things, the employees are entitled to a bonus specified as a percentage of the revenue generated from sale of certain products upon reaching certain thresholds.

Outsource Manufacturers. We have manufacturing agreements with electronics manufacturing ("EMS") providers related to the outsourced manufacturing of our products. Certain manufacturing agreements establish annual volume commitments. We are also obligated to repurchase Company-forecasted but unused materials. The Company has non-cancellable, non-returnable, and long-lead time commitments with its EMS providers and certain suppliers for inventory components that will be used in production. The Company’s exposure associated with these commitments is approximately $4,583 as of December 31, 2011. One of the EMS providers with whom we have terminated our relationship is claiming that we have an obligation to buy inventory pursuant to cancelled purchase orders. We believe that we are not legally obligated to take delivery of this inventory and we also have counterclaims against the EMS provider.

Legal Proceedings. In addition to the legal proceedings described below, we are also involved from time to time in various claims and other legal proceedings which arise in the normal course of our business. Such matters are subject to many uncertainties and outcomes that are not predictable. However, based on the information available to us, we do not believe any such proceedings will have a material, adverse effect on our business, results of operations, financial position, or liquidity, except as described below.

Former Officer Indemnification

On July 25, 2007 and January 31, 2008, the U.S. Attorney for the District of Utah indicted two of our former officers, Frances Flood (“Flood”) and Susie Strohm (“Strohm”), for allegedly causing us to issue materially misstated financial statements for our 2001 and 2002 fiscal years and for perjury in connection with the investigation by the SEC into the alleged misstatements.  In December 2003, we entered into indemnification agreements with each former officer, requiring payment of all reasonable attorneys’ fees and costs incurred in defending against the charges in certain circumstances consistent with and subject to limitations imposed by our bylaws and applicable law.  To date, we have paid approximately $3,383 in attorneys’ fees and costs to defend against the charges.

On February 27, 2009, Flood was convicted on nine counts, including conspiracy to willfully falsify our books and records, willfully making false statements in quarterly and annual reports, willfully making and causing to be made misleading and false statements to our accountants in connection with the accountants’ audits, federal securities fraud, and perjury in connection with testimony given under oath in an official proceeding brought by the SEC in 2003.  Strohm was convicted on one count of perjury in connection with testimony given under oath in an official proceeding brought by the SEC in 2003.

On June 2, 2010, Flood was sentenced to 4 years in prison plus 3 years of probation and Strohm was sentenced to 2 years’ probation plus 150 hours of community service.  Flood began serving her prison sentence on November 3, 2010.  On April 4, 2011, the Tenth Circuit Court of Appeals in Denver affirmed Flood’s conviction, but has allowed her to assert in a collateral proceeding her claim that she received ineffective assistance of counsel because her trial counsel allegedly labored under actual conflicts of interest.  On November 8, 2011, the Tenth Circuit affirmed Strohm’s perjury conviction as well.

Flood:  On August 21, 2008, Flood filed a lawsuit in Federal District Court for the District of Utah, seeking to compel us to pay her attorneys’ fees and costs to defend against the criminal charges.  On January 12, 2009, the District Court issued a preliminary injunction requiring us to pay Flood’s criminal legal fees and costs through trial.  Pursuant to the Court’s order, we paid approximately $373 to Flood’s attorneys and approximately $248 into the Court’s escrow.

On August 30, 2010, the Tenth Circuit Court of Appeals issued a ruling vacating the District Court’s preliminary injunction on the grounds that it rested on a legally erroneous interpretation of Flood’s Employment Separation Agreement.  On November 29, 2010, ClearOne filed a motion in the United States District Court for the District of Utah seeking a return of the monies paid by ClearOne pursuant to the Court’s order.

On January 23, 2012, the District Court granted ClearOne’s motion for return of the $248 held in the Court’s escrow, but denied ClearOne’s motion with respect to the $373 paid to Flood’s attorneys.  On February 21, 2012, ClearOne filed a writ of mandamus with the Tenth Circuit seeking an order requiring Flood’s attorneys to return the $373 paid pursuant to the Court’s order.  ClearOne’s writ of mandamus is expected to be submitted to the Tenth Circuit before the end of March 2012.

Also pending in the District Court is ClearOne’s counterclaim for $3,300 seeking to enforce Flood’s August 2003 promise to repay all advanced expenses if it was ultimately adjudged that she did not meet the requisite standard of conduct.

Strohm:  On August 21, 2008, Strohm and her counsel (“Dorsey”) filed a lawsuit in the Third Judicial District Court in Salt Lake City, Utah seeking to compel us to pay Strohm’s attorneys’ fees and costs to defend against the criminal charges, plus interest, and for attorneys’ fees in connection with the civil action.

October 26, 2009, the Court granted Strohm’s motion for mandatory indemnification, ruling that we were required to indemnify Strohm for her reasonable attorneys’ fees and expenses to the extent that she was successful on the merits at trial.  On March 2, 2010, the Court ruled that the Dorsey engagement letter provided an alternative basis requiring the Company to pay Strohm’s reasonable attorneys’ fees and costs incurred in connection with the federal criminal proceedings.  The Court also ruled that ClearOne is required to pay Dorsey’s reasonable attorneys’ fees and costs incurred in bringing the civil lawsuit against the Company, subject to certain deductions.

On January 24, 2011, the Court ruled that ClearOne was required to pay Dorsey at Court-determined rates for all criminal defense services rendered and costs incurred through the federal jury verdict in the criminal case on February 27, 2009, but that ClearOne was not required to pay for any post-verdict criminal defense services.

On June 8, 2011, the District Court entered Judgment against ClearOne for $973 in fees and expenses in the criminal case, plus $362 in interest at 18% through February 1, 2011, which amounts were paid by ClearOne under protest to Dorsey on February 1, 2011.  The Judgment also included $865 in civil case fees and expenses plus interest.  ClearOne has posted a cash bond to cover the civil case fees and interest pending ClearOne’s appeal.

On August 4, 2011, the Utah Supreme Court decided that it would hear ClearOne’s appeal.  Dorsey has appealed as well.  Appellate briefs were fully submitted on March 22, 2012, and the Utah Supreme Court is expected to schedule oral argument.

Theft of Intellectual Property and Related Cases.

In January 2007, we filed a lawsuit in the Third Judicial District Court, Salt Lake County, State of Utah against WideBand Solutions, Inc. (“WideBand”) and two of its principals, one former employee named Dr. Jun Yang, and Andrew Chiang, who was previously affiliated with an entity which sold certain assets to us (the “Trade Secret Case”).  We also brought claims against Biamp Systems Corporation, Inc. (“Biamp”).  The matter was subsequently removed to federal court, the United States District Court, District of Utah, Central Division. The case is styled ClearOne Communications, Inc. v. Jun Yang, et. al. Civil No. 2:07-co-37 TC. 

On November 5, 2008, the jury returned a unanimous verdict in favor of us and against all of the Defendants, awarding approximately $3,500 in compensatory damages and $7,000 in punitive damages.  Among other things, the jury found that all of the Defendants willfully and maliciously misappropriated our trade secrets.

On April 8, 2009 the court issued a permanent injunction order against all of the defendants.  Specifically, the WideBand defendants were prohibited from any further use of our trade secrets, barred from using any of the trade names associated with products that had been found to have used our trade secrets, and were ordered to provide a copy of the permanent injunction to future employers, potential licensors and anyone interested in acquiring WideBand’s assets.  Biamp was ordered to destroy and not to use any of the object code that it had previously licensed from WideBand.  On April 20, 2009 the court affirmed the jury’s finding that all of the Defendants had acted willfully and maliciously in misappropriating our trade secrets, denied our request for prejudgment interest, and denied Defendants’ post-trial requests to set aside the verdict.  The court increased the award against Biamp from about $1,600 to about $3,600.  On April 21, 2009, the court entered a final Judgment in our favor in the amount of approximately $9,700.  The WideBand Defendants and Biamp appealed the Court’s judgment and certain other pre- and post-trial rulings.

During July 2009, the Court issued an award of costs in favor of ClearOne and against all defendants, in the amount of $75.  

Biamp posted a cash bond to secure the judgment against it in the amount of approximately $3,700.  This amount does not secure the additional amounts awarded in ClearOne’s favor and against Biamp, for attorney fees and costs, in the approximate amount of $1,110.

At various dates, the court has issued orders finding Defendants Lonny Bowers and Jun Yang in contempt, along with Lonny Bowers’ father Donald Bowers, and certain entities associated with these defendants.  Some of the contempt related orders are dated September 3, 2009, November 19, 2009, January 8, 2010, August 13, 2010, and October 14, 2010.  The court has issued bench warrants for Lonny Bowers, Jun Yang, and Donald Bowers.

On March 25, 2010, the District Court in the Trade Secret Case affirmed an earlier order issued by the Magistrate Judge on January 29, 2010, awarding us attorney fees and costs, in the amounts of $984 jointly and severally against Biamp, Andrew Chiang, Jun Yang, Lonny Bowers, WideBand Solutions, Inc., and Versatile DSP; in the additional amount of $118 against Biamp only; and in the additional amount of $908 against the WideBand Defendants only.  

Numerous appeals were filed by all of the parties.  Oral argument was held on the appeals on  May 10, 2011.  On June 27, 2011, the Tenth Circuit affirmed in all respects the verdict and related rulings against the WideBand Defendants.  On July 8, 2011, the Tenth Circuit affirmed the contempt orders against Donald Bowers and the other contempt defendants.  On August 8, 2011, the Tenth Circuit affirmed Biamp’s liability, including the federal district court’s award of exemplary damages based upon the finding that Biamp’s misappropriation was willful and malicious, but made two reductions in the amount of damages.  The amount of ClearOne’s judgment against Biamp is now estimated to be $3,700, not including additional amounts that may be awarded for attorney fees incurred on appeal.  This amount reflects reductions by the Tenth Circuit Court of Appeals of approximately $1,100 from the federal district court’s previous judgment of about $4,800.  On August 9, 2011, the Tenth Circuit denied ClearOne’s appeal requesting additional pre-judgment interest.  On October 18, 2011, the Tenth Circuit granted ClearOne’s request for its attorney fees and costs incurred on appeal, and remanded the case to the District Court to determine the amount of fees to be awarded.  We submitted our fee request in November 2011.

On December 13, 2011, the United States District Court for the District of Utah released the sum of $3,702 to ClearOne.  This payment is the full amount of the supersedeas bonds posted by Biamp with the Utah Court, following ClearOne's jury verdict against Biamp in November 2008, which was subsequently partially affirmed by the United States Court of Appeals for the Tenth Circuit.

As to the balance of the awards against the other defendants, while we intend to vigorously pursue collection of the damage awards, there can be no assurance that we will ultimately collect on all or a portion of these award.   Furthermore, the jury’s verdict and damage awards are subject to appeal by one or more of the defendants.

The DialHD Georgia Action:

During July 2009, DialHD and Donald Bowers filed a lawsuit against us in the Superior Court of Columbia County in the State of Georgia.  DialHD is apparently owned in whole or in part by Donald Bowers, who is the father of WideBand defendant Lonny Bowers.  On September 7, 2010, the Court dismissed most of the claims against ClearOne.  On September 13, 2011, the Court dismissed the remaining claims against ClearOne.  On October 12, 2011, ClearOne filed a motion seeking an award of its attorney fees and costs incurred in the case from Dial HD, Donald Bowers, and/or the attorney representing them, as a sanction.  On January 25, 2012, the Court ordered the taxing of costs in the amount of approximately $1 against the plaintiffs.  Plaintiffs did not file a notice of appeal.

ARS Special Arbitration:

In January 2010, we filed an arbitration proceeding against UBS Financial Services,  Inc. (“UBS”) with the Financial Industry Regulatory Authority (“FINRA”) pursuant to the Auction Rate Securities (“ARS”) Special Arbitration Procedures established by FINRA for securities firms who entered into settlement agreements with the SEC regarding the firms’ sales of auction rate securities. We also filed a separate FINRA arbitration proceeding against Morgan Stanley & Co., Inc. (“Morgan Stanley”) pursuant to the ARS Special Arbitration Proceedings established for securities firms that entered into settlement agreements with the Office of the New York State Attorney General. At the relevant time we held an aggregate of $12,200 in ARS from UBS and Morgan Stanley, which turned out to be illiquid. In October 2008, we accepted offers to repurchase our $12,200 of ARS, at par value, from these two investment banks that sold them to us pursuant to the settlement agreements, but did not waive any claims for consequential damages. In both arbitration proceedings, we are seeking consequential damages as a result of our inability to access funds invested in ARS that UBS and Morgan Stanley sold to us, including losses with respect to a planned strategic business acquisition and related due diligence costs. The arbitrations were rescheduled in late 2011, and both will take place in Salt Lake City.  The arbitration against Morgan Stanley was divided into two sessions, and we completed the first session in early March 2012.  The second session is set for hearing in October 2012.  The arbitration against UBS is also set for hearing in October 2012.  We have made significant damages claims in these proceedings, and if we prevail with respect to some or all of our claims, we may be entitled to a material recovery against one or both of the defendants.  We cannot, however, predict the outcome of these proceedings or the magnitude of any potential recovery.

Conclusion:

These litigations are subject to all of the risks and uncertainties of litigation and there can be no assurance as to the probable result of the litigations.