Note 11. Commitments and Contingencies

Litigation.

In April 2012, we filed a complaint in the United States District Court for the Southern District of Texas (12-cv-1118) against Dr. Jacob Zabara in response to a letter from Dr. Zabara alleging that he is entitled to royalties on products that incorporate his patents licensed to us under a 1988 license agreement, even if the patents have expired. The complaint sought a declaratory judgment that Dr. Zabara is not entitled to royalties for expired patents and not entitled to royalties at all unless our device includes an invention claimed in an unexpired, licensed patent. Dr. Zabara answered the complaint and filed counterclaims seeking a declaratory judgment that he is entitled to an ongoing royalty, that we breached the license agreement by failing to pay at least a minimum royalty and by failing to pay a royalty on its tunneling tool, and that we failed to use our “best efforts to develop and market a Product or Products” as required by the license agreement.

On May 3, 2013, the district court ruled (i) that we breached the license agreement by failing to pay the $9,000-per-quarter minimum royalty since July 2011, (ii) that the license agreement requires us to use our “best efforts to develop and market a Product or Products” regarding each of the licensed patents, and (iii) that a trial will be required to determine whether we used our “best efforts” as required by the license agreement.

Dr. Zabara claims to be entitled to damages of approximately $613,000 for unpaid royalties on the tunneling tool and damages of at least $200 million for royalties he claims would have been earned had we used our “best efforts to develop and market a Product or Products” for the licensed patents not embodied in our epilepsy products. We have not recorded an expense related to damages in connection with this matter because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, we cannot reasonably estimate the range of loss, if any, that may result from this matter.

Trial in the matter is scheduled to begin on August 12, 2013. We will continue to defend this matter vigorously.

We are named as a defendant in lawsuits or are the subject of governmental inquiries from time to time arising in the ordinary course of business. The outcome of such lawsuits or other proceedings cannot be predicted with certainty and may have a material adverse effect on our consolidated financial position or net income.

Clinical Study Agreements.

We have agreements associated with our other clinical studies and registries in connection with which we expect to spend approximately $2.8 million over the next two years.

Licensing and Investment Agreements.

Effective December 17, 2007, we entered into a license agreement granting an exclusive license to a third party under certain of our patents and patent applications pertaining to weight reduction, hypertension and diabetes in exchange for an up-front, non-refundable payment, plus a royalty on future commercial sales of any product covered by the licensed patents. The unamortized deferred revenue in our consolidated balance sheet as of April 26, 2013 was $1.5 million. We retained the responsibility to prosecute the licensed patent applications and to maintain the licensed patents, including the obligation to pay related expenses for U.S. patents and applications. We estimate that our obligation to prosecute the licensed patent applications will be satisfied during the fiscal year 2014.

In October 2009, we entered into a contractual arrangement with Flint Hills Scientific, L.L.C. related primarily to cardiac-based seizure detection patents. We agreed to future cancellable minimum or milestone-based fees for intellectual property licensing, patent issuance fees, and consulting and royalty fees. We expect future expenditures of approximately $3.9 million through fiscal year 2018 under our agreement with Flint Hills.

In October 2011, we entered into an investment agreement with ImThera, a private company developing a neurostimulation medical device for the treatment of obstructive sleep apnea. We agreed to future milestone-based investments and expect a future investment of $4.0 million by September 2014.

In June 2012, we entered into a patent license agreement and a technology transfer agreement with Imricor Medical Systems, Inc., for the integration of MRI-compatibility with our leads. We agreed to future milestone-based payments and royalties and expect future expenditures of $2.3 million through fiscal year 2018.

In September 2012, we entered into an equity investment agreement and marketing arrangement with Cerbomed GmbH, a privately-held, development-stage company working on a transcutaneous (non-invasive) vagus nerve stimulation device for the treatment of epilepsy. This agreement includes future optional milestone-based investments of €3.5 million.

Lease Agreements.

We lease the following facilities and equipment with non-cancellable leases, accounted for as operating leases: (i) a storage and distribution facility in Austin, Texas, (ii) administrative and sales offices in Brussels, Belgium, elsewhere in Europe and the U.S., (iii) sales offices in Beijing, China and Hong Kong, and (iv) transportation and office equipment. During the quarter ended October 28, 2011, we acquired the land and building in which we headquarter our operations in Houston, Texas and terminated the related operating lease. We moved our Brussels offices to a new building in March 2013 and committed to a $2.2 million nine-year lease.

Future minimum lease payments as of April 26, 2013 are as follows:

52/53 Weeks Ending on the last Friday of April:



2014	$	1,458,432
2015		1,296,274
2016 (53 weeks)		1,170,269
2017		590,394
2018		407,569
Thereafter		857,786

Our lease expenses for the 52 weeks ended April 26, 2013, April 27, 2012, 52 and April 29, 2011 amounted to $0.7 million, $1.4 million and $3.4 million, respectively.