Note 6 – Commitments and Contingencies

Operating lease and commitments

We lease the following space as office and service space for our foreign subsidiaries:

Location	Lease Expiration	Square Footage

The Netherlands	April 2013		1,700
Australia	April 2014		1,140
Japan	April 2014		2,150
Germany	April 2014		1,850
Spain	December 2013		4,400

We believe that all facilities are in good condition and are suitable and adequate for our current operations. Rent expense is expected to be approximately $0.4 million in 2013.

We incurred rent expense of $0.4 million, $0.3 million, and $1.4 million for the years ended December 31, 2012, 2011, and 2010, respectively.

At December 31, 2012, our estimated contractual obligations under operating lease agreements are as follows (in thousands):

	Payments due by period
				Less than				1-3	3-5	More than
Contractual obligations	Total			1 year				years	years	5 years
Operating leases		$	328		$	272	$	56	-		-

Royalties

We are a party to three patent license agreements with Massachusetts General Hospital ("MGH") whereby we are obligated to pay royalties to MGH for sales of certain products as well as a percentage of royalties received from third parties. For the years ended December 31, 2012, 2011, and 2010, approximately $2.8 million, $15.0 million, and $2.9 million of royalty expense, respectively, was incurred under these agreements.

Litigation

We continually assess litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss, which could be estimated. In accordance with the FASB's guidance on accounting for contingencies, we accrue for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. In the cases where we believe that a reasonably possible loss exists, we disclose the facts and circumstances of the litigation, including an estimable range, if possible. In management's opinion, we are not currently involved in any legal proceedings, which, individually or in the aggregate, could have a material effect on our financial statements. We believe that contingent losses associated with any of our current litigation were remote as of December 31, 2012 and at the time of the filing, and as such, we have not recorded or disclosed any material loss contingencies related to this litigation.

Candela Corporation, Massachusetts Litigation

On August 9, 2006, we commenced an action for patent infringement against Candela Corporation (acquired in 2010 by Syneron, Inc.) in the United States District Court for the District of Massachusetts seeking both monetary damages and injunctive relief. During the course of this lawsuit, we and MGH alleged that certain Candela products, which use laser and lamp technology for hair removal willfully infringe U.S. Patent Nos. 5,735,844 (the "'844 patent") and 5,595,568 (the "'568 patent"), which are exclusively licensed to us by MGH.

On September 15, 2011, Palomar and MGH entered into a comprehensive settlement agreement with Syneron, Inc., Syneron Medical Ltd., and Candela Corporation which ended the patent disputes between the companies, including this patent dispute. The settlement agreement includes two Non-exclusive Patent License Agreements by Palomar with Candela and Syneron. Under the first Agreement, Palomar granted to Candela and Syneron a non-exclusive, worldwide, fully paid-up, irrevocable license to the '844 patent and the '568 patent and foreign counterparts for their professional laser- and lamp-based hair removal systems. Under this Agreement, Candela and Syneron paid Palomar $31 million and granted to Palomar a royalty-free license to U.S. Patent Nos. 6,743,222 and 5,312,395 and U.S. and foreign counterparts for professional laser- and lamp-based systems. Under the second Agreement, Palomar agreed to grant to Syneron and affiliates a non-exclusive, royalty bearing, license in the United States to the '844 patent and the '568 patent for consumer home-use lamp-based hair removal products. Syneron agreed to pay Palomar on sales in the United States a 5.0 percent royalty up to an undisclosed amount of cumulative sales, then 6.5 percent up to the next undisclosed amount of cumulative sales, and 7.5 percent on all cumulative sales thereafter. In addition, Palomar was to receive a royalty-free license to certain Syneron and Candela patents. In accordance with the second Agreement, in June 2012, Palomar and Syneron and Candela entered into a Non-Exclusive Patent License in the Consumer Field, effective September 15, 2011.

On August 9, 2006, Candela commenced an action for patent infringement against us in the United States District Court for the District of Massachusetts seeking both monetary damages and injunctive relief. During the course of the lawsuit, Candela alleged that certain of our products infringed U.S. Patent No. 6,743,222 (the "'222 patent") which is directed to acne treatment, and U.S. Patent No. 5,312,395 (the '395 patent) which is directed to treatment of pigmented lesions. On September 15, 2011, Palomar and MGH entered into a comprehensive settlement agreement with Syneron, Inc., Syneron Medical Ltd., and Candela Corporation which ended the patent disputes between the companies, including this patent dispute. The settlement agreement includes two Non-Exclusive Patent License Agreements under which, among other provisions, Candela and Syneron granted to Palomar a royalty-free license to the '222 patent and the '395 patent and U.S. and foreign counterparts.

Syneron, Inc., Massachusetts Litigation

On November 14, 2008, we commenced an action for patent infringement against Syneron, Inc. in the United States District Court for the District of Massachusetts seeking both monetary damages and injunctive relief. During the course of this lawsuit, we alleged that certain Syneron products, which use light-based technology for hair removal, willfully infringe the '568 patent and the '844 patent, which are exclusively licensed to us by MGH. On September 15, 2011, Palomar and MGH entered into a comprehensive settlement agreement with Syneron, Inc., Syneron Medical Ltd., and Candela Corporation which ended the patent disputes between the companies, including this patent dispute. The settlement agreement includes two Non-Exclusive Patent License Agreements by Palomar with Candela and Syneron. Under the first Agreement, Palomar granted to Candela and Syneron a non-exclusive, worldwide, fully paid-up, irrevocable license to the '844 patent and the '568 patent and foreign counterparts for their professional laser- and lamp-based hair removal systems. Under this Agreement, Candela and Syneron paid Palomar $31 million and granted to Palomar a royalty-free license to certain Candela patents. Under the second Agreement, Palomar agreed to grant to Syneron and affiliates a non-exclusive, royalty bearing license in the United States to the '844 patent and the '568 patent for consumer home-use lamp-based hair removal products. Syneron agreed to pay Palomar on sales in the United States a 5.0 percent royalty up to an undisclosed amount of cumulative sales, then 6.5 percent up to the next undisclosed amount of cumulative sales, and 7.5 percent on all cumulative sales thereafter. In addition, Palomar was to receive a royalty-free license to certain Syneron and Candela patents. In accordance with the second Agreement, in June 2012, Palomar and Syneron and Candela entered into a Non-Exclusive Patent License in the Consumer Field, effective September 15, 2011.

Tria Beauty, Inc., First Massachusetts Litigation

On June 24, 2009, we commenced an action for patent infringement against Tria Beauty, Inc. (previously named Spectragenics, Inc.), in the United States District Court for the District of Massachusetts seeking both monetary damages and injunctive relief. The complaint alleged that the Tria System, which uses light-based technology for hair removal, willfully infringes the '844 patent, which is exclusively licensed to us by MGH. Tria answered the complaint denying that its products infringe valid claims of the asserted patent and filing a counterclaim seeking a declaratory judgment that the asserted patent is not infringed, is invalid and not enforceable. We filed a reply denying the material allegations of the counterclaims. On September 21, 2009, following successful re-examination of the '568 patent, we filed a motion to amend our complaint to add a claim for willful infringement of the '568 patent, which is also exclusively licensed to us by MGH. Our motion also included adding MGH as a plaintiff in the lawsuit. A claim construction hearing (also known as a Markman hearing) was held on August 10, 2010, and we received what we consider to be a favorable ruling on October 13, 2010. On January 25, 2011, Tria filed a second amended answer and counterclaim including another claim that the patents are unenforceable for inequitable conduct. The parties are in discovery. No trial date has yet been set.

Tria Beauty, Inc., Second Massachusetts Litigation

On May 22, 2012, we commenced an action for patent infringement against Tria Beauty, Inc. in the United States District Court for the District of Massachusetts seeking both monetary damages and injunctive relief. The complaint alleged that the Tria System, which uses light-based technology for hair removal, willfully infringes U.S. Patent No. 8,182,473 (the "'473 patent"). On July 16, 2012, Tria answered the complaint denying that its products infringe valid claims of the '473 patent and filing counterclaims seeking a declaratory judgment that the asserted patent is not infringed, is invalid and not enforceable. Tria's answer further included purported counterclaims of violation of Massachusetts General Laws Chapter 93A and abuse of process, seeking damages "in excess of $75,000, exclusive of interest and costs." We have filed a response to Tria's answer denying and asserting defenses to Tria's purported counterclaims. On December 20, 2012, we filed a second amended complaint which further alleges that the Tria System infringes U.S. Patent Nos. 8,328,794 and 8,328,796. On January 13, 2013, Tria answered the second amended complaint denying that its products infringe valid claims of the asserted patents and filing counterclaims seeking a declaratory judgment that the asserted patents are not infringed, are invalid and not enforceable. On February 14, 2013, we filed a response to Tria's answer denying and asserting defenses to Tria's purported counterclaims.

Asclepion Laser Technologies GmbH, German Litigation

On October 13, 2010, we commenced an action for patent infringement against Asclepion Laser Technologies GmbH in the District Court of Düsseldorf, Germany seeking both monetary damages and injunctive relief. The complaint alleged that Asclepion's MeDioStar and RubyStar products infringe European Patent Number EP 0 806 913, which is the first issued European patent corresponding to U.S. Patent Numbers 5,595,568 and 5,735,844. On October 29, 2010, Asclepion asked the court to stay its proceedings until a final decision is rendered by the Court of Rome in Italy (see Asclepion Laser Technologies GmbH, Italian Litigation below) and until a final decision in the opposition proceedings is rendered by the European Patent Office. On December 16, 2010, Asclepion filed an intervention to the opposition appeal proceedings concerning patent EP 0 806 913 requesting that the patent be revoked in its entirety. On January 20, 2011, we agreed to Asclepion's request for a stay of this lawsuit. On January 31, 2011, the District Court of Düsseldorf stayed this lawsuit until a final decision is rendered by the Court of Rome in Italy.

Asclepion Laser Technologies GmbH, Italian Litigation

On October 22, 2010, we were served with an International Summons for a lawsuit filed September 20, 2010 by Asclepion Laser Technologies GmbH in the Court of Rome in Italy. In this suit, Asclepion asks the Italian court to declare that Asclepion's MedioStar and RubyStar products do not infringe either the Italian or German portions of EP 0 806 913 B1 or EP 1 230 900 B1, which are the first two issued European patents corresponding to U.S. Patent numbers 5,595,568 and 5,735,844. We believe the Court of Rome lacks jurisdiction over the German claims of these European Patents and have filed a request to the Italian Supreme Court challenging the international jurisdiction of the Italian Courts for deciding infringement of the non-Italian parts of the European patents.