Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

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Commitments and Contingencies
9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
Commitments and Contingencies
Note B - COMMITMENTS AND CONTINGENCIES
 
[1] Legal Fees:
 
Dovel & Luner, LLP provides legal services to the Company with respect to the Company’s pending patent litigation filed in September 2011 against sixteen (16) data networking equipment manufacturers in the United States District Court for the Eastern District of Texas, Tyler (See Note D[1]).  The terms of the Company’s agreement with Dovel & Luner LLP essentially provides for legal fees on a full contingency basis ranging from 12.5% to 35% (with certain exceptions) of the net recovery (after deduction for expenses) depending on the stage of the preceding in which a result (settlement or judgment) is achieved.  For the nine month period ended September 30, 2012, the Company incurred legal fees and expenses of $297,000 to Dovel and Luner, LLP with respect to the litigation.
 
Dovel & Luner, LLP provided legal services to the Company with respect to the litigation settled in July 2010 against several major data networking equipment manufacturers (See Note D[3]).  The terms of the Company’s agreement with Dovel & Luner, LLP with respect to this litigation provided for legal fees of a maximum aggregate cash payment of $1.5 million plus a contingency fee of 24% (based on the settlement being achieved at the trial stage).  With respect to the royalty payments payable quarterly by Cisco in accordance with the Company’s settlement and license agreement with Cisco (See Note D[3]), the Company has an obligation to pay Dovel & Luner 24% of such royalties received.  During the nine months ended September 30, 2012 and September 30, 2011, the Company incurred aggregate legal fees to Dovel & Luner, LLP of approximately $1,581,000 and $1,493,000, respectively, with respect to the aforementioned litigation.
 
With respect to the Company’s litigation against D-Link, which was settled in May 2007 (See Note D[3]), the Company utilized the services of Blank Rome, LLP on a full contingency basis.  In accordance with the Company’s contingency fee agreement with Blank Rome LLP, once the Company recovers its expenses related to the litigation (which have not yet been recovered), the Company is obligated to pay legal fees to Blank Rome LLP equal to 25% of the royalty revenue received by the Company from its license agreement with D-Link, with respect to the aforementioned litigation.
 
[2] Amended Patent Purchase Agreement:
 
On January 18, 2005, the Company and Merlot Communications, Inc., the successor of which is BAXL Technologies, Inc. (the “Seller”), amended the Patent Purchase Agreement originally entered into in November 2003 (the “Amendment”) pursuant to which the Company paid an additional purchase price of $500,000 to Seller in consideration for the restructuring of future contingent payments to Seller from the licensing or sale of the Patents.  The Amendment provides for future contingent payments by the Company to Seller of $1.0 million upon achievement of $25 million of Net Royalties (as defined), an additional $1.0 million upon achievement of $50 million of Net Royalties and an additional $500,000 upon achievement of $62.5 million of Net Royalties from licensing or sale of the patents acquired from Seller.  At June 30, 2011, a payment of $1.0 million was payable to Seller since Net Royalties (as defined) of $25 million was achieved.  This amount has been recorded as additional patent expense for the nine months ended September 30, 2011 and has been paid to Seller.
 
[3] Services Agreement:
 
Pursuant to an agreement, dated November 30, 2004, between the Company and ThinkFire Services USA, Ltd. (“ThinkFire”), the Company is obligated to pay ThinkFire fees from royalty payments received from certain licensees in consideration for services performed on behalf of the Company.  During the nine month period ended September 30, 2012 and September 30, 2011, the Company incurred fees of approximately $73,000 and $60,000, respectively, with respect to its obligation to ThinkFire.
 
[4] Lease Agreement:
 
The Company currently leases office space in New York City at a cost of $3,300 per month which lease expires on December 31, 2012.
 
On June 16, 2011, the Company entered into a four-year lease agreement commencing July 18, 2011 to rent office space, consisting of approximately 2,400 square feet, for offices in New Canaan, Connecticut.  In accordance with the lease, the Company pays a base rent of $6,400 per month for the first two years, $6,800 per month for the third year and $7,000 per month for the fourth year.  The base rent is subject to annual adjustments to reflect increases in real estate taxes and operating expenses.  The Company also entered into a one year sublease (which expired in July 2012) at a base rent of $3,700 per month to sublet approximately 50% of the space to a third party.
 
[5] Patent Acquisition Agreement:
 
On September 13, 2012, the Company entered into a Patent Purchase Agreement with a third party inventor pursuant to which the Company has the right to acquire four issued patents and one pending patent application pertaining to the identification of online media works for a purchase price of $1,000,000 in cash and $500,000 of the Company’s common stock.  The acquisition is subject to certain material conditions which are required to be satisfied prior to the closing.