Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies
9 Months Ended
Sep. 30, 2012
Commitments and Contingencies

7. Commitments and Contingencies

Silicon Labs Litigation

On May 13, 2012, the Company filed a declaratory judgment complaint in United States District Court for the Southern District of California against Silicon Laboratories Inc., or Silicon Labs, as defendant seeking an order that the Company’s CMOS hybrid tuner products, such as the MxL301 and MxL601, do not infringe nineteen (19) patents owned by Silicon Labs. The declaratory judgment complaint further seeks a ruling that the defendant’s patents are invalid. Silicon Labs has filed counterclaims for infringement on five (5) of the nineteen (19) patents and one (1) additional Silicon Labs patent. On September 13, 2012, Silicon Labs filed a motion for preliminary injunction requesting an injunction on the Company’s MxL601 product based upon alleged infringement of U.S. Patent No. 7,200,364. The hearing on the preliminary injunction motion is set for November 2, 2012. No trial date has been set.

On July 17, 2012, Silicon Labs filed a complaint for patent infringement against the Company in United States District Court for the Southern District of California. The Silicon Labs complaint asserts that a wide range of the Company’s products infringe a single Silicon Labs patent, U.S. Patent No. 7,035,607, or the ‘607 patent. The ‘607 patent is related to several of the nineteen (19) patents on which the Company filed a declaratory judgment action against Silicon Labs. The Silicon Labs complaint seeks damages and injunctive relief against the Company’s products. The Company has filed counterclaims for infringement on three (3) patents owned by the Company – United States Patent Nos. 7,362,178; 8,198,940; and 7,778,613. Silicon Labs has filed a motion to dismiss or transfer the Company’s counterclaims for infringement to the United States District Court for the Western District of Texas. A trial date has been set for February 11, 2014.

On July 30, 2012, Silicon Labs filed a declaratory judgment complaint in United States District Court for the Western District of Texas against the Company seeking an order that Silicon Labs’ products do not infringe the three (3) patents owned by the Company asserted as counterclaims in the second Southern District of California action. The declaratory judgment complaint further seeks a ruling that the patents are invalid. The Company has filed a motion to dismiss for lack of personal jurisdiction, and the Court has granted limited jurisdictional discovery related to the issue. No trial date has been set.

The Company has not recorded any accrual for loss contingencies associated with Silicon Labs litigation; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable.


Export Compliance Matter

As noted in the Company’s Current Report on Form 8-K filed on February 7, 2012, in the first quarter of 2012, the Company determined that it may have taken actions that could constitute facilitation (within the meaning of applicable sanctions and export control laws) of shipments of foreign produced products to Iran or taken other actions that may be in violation of U.S. export control and economic sanctions laws. Specifically, certain of the Company’s tuner products, which are foreign produced and not subject to U.S. export controls, were included in set-top converter boxes produced by set-top box manufacturers in Asia to permit conversion of digital television signals to analog signals in international markets, including Iran, using the DVB-T, or Digital Video Broadcasting – Terrestrial, broadcast standard. The DVB-T standard is used in most of Europe, Asia (excluding China), Australia, and Africa as well as in parts of the Middle East, including Iran. While the underlying shipment of the Company’s tuners into Iran by foreign manufacturers of these set-top boxes may have been lawful, the Company may have violated applicable sanctions and export control laws without the proper U.S. Government authorization.

The Company initially identified these potential violations internally, rather than as a result of a third-party audit or government investigation, and upon learning of these potential violations, the Company’s audit committee promptly retained outside counsel to conduct a review of the Company’s sanctions and export control compliance. On February 7, 2012, the Company made voluntary initial filings with the Office of Foreign Assets Control of the United States Department of the Treasury, or OFAC, and with the Bureau of Industry and Security of the United States Department of Commerce, or BIS, notifying these regulatory agencies that the Company was conducting a review of export control matters and that the Company would submit any supplemental voluntary self-disclosures once the Company’s internal review was complete. The initial stage of the review was concluded in March 2012. Subsequently, the Company also learned that the Company was not in full compliance with BIS’s deemed export rule which requires, in some circumstances, that the companies obtain a deemed export license from BIS for employment of certain foreign nationals even if, as was the Company’s situation, the Company had obtained an H1-B visa prior to employing the individual. The Company has now applied for such license with respect to the subject employee.

In connection with its March 2012 review, the Company’s audit committee determined that the Company’s management team lacked sufficient familiarity with and understanding of export control and sanctions laws and their applicability to the Company’s products and services. The Company’s audit committee concluded that the Company’s management team did not intentionally or knowingly violate applicable sanctions and export control laws.

The Company submitted final voluntary disclosures to OFAC on June 1, 2012 and BIS on June 15, 2012 and July 11, 2012. On September 27, 2012, OFAC closed out the Company’s Voluntary Self Disclosure with the issuance of a cautionary letter, and no monetary or other penalty was imposed against the Company. The BIS Voluntary Self Disclosure remains pending and the Company informed BIS that OFAC closed out its case with a cautionary letter.

Penalties and potential criminal enforcement actions could be imposed against the Company and/or the Company’s management and certain of the Company’s employees. The Company cannot predict when BIS will complete its review of the Company’s submissions, and resolution of the BIS matter could take substantial time and require substantial expenditure and management resources, either of which could be harmful to the Company’s business and operating results.

Any fines that BIS may impose on the Company could be material to the Company’s operating results in the period in which they are imposed and could have a material adverse effect on the Company’s financial condition. The maximum civil monetary penalty for each violation is up to $250 or twice the value of the transaction, whichever is greater. In the three and nine months ended September 30, 2012, the Company reduced its previously recorded OFAC penalties and fines by $625 reflected in selling, general, and administrative expense. Based upon facts known to the Company to date, the Company has retained a total provision of $250 for this export compliance matter, representing management’s estimated exposure for potential BIS fines in accordance with applicable accounting literature. Should additional facts be discovered in the future and/or should actual fines or other penalties differ from the Company’s estimates, its business, operating results, and financial condition could be materially and negatively affected. In that regard, the Company cannot guarantee that BIS will agree with its assessments of the quantity and nature of the potential violations. As a result, BIS could seek to impose higher fines and penalties than those the Company has estimated to date, and the Company could incur significant additional legal expenses in response. As a result of increased awareness relative to U.S. export control and economic sanction laws relating to the sale of the Company’s products, the Company has implemented additional export control compliance management oversight and has undertaken remedial measures to reduce the risk of similar events occurring in the future.