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Commitments and Contingencies
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2015
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies | Commitments and Contingencies Legal Matters The Company reviews all legal matters at least quarterly and assesses whether an accrual for loss contingencies needs to be recorded. The assessment reflects the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company records an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable; however, the Company believes that it has valid defenses with respect to its pending legal matters. Actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. Patent litigation in particular is subject to significant postural shifts over short time frames, making the Company’s ability to assess probable liability particularly speculative in any given fiscal quarter even though the matter may be resolved in the next fiscal quarter. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows for the period in which the resolution occurs or in future periods. The Company is involved in disputes, claims, litigation, investigations, proceedings and other legal actions, consisting of intellectual property, commercial, securities, and employment matters from time to time that arise in the ordinary course of business, including the legal matters identified below. U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. On August 1, 2014, the Court dismissed the case but granted leave to amend. On September 26, 2014, the purported class filed an amended complaint which made allegations similar in nature to those in the original complaint. On October 27, 2014, the Company filed a motion to dismiss the amended complaint. On February 2, 2015, the Court granted Company’s motion to dismiss and entered judgment in favor of the Company. On February 23, 2015, Mazzafero filed a notice of appeal in the United States Court of Appeals for the Ninth Circuit appealing the decision of the district court. The Company believes it has meritorious defenses to these claims and will defend this litigation vigorously. Azalea Networks China Lawsuit. In March 2011, a former customer (the "Plaintiff") of Azalea Networks ("Azalea"), a Chinese entity acquired by the Company on September 2, 2010, filed a lawsuit in Beijing, China, against the Company. The Plaintiff alleged breach of contract for the failure of certain products to perform according to specifications. The Company believed it had meritorious defenses to these claims and defended this litigation vigorously. On December 24, 2014, the Company and the Plaintiff reached a settlement agreement, which was consented to by the former Azalea shareholders, under which the Company agreed to make a cash payment to the Plaintiff of $750,000 in consideration for the release of the Company's liability for the alleged defective products. Pursuant to the merger agreement entered in connection with the acquisition of Azalea, the Company made a claim against the escrow shares seeking full reimbursement of the legal settlement payment. As a result, 40,560 shares with a fair value of approximately $750,000 (determined on the settlement date) were returned to the Company and recorded as a gain offsetting the legal settlement expense. The remaining shares, which have been held in escrow pending completion of this matter, were released and distributed to the former Azalea shareholders. Shareholders Class Action. On March 9, 2015, a shareholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Ballester v. Aruba Networks, Inc., et al., C.A. No. 10765 (Del. Ch. filed March 9, 2015), on behalf of a purported class of Aruba shareholders and naming as defendants Aruba, Aruba's Board of Directors, Hewlett-Packard Company, and Aspen Acquisition Sub, Inc., a wholly-owned subsidiary of Hewlett-Packard Company. For further information, refer to Note 12, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements. In addition, these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Furthermore, the outcome of any patent related matters may require the Company to make ongoing royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected in any particular period by an unfavorable resolution of one or more of these contingencies. Lease Obligations The Company leases office space under non-cancelable operating leases with various expiration dates through March 2023. The following table summarizes the Company's future minimum lease payments under non-cancelable operating leases at January 31, 2015:
Employee Agreements The Company has signed various employment agreements with certain executives pursuant to which if their employment is terminated without cause, the executives are entitled to receive certain benefits, including, but not limited to, accelerated stock vesting. Non-cancelable Purchase Commitments The Company outsources the production of its hardware to third-party contract manufacturers, and enters into various inventory-related purchase commitments with these contract manufacturers and other suppliers. In addition, from time to time, the Company also enters into significant information technology and marketing agreements with its vendors, which are non-cancelable. The Company had $48.0 million and $45.4 million in non-cancelable purchase commitments as of January 31, 2015 and July 31, 2014, respectively. During the first quarter of fiscal 2015, the Company recognized a reserve for excess inventory of $1.0 million associated with a non-cancelable purchase order, which was included in product cost of revenue in the Condensed Consolidated Statement of Operations. Product Warranty The Company’s liability for estimated future product warranty costs is included as a component of accrued liabilities in the Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:
Indemnification In its sales agreements, the Company may agree to indemnify its direct and indirect sales channels and end user customers for certain expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification provisions are generally perpetual any time after execution of the agreement. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. In certain circumstances, the Company may be subject to uncapped indemnity obligations. To date the Company has not paid material amounts to settle claims or defend lawsuits pursuant to such indemnification provisions. The Company has no liabilities recorded for these agreements as of January 31, 2015 and July 31, 2014. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their company capacities. |
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