12—LEGAL PROCEEDINGS AND CONTINGENCIES

The Company regularly evaluates the status of claims and legal proceedings in which it is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss may have been incurred, and to determine if accruals are appropriate. The Company expenses legal costs as such costs are incurred.

Pet Product Patent Litigation

As reported in the Company’s most recent Annual Report on Form 10-K, in June 2011 the Company was notified that a complaint had been filed against a customer of a Company subsidiary, Penford Products Co. (“Penford Products”), in the United States District Court for the District of New Jersey. The complaint alleged that certain pet products supplied by Penford Products to the customer infringed upon a patent owned by T.F.H. Publications, Inc. (the “Plaintiff”). The customer tendered the defense of this lawsuit to Penford Products pursuant to the terms of its supply agreement with Penford Products. Penford Products thereafter commenced a defense of the litigation on behalf of the customer. In April 2012, the Plaintiff filed an amended complaint alleging that certain additional products made by Penford Products for the same customer infringed upon two of the Plaintiff’s patents. In November 2013, the Plaintiff filed another amended complaint adding Penford Products as a defendant in the suit. The Plaintiff is seeking an injunction against infringement of its patents, as well as the recovery of certain damages.

The court held a claim construction hearing on August 7, 2013, and rendered an opinion dated April 30, 2014. The Company believes that the court’s opinion substantially supports its position that none of the products supplied by Penford Products infringes upon the patents in the suit. The Company is currently evaluating further steps in the litigation. The Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

NewPage Bankruptcy Preference Litigation

As reported in the Company’s most recent Annual Report on Form 10-K, in late August and early September 2013, two of the Company’s subsidiaries, Penford Products and Carolina Starches, LLC (“Carolina Starches”), were served with separate complaints filed by Pirinate Consulting Group, LLC, as Litigation Trustee (the “Trustee”) for the NP Creditor Litigation Trust, as successor in interest to the bankruptcy estate of NewPage Corporation, an industrial starch customer of each subsidiary, in the United States Bankruptcy Court for the District of Delaware.

The complaint filed against Penford Products seeks the recovery of alleged preferential transfers in the amount of approximately $778,000, together with other damages. An answer denying all liability in this matter has been filed. The Company believes that it has adequate defenses to this claim; however, the Company cannot at this time determine the likelihood of any outcome or estimate any damages that might be awarded.

 

The Trustee also sought recovery of alleged preferential transfers of approximately $216,000, together with other damages, from Carolina Starches. In March 2014, Carolina Starches entered into a settlement agreement with the Trustee which provides, among other things, for the full and final settlement of this matter in exchange for a payment by Carolina Starches to the Trustee of $10,000.

Management is unable to provide additional information regarding any possible loss in connection with the foregoing claims and proceedings because (i) the Company currently believes that the claims are not adequately supported, and (ii) there are significant factual and/or legal issues to be resolved. With regard to these matters, management does not believe, based on currently available information, that the eventual outcomes will have a material adverse effect on the Company’s financial condition, results of operations or liquidity, although the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.

Other Claims and Litigation

The Company is involved from time to time in various other claims and litigation arising in the normal course of business. In the judgment of management, which relies in part on information obtained from the Company’s outside legal counsel, the ultimate resolution of these other matters will not materially affect the consolidated financial position, results of operations or liquidity of the Company.