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Commitments and Contingencies | 9 Months Ended
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Sep. 29, 2024
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Note 8. Commitment s and Contingencies Purchase Obligations The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. As of September 29, 2024, the Company had approximately $84.9 million, as compared to $42.6 million as of December 31, 2023, in short-term non-cancelable purchase commitments with suppliers or where the suppliers had procured unique materials and components upon receipts of the Company’s purchase orders. Due to an elongation of the time from order placement to production that occurred several years ago, the Company issued purchase orders to supply chain partners beyond contractual termination periods. As of September 29, 2024, $204.1 million of purchase orders beyond contractual termination periods remained outstanding. Consequently, the Company may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order if the purchase order is cancelled. Expenses incurred in respect of cancelled purchase orders have historically not been significant relative to the original order value. For those orders not governed by master purchase agreements, the commitments are governed by the commercial terms on the Company’s purchase orders subject to acknowledgment from its suppliers. The Company establishes a loss liability for all products it does not expect to sell or orders it anticipates canceling for which it has committed purchases from suppliers. Such loss liability is included in Other accrued liabilities on the Company’s unaudited condensed consolidated balance sheets. Losses incurred in relation to purchase commitments, including unique materials and components, amounted to a gain of $1.2 million and a loss of $5.0 million for the three and nine months ended September 29, 2024, respectively, and losses of $0.6 million and $2.0 million for the three and nine months ended October 1, 2023, respectively. Non-Trade Commitments As of September 29, 2024, the Company had non-cancellable purchase commitments of $11.3 million pertaining to non-trade activities. Warranty Obligations Changes in the Company’s warranty obligations, which is included in Other accrued liabilities on the unaudited condensed consolidated balance sheets, were as follows:
|  | Three Months Ended |  |  | Nine Months Ended |
(In thousands) |  | September 29, 2024 |  |  | October 1, 2023 |  |  | September 29, 2024 |  |  | October 1, 2023 |
Balance as of beginning of the period |  | $ | 4,771 |  |  | $ | 6,217 |  |  | $ | 5,738 |  |  | $ | 6,320 |
Provision for warranty liability made |  |  | 1,060 |  |  |  | 2,185 |  |  |  | 2,468 |  |  |  | 4,862 |
Settlements made |  |  | (1,046 | ) |  |  | (1,364 | ) |  |  | (3,421 | ) |  |  | (4,144 | )
Balance as of the end of the period |  | $ | 4,785 |  |  | $ | 7,038 |  |  | $ | 4,785 |  |  | $ | 7,038 |
Leases As of September 29, 2024, the Company entered into an office lease that has not yet commenced with short-term and long-term future lease payments of $0.3 million and $43.0 million, respectively, that are not yet recorded on the unaudited Consolidated Balance Sheets. This lease will commence in 2025 with a non-cancelable lease term of 11 years. Litigation and Other Legal Matters The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next twelve months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect 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. The 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. Huawei v. NETGEAR Inc., NETGEAR Deutschland GmbH, and Exertis-Connect GmbH (at the Dusseldorf District Court, Germany) On or around March of 2022, Huawei filed two patent infringement lawsuits at the District Court of Dusseldorf, Germany, against NETGEAR Inc., NETGEAR Deutschland GmbH, and Exertis-Connect GmbH, a third-party webstore selling NETGEAR products in Germany. Huawei asserted one EU patent in each suit, EP 3 337 077 B1 (“EP 077”) in case no. 08/22 and EP 3 143 741 B1 (EP 741) in case no. 09/22. In its complaints, Huawei alleged that the Company’s WiFi 6 products infringed the two patents, which Huawei further claimed are standard-essential patents. On or around February 9, 2023, the Federal Patent Court issued preliminary opinions finding both asserted patents invalid. The Company attended an oral hearing for both infringement cases on March 21, 2023 before the Dusseldorf District Court and the Court dismissed case no. 09/22 for the EP 741 and stayed case no. 08/22 for EP 077. Huawei is appealing the dismissal of case no. 09/22, and the deadline for the parties’ briefing is scheduled for November 22, 2024 with an oral hearing on March 6, 2025. On March 20, 2024, the Patent Court maintained the validity of EP 741, but with an amended claim. Case no. 08/22 (EP 077) remains stayed while the nullity action is ongoing. An oral hearing for the EP 077 nullity action is scheduled for December 12, 2024. On or around May 10, 2022, the Company was served with two suits that Huawei filed before the Jinan Intermediate People’s Court of China asserting Patent Nos. ZL 201811536087.9 (case no. 407) and ZL 201810757332.2 (case no. 408) against the Company’s WiFi 6 products. The Company’s challenge of the Jinan Court’s jurisdiction in both cases was denied by the Supreme Court of China. The parties attended an evidentiary hearing for the cases on July 3, 2023. Licensing and technical hearings followed on July 24, 2023 and July 25, 2023. On or around June 12, 2024, the Jinan Court found that the Company Wi-Fi 6 products infringe Huawei’s two asserted Chinese patents. The Company appealed both cases to the Chinese Supreme Court on June 21, 2024. Huawei v. NETGEAR Inc., NETGEAR Deutschland GmbH, and NETGEAR International Limited (at the Unified Patent Court - UPC) On or around July 3, 2023, Huawei filed an infringement suit, asserting patent EP 3 611 989 (the ’989 Patent), against NETGEAR Inc., NETGEAR Deutschland GmbH, and NETGEAR International Limited at the Unified Patent Court (UPC) in Munich, Germany. The deadline for the parties to complete briefing was extended to July 3, 2024. An interim conference took place on August 29, 2024, and oral hearing was held on October 30 and 31, 2024. On or around December 11, 2023, Huawei filed a second UPC suit, asserting EP 3 678 321 (EP 321), against the Company. The Company submitted its Statement of Defense on April 18, 2024. Oral argument is scheduled to take place on March 25, 2025. Huawei v. NETGEAR Inc., NETGEAR Deutschland GmbH, and NETGEAR International Limited (at the Munich District Court, Germany) On May 17, 2024, Huawei filed a Complaint asserting EP 3 334 112 (EP 112) against the Company’s WiFi-6 products at the Munich District Court. The entities named in the suit are NETGEAR Inc, NETGEAR International, and NETGEAR Germany. The deadline for the parties to complete briefing is November 15, 2024 and the oral hearing is scheduled for December 19, 2024. On July 10, 2024, Huawei filed a Complaint asserting EP 3 937 445 (EP 445) against the Company’s WiFi-6 products at the Munich District Court. The entities named in the suit are NETGEAR Inc, NETGEAR International, and NETGEAR Germany. The Company filed a Statement of Defense for NETGEAR Germany on July 10, 2024. The oral hearing is scheduled for April 9, 2025. TP-Link v. NETGEAR (at the ITC and Northern District of California District Court) On May 6, 2024, TP-Link sued the Company at the International Trade Commission (ITC), alleging that the Company’s Orbi and Nighthawk products (collectively, the “Accused Products”) infringe five of TP-Link’s patents: U.S. Pat. No. 7,636,550 entitled “System and Method for Determining Channel Quality in a Wireless Network,” U.S. Pat. No. 8,176,148 entitled “Method and System for Wireless Network Configuration,” U.S. Pat. No. 8,229,357 entitled “Method and System For a Portable Wireless Range,” U.S. Pat. No. 7,672,268 entitled “Systems and Methods for Implementing Double Wide Channels in a Communication System,” and U.S. Pat. No. 8,774,008 entitled “Real-Time Network Measurement” (collectively, the “Asserted Patents”). The ITC instituted the case on June 14, 2024 and the Company filed its Response on July 18, 2024. On June 8, 2024, TP-Link filed a parallel lawsuit before the Northern District of California District Court alleging that the Company infringes the same Asserted Patents by the same Accused Products. On August 28, 2024, the Company entered into a settlement agreement (the “Settlement Agreement”) with TP-Link regarding all of their respective pending U.S. International Trade Commission and patent infringement disputes, and TP-Link’s patent challenges and breach of contract claims, and NETGEAR received a $135 million payment as consideration for the same. Consistent with the terms of the Settlement Agreement, all pending litigation between the parties were dismissed or not further pursued, as applicable, on or around September 11, 2024. TP-Link v. NETGEAR (at the Northern District of California District Court) On June 10, 2024, TP-Link filed a lawsuit against NETGEAR in the United States District Court Northern District of California alleging breach of contract. The Company recently obtained an Initial Determination at the ITC that TP Link’s products infringe on the Company’s U.S. Patent 7,936,714 (the ’714 Patent). TP-Link alleged, in its Complaint, that the ’714 Patent is a Standard Essential Patent (SEP) and by suing TP-Link for patent infringement, the Company breached its contractual obligation, as a member of Wi-Fi Alliance or WFA, to offer TP- Link (also a WFA member) a license to the ’714 Patent on reasonable and non-discriminatory (RAND) terms. The suit seeks a declaratory judgment from the Court that the Company is subject to RAND licensing obligations and damages. On June 18, 2024, TP-Link filed a motion for preliminary injunction seeking to enjoin the Company from enforcing an exclusion order from the ITC based on the ’714 patent. The parties have settled this matter. On or around September 11, 2024, TP-Link filed for dismissal of this case based on the Settlement Agreement described above. As described above, for the three and nine months ended September 29, 2024, the Company received a payment from the litigation settlement with TP-Link, leading to a contra-expense of $92.7 million in the litigation reserves, a reversal of $8.2 million contingent fee recorded in litigation reserves in the prior quarter, and a reduction of $10.9 million in general and administrative expenses to offset the related legal fees incurred to date. The Company included the amounts in the unaudited condensed consolidated statements of operations. The Company, at this time, is not able to reasonably estimate any financial impact to the Company resulting from any ongoing litigation matters. The Company does not believe that it is reasonably possible that a material loss has been incurred for any of the matters disclosed above, and consequently has not established any loss provisions.

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