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Commitments and Contingencies

9 Months Ended

May 31, 2012

6. Commitments and Contingencies

Operating Lease Agreements—The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which are noncancellable and which expire at various dates between January 2013 and December 2020. Lease expense related to these noncancellable operating leases was $208 thousand and $604 thousand for the three and nine months ended May 31, 2012, respectively, and $216 thousand and $561 thousand for the three and nine months ended and May 31, 2011, respectively. Lease expense is recognized on a straight-line basis over the term of the lease. The aggregate future noncancellable minimum rental payments for the Company’s operating leases as of May 31, 2012 consist of the following (in thousands):

Years Ending August 31,	Operating Leases
Remainder of 2012	$	202
2013	834
2014	814
2015	889
2016	855
Thereafter	504
Total	$	4,098

Purchase Obligations—The Company had purchase commitments for property, plant and equipment in the amount of $3.5 million and $10.9 million as of May 31, 2012 and August 31, 2011.

Litigation—The Company is subject to various claims arising in the ordinary course of business.

On October 14, 2010, Cree, Inc. (“Cree”), a competitor and a major manufacturer of LED products, filed a complaint against the Company in the United States District Court of Delaware asserting infringement of certain of their patents. The complaint sought injunctive relief, unspecified monetary damages, pre- and post-judgment interest and attorneys’ fees. The Company filed an answer to the complaint on November 3, 2010, denying all allegations of infringement. On March 22, 2011, Cree’s second amended complaint was placed on file adding additional United States patents that it alleged the Company has infringed. Cree then filed a third amended complaint, based on the same Cree patents and adding a subsidiary of the Company as a defendant. The Company answered the third amended complaint on May 16, 2011, denying all allegations of infringement. On November 1, 2011, Cree filed a motion for leave to file a fourth amended complaint adding a claim of willful infringement on one of the six patents-in-suit. On December 21, 2011, the court granted Cree’s motion for leave to amend, which would allow Cree to seek treble damages on its claim that the Company has willfully infringed one of the six patents-in-suit. The Markman hearing in this case was held on January 24, 2012, and the court issued a Markman ruling on March 21, 2012. On August 15, 2011, the Company filed a complaint for patent infringement against Cree in the United States District Court of Delaware seeking injunctive relief, damages, pre- and post-judgment interest, costs, expenses and attorneys’ fees for infringing a number of the Company’s patents. On October 11, 2011, Cree filed an answer and counterclaims to the Company’s complaint, denying all allegations of infringement, alleging that the Company and Taiwan SemiLEDs have infringed certain of its patents and seeking injunctive relief, unspecified monetary damages, pre- and post-judgment interest and attorneys’ fees. The Company and Taiwan SemiLEDs filed their answer to Cree’s counterclaims on November 4, 2011. On November 22, 2011, Cree filed an amended counterclaim adding a claim of willful infringement on one of the patents-in-suit, allowing Cree to seek treble damages. The Company answered the amended counterclaim on December 5, 2011.

The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in assessing both the likelihood of an unfavorable outcome and whether the amount of loss, if any, can be reasonably estimated. As of May 31, 2012, based on then-recent developments and currently available information, management believed it was probable that the parties would settle prior to trial and that the Company would incur a liability for the settlement. Management’s best estimate of this liability was $1.5 million; accordingly, the Company recorded a provision for potential litigation settlement in this amount during the three months ended May 31, 2012. The settlement payment finally agreed to with Cree was in line with the provision; see Note 12.

Third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their past, current or future intellectual property rights. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes in the Company’s methods of doing business or could require the Company to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm the Company’s business, operating results, cash flows and financial position.