8. Commitments and contingencies

Leases and non-cancelable contractual obligations

The Company leases its facilities and certain equipment under operating leases that expire through September 2024. As of September 30, 2017, the minimum aggregate payments due under operating leases and specified non-cancelable contractual obligations, which consist of software license and maintenance agreements, are summarized as follows:

As a result of the MedSupport acquisition, the Company leases a property owned by a related party.  Rent expense for the property was $8 and $13 for the three and nine months ended September 30, 2017, respectively.

Rent expense of $289 and $263 for the three months ended September 30, 2017 and September 30, 2016, respectively, and $829 and $766 for the nine months ended September 30, 2017 and September 30, 2016, respectively, was included in the accompanying consolidated statements of comprehensive income.

Purchase obligations

The Company had approximately $36,800 of outstanding purchase orders with its outside vendors and suppliers as of September 30, 2017.

Warranty obligations

The following table identifies the changes in the Company’s aggregate product warranty liabilities for the nine and twelve-month periods ended September 30, 2017 and December 31, 2016, respectively:

Legislation and HIPAA

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has continued with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in exclusion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed.

The Company believes that it is in compliance in all material respects with applicable fraud and abuse regulations and other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures health insurance portability, reduces healthcare fraud and abuse, guarantees security and privacy of health information, and enforces standards for health information. The Health Information Technology for Economic and Clinical Health Act (HITECH Act) imposes notification requirements of certain security breaches relating to protected health information. The Company may be subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. The Company believes that it complies in all material respects with the provisions of those regulations that are applicable to the Company’s business.

Legal proceedings

Separation Design Group lawsuit

On October 23, 2015, Separation Design Group IP Holdings, LLC (SDGIP) filed a lawsuit against the Company in the United States District Court for the Central District of California. On December 7, 2015, SDGIP filed a First Amended Complaint in the SDGIP Lawsuit.

SDGIP alleged that the Company willfully infringed U.S. Patent Nos. 8,894,751 (‘751 Patent) and 9,199,055 (‘055 Patent), both of which are titled “Ultra Rapid Cycle Portable Oxygen Concentrator.” SDGIP also alleged misappropriation of trade secrets and breach of contract stemming from a meeting in September 2010. The Company never received any communication from SDGIP related to patent infringement, misuse of trade secrets, or breach of the mutual non-disclosure agreement prior to SDGIP filing the lawsuit. SDGIP sought to recover damages (including compensatory and treble damages), costs and expenses (including attorneys’ fees), pre-judgment and post-judgment interest, and other relief that the Court deems proper. SDGIP also sought a permanent injunction against the Company.  

The Company answered SDGIP’s First Amended Complaint, denying SDGIP’s allegations of patent infringement, trade secret misappropriation, and breach of contract and asserting several affirmative defenses. The Company also filed counterclaims against SDGIP alleging that the patents-in-suit were unenforceable due to inequitable conduct.

On May 19, 2017, the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office granted the Company’s inter partes review (IPR) petition with respect to the ‘751 Patent and instituted review of the validity of the patent claims in the ‘751 Patent asserted by SDGIP in the lawsuit.  On June 16, 2017, the PTAB granted the Company’s IPR petition with respect to the ‘055 Patent and instituted review of the validity of the patent claims in the ‘055 Patent asserted by SDGIP in the lawsuit.

The parties reached a mutually agreeable settlement in October 2017. On October 19, 2017, the Court dismissed the lawsuit without prejudice. The parties filed a Joint Stipulation of Dismissal of all claims in the lawsuit with prejudice on November 1, 2017. The Company recognized a loss of $600 for all alleged past damages relating to the asserted patents and trade secrets during the three months ended September 30, 2017 classified within general and administrative expense and the related payable was recorded in accounts payable and accrued expenses as of September 30, 2017.  In addition, the Company will record an intangible for future rights to use the patents-in-suit as well as any future patents related to the patents-in-suit of $2,400 in the fourth quarter of 2017. The Company paid $3,000 on November 3, 2017 finalizing the payment of this settlement.  Although the Company came to a settlement agreement to remove the risk of uncertain legal and financial obligations going forward, the Company in no way assumed or admitted any wrong doing.

CAIRE Inc. lawsuit

On September 12, 2016, CAIRE Inc. (CAIRE) filed a lawsuit in the United States District Court for the Northern District of Georgia against the Company. CAIRE alleges that the Company infringes U.S. Patent No. 6,949,133, entitled “Portable Oxygen Concentrator.” CAIRE alleges willful infringement and seeks damages, injunctive relief, pre-judgment and post-judgment interest, costs, and attorneys’ fees. The Company denies CAIRE’s allegations and plans to vigorously contest CAIRE’s claims. On September 11, 2017, the Company filed with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office a petition for inter partes review (IPR) of the patent CAIRE is asserting against the Company.

Other legal proceedings

The Company is party to various legal proceedings arising in the normal course of business. The Company carries insurance, subject to specified deductibles under the policies, to protect against losses from certain types of legal claims. At this time, the Company does not anticipate that any of these other proceedings will have a material adverse effect on the Company’s business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.