Item 3. Legal Proceedings

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Legal Proceedings

We are involved in litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, and handling or disposal of vehicles. These legal proceedings include the following matters:

On November 20, 2007, Car Auction & Reinsurance Solutions, Inc. (CARS) filed suit against us in the Superior Court in the County of New Castle, Delaware. CARS was seeking in excess of $2.0 million in damages, punitive damages, and prejudgment interest related to allegations involving breach of contract and misrepresentation. On September 15, 2011 the parties reached a settlement amount that was not material to our consolidated financial condition or results of operations.

On August 21, 2008, a former employee filed a Charge of Discrimination with the Equal Employment Opportunity Commission, or EEOC, claiming, in part, that he was denied employment based on his race and subjected to unlawful retaliation. We responded to the Charge of Discrimination explaining that we have a policy prohibiting the employment of individuals with certain criminal offenses and that the former employee was terminated after it was belatedly discovered that he had been convicted of a felony and other crimes prior to being hired by us. The Charge of Discrimination lay dormant at the EEOC for over two years. In January,

2011, however, the EEOC began actively investigating the allegations and challenging our policy of conducting criminal background checks and denying employment based on certain criminal convictions. It is the EEOC’s position that such a practice is unlawful because it has a disparate impact on minorities. It is our position that our policy is required by one of our largest auto insurance company customers. Because our customer is in the insurance and financial services industry, its operations are heavily regulated. The Federal Deposit Insurance Act (12 U.S.C. §1829) prohibits savings and loan holding companies, such as our customer, from employing “any person who has been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense.” In turn, it is our understanding that our customer is obligated to make sure its vendors, such as us, comply with similar hiring restrictions. The EEOC is still investigating the Charge of Discrimination. We anticipate that if the Charge of Discrimination is not dismissed or settled, the EEOC will file a lawsuit in Federal Court on behalf of all former employees and applicants of ours who were denied employment because of our policy. We believe that our practices are not unlawful and intend to continue to vigorously defend this action.

On April 23, 2010, Deborah Hill filed suit against us in the Twentieth Judicial Circuit of Collier County, Florida, alleging negligent destruction of evidence in connection with a stored vehicle that suffered damage due to a fire at our facility in Florida where the vehicle was being stored. Relief sought is for compensatory damages, costs and interest allowed by law. We believe the claim is without merit and intend to continue to vigorously defend the lawsuit.

On September 21, 2010, Robert Ortiz and Carlos Torres filed suit against us in Superior Court of San Bernardino County, San Bernardino District, which purported to be a class action on behalf of persons employed by us in the positions of facilities managers and assistant general managers in California at any time since the date four years prior to September 21, 2010. The complaint alleges failure to pay wages and overtime wages, failure to provide meal breaks and rest breaks, in violation of various California Labor and Business and Professional Code sections, due to alleged misclassification of facilities managers and assistant general managers as exempt employees. Relief sought includes class certification, injunctive relief, damages according to proof, restitution for unpaid wages, disgorgement of ill-gotten gains, civil penalties, attorney’s fees and costs, interest, and punitive damages. We believe the claim is without merit and intend to continue to vigorously defend the lawsuit.

On February 12, 2011, Jose E. Brizuela filed suit against us in Superior Court, San Bernardino County, San Bernardino District, which purports to be class action on behalf of persons employed by us paid on a hourly basis in California at any time since the date four years prior to February 14, 2011. The complaint alleges failure to pay all earned wages due to an alleged practice of rounding of hours worked to the detriment of the employees. Relief sought includes class certification, injunctive relief, unpaid wages, waiting time penalty-wages, interest, and attorney’s fees and costs of suit. We believe the claim is without merit and intend to continue to vigorously defend the lawsuit.

On August 10, 2011, Glenn A. Mangis and Lynn Brown-Mangis, husband and wife, filed suit against us in the Superior Court of Washington for Pierce County, alleging exposure to asbestos during the course of his employment as a carpenter, electrician and laborer; and as a direct result of said exposure, Plaintiff developed mesothelioma. Plaintiff’s wife is alleging loss of spousal relationship as a result. Relief sought is for general and special damages, medical and related expenses, costs and disbursements in case, prejudgment interest and all other relief the Court deems just. No specific amount was given. We believe the claim is without merit and intend to continue to vigorously defend the lawsuit.

We provide for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. We believe that any ultimate liability will not have a material effect on our consolidated financial position, results of operations or cash flows. However, the amount of the liabilities associated with

these claims, if any, cannot be determined with certainty. We maintain insurance which may or may not provide coverage for claims made against us. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that we carry requires that we pay for costs and/or claims exposure up to the amount of the insurance deductibles negotiated when insurance is purchased.

Governmental Proceedings

The Georgia Department of Revenue, or DOR, recently conducted a sales and use tax audit of our operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of the audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that we failed to remit sales taxes totaling $73.8 million, including penalties and interest. In issuing the notice of proposed assessment, the DOR stated its policy position that sales for resale to non-U.S. registered resellers are subject to Georgia sales and use tax.

We have engaged a Georgia law firm and outside tax advisors to review the conduct of our business operations in Georgia, the notice of assessment, and the DOR’s policy position. In particular, our outside legal counsel has provided us with an opinion that our sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax. In rendering its opinion, our counsel noted that non-U.S. registered resellers are unable to comply strictly with technical requirements for a Georgia certificate of exemption but concluded that our sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax notwithstanding this technical inability to comply.

Based on the opinion from our outside law firm and advice from outside tax advisors, we have not provided for the payment of this assessment in our consolidated financial statements. We believe we have strong defenses to the DOR’s notice of proposed assessment and intend to defend this matter. We have filed a request for protest or administrative appeal with the State of Georgia. There can be no assurance, however, that this matter will be resolved in our favor or that we will not ultimately be required to make a substantial payment to the Georgia DOR. We understand that Georgia law and DOR regulations are ambiguous on many of the points at issue in the audit, and litigating and defending the matter in Georgia could be expensive and time-consuming and result in substantial management distraction. If the matter were to be resolved in a manner adverse to Copart, it could have a material adverse effect on our results of operations and consolidated financial statements.

Item 4. _Reserved _ | --- | --- | --- |

PART II