| COMMITMENTS AND CONTINGENCIES |
NOTE 16. COMMITMENTS AND CONTINGENCIES Legal proceedings In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors. In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material. As of September 30, 2026, the Company recorded an estimated $16 million accrued loss related to litigation settlements. As of December 31, 2025, the Company recorded an estimated $9.75 million accrued loss related to the settlement of the In re Pegasystems Inc. Derivative Litigation matter, see additional discussion below. Appian Corp. v. Pegasystems Inc. & Youyong Zou The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287, consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company appealed the Virginia Uniform Trade Secrets Act judgment. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a unanimous written opinion on July 30, 2024. The Court of Appeals reversed the judgment and ordered a new trade secrets claim trial. Appian filed a petition for appeal with the Supreme Court of Virginia on August 29, 2024, which was granted on March 7, 2025 for appeal and the Company’s assignments of cross-error. On January 8, 2026, the Supreme Court of Virginia issued a unanimous written opinion affirming the ruling of the Court of Appeals of Virginia. On January 13, 2026, the Circuit Court of Fairfax County, Virginia notified the parties that this case has been reassigned to Judge David A. Oblon for further proceedings. On January 29, 2026, the Supreme Court of Virginia remanded Appian’s trade secret case to the Court of Appeals with direction to remand to the Circuit Court of Fairfax County for further proceedings in accordance with its written opinion. On February 27, 2026, the Court of Appeals of Virginia issued a mandate stating that the judgment is affirmed in part, reversed in part, and remanded to the Circuit Court of Fairfax County for further proceedings consistent with the views expressed in the written opinion of the Court of Appeals of Virginia. On May 7, 2026, Judge Oblon held a first status conference for the remanded trial proceedings and set the retrial to commence on January 11, 2027. On September 24, 2026, Judge Oblon entered a Scheduling Order which he amended on October 1, 2026. In those orders, Appian was granted the opportunity to have pretrial motions heard on October 16 and November 13, 2026; the Company was granted the opportunity to have pretrial motions heard on November 6 and December 18, 2026. On October 16, 2026, the Court granted Appian’s motion to present a reasonable royalty damages theory it was barred from presenting at the original trial. In that reasonable royalty claim, Appian seeks $284.6 million in damages for accused marketing and sales activities and $1.36 billion in damages for accused Pega Platform revisions. If the jury finds there was trade secret misappropriation, it could award either unjust enrichment or reasonable royalty damages. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of a new trial resulting from the appellate proceedings. PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell and Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell Federal court cases On December 4, 2024, the shareholders representing approximately 3% of the settlement class that opted out of the court approved settlement in the class action matter captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD) (the “Class Action”) filed two lawsuits against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in the United States District Court for the District of Massachusetts. The first was captioned Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., and Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:24-cv-12999-WGY); the second was captioned PS Lit Recovery, LLC v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:24-cv-11220-WGY). The complaints, which are substantially similar, generally allege, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaints also assert claims for common law fraud and negligent misrepresentation and seek unspecified damages. The defendants moved to dismiss the complaints on March 13, 2025 and on May 21, 2025, the Court held a hearing on the motion to dismiss. The Court (i) granted the motion to dismiss as to the plaintiffs’ scheme liability claims; (ii) granted the motion to dismiss as to certain claims against Ken Stillwell; and (iii) took the motion to dismiss under advisement as to all other claims. On January 8, 2026, the Court issued a written order granting the motion to dismiss as to the Section 10(b) and common law fraud claims against Ken Stillwell and denying the motion to dismiss as to the remaining claims. On September 18, 2026, the parties to the federal and state court opt out securities cases agreed to a final settlement of these suits. Under the terms of the final settlement, the plaintiffs in the federal and state court opt out securities cases agreed to the dismissal of all claims with prejudice. On October 5, 2026, stipulations of dismissal with prejudice were filed with the Court. State court cases On February 26, 2025, the same shareholders filed two lawsuits against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in Massachusetts Superior Court. The first is captioned Eminence Fund Long Master, Ltd., Eminence Fund Master, Ltd., Eminence Fund II Master, LP, Eminence Partners Long II, LP, Eminence Fund Leveraged Master, Ltd., Eminence Partners, L.P., and Eminence Partners II, L.P. v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case No. 2584CV00541-BLS1); the second is captioned PS Lit Recovery, LLC v. Pegasystems, Inc., Alan Trefler, and Kenneth Stillwell (Case No. 2584CV00539-BLS1). The complaints, which are substantially similar, allege the same state law claims raised in the two federal lawsuits brought by the same plaintiffs in the United States District Court for the District of Massachusetts. On April 14, 2025, the court granted the parties’ joint stipulations to stay both cases pending the resolution of the parallel federal actions and ordered the plaintiffs to file periodic status reports regarding the federal cases showing cause why the state cases should remain open. On September 18, 2026, the parties to the federal and state court cases agreed to a final settlement of the litigation and on October 6, 2026, a notice of voluntary dismissal was prejudice was filed with the Court. See discussion above within the “Federal court cases” subsection. In re Pegasystems Inc. Derivative Litigation As previously disclosed, the Company entered into a settlement of derivative lawsuits captioned Mary Larkin and Dag Sagfors, Derivatively on Behalf of Nominal Defendant Pegasystems Inc. v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Leon Trefler, Larry Weber, Kenneth Stillwell, Don Schuerman, Kerim Akgonul, and Benjamin Baril, and Pegasystems Inc., nominal defendant (Case 1:25-cv-10303), filed in the United States District Court for the District of Massachusetts, and John Dwyer and Ray Gerber, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Don Schuerman, Kerim Akgonul, and Benjamin Baril, and Pegasystems Inc., Nominal Defendant (Case 2484CV01734), and Jayne Birch and Robert Garfield, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Kerim Akgonul, Don Schuerman, Leon Trefler, Douglas Kim, John Petronio, Benjamin Baril, and Kenneth Stillwell, and Pegasystems Inc., Nominal Defendant (Case 2484CV03076-BLS-1), filed in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts. On June 30, 2026, the Massachusetts Superior Court entered an order for final approval of the settlement, including a $7 million special dividend to shareholders (excluding defendants) and payment by the Company of $2.75 million in plaintiffs’ attorney fees. On July 2, 2026, in light of the settlement, the parties to the federal court action filed a stipulation and proposed order of dismissal with prejudice as to all claims. On July 16, 2026, the Court signed the order dismissing the federal court action with prejudice. Also on July 2, 2026, the state court entered a final judgment and order of dismissal dismissing the consolidated state cases with prejudice. On September 16, 2026, the special dividend was paid, concluding the matter. Pegasystems v. Appian Defamation Litigation On August 2, 2023, the Company filed a complaint against Appian in the U.S. District Court for the District of Massachusetts, captioned Pegasystems Inc. v. Appian Corporation, 1:23-cv-11776-LTS (D. Mass.). The complaint asserts claims for defamation, trade libel, and violations of the Lanham Act, 15 U.S.C. § 1125(a) based on statements Appian made following the verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above. In response to a motion to dismiss filed by Appian on August 18, 2023, the Company amended the complaint to add additional factual allegations in support of the same claims. On September 22, 2023, Appian moved to dismiss the amended complaint, which the Court denied on January 5, 2024. On February 20, 2024, Appian answered the complaint, asserted counterclaims against the Company for defamation, trade libel, violations of the Lanham Act, 15 U.S.C. § 1125(a), and violations of Mass. Gen. Laws ch. 93A §§ 2 and 11, and sought a declaratory judgment that the Company was not entitled to the recovery sought in the amended complaint. On August 15, 2024, the Company moved to dismiss the counterclaims, which the Court allowed in part and denied in part on October 8, 2024; specifically, the Court allowed the Company’s motion to dismiss the trade libel counterclaim with respect to Appian’s allegations regarding the Company’s Code of Conduct. On November 26, 2024, Appian moved for judgment on the pleadings. On March 11, 2025, the Court allowed the motion for judgment on the pleadings in part and entered judgment for Appian on the basis of a statement made by Appian’s chief executive officer, but otherwise denied the motion. The parties exchanged opening expert reports in March 2026. The Company claims $41.9 million in damages from Appian’s conduct. Appian seeks $31.8 million in lost profits damages and further requests that the Company be required to disgorge $109.5 million in profits as unjust enrichment arising from business contracts Appian contends it competed with Pegasystems on from 2022-2025. Apart from Company revenues in which Appian contends it competed with Pegasystems for business, Appian further sought that the Company be forced to disgorge the entirety of its profits ($2.33 billion) from 2022-2025. Oral argument on summary judgment motions was held on July 24, 2026. On August 21, 2026, the Court issued an opinion granting in part and denying in part the parties’ cross-motions for summary judgment. Among other things, the Court dismissed Appian’s $2.33 billion disgorgement claim. The Court allowed the Company’s defamation, trade libel, and Lanham Act claims to proceed to trial on certain challenged statements, and it allowed Appian’s Lanham Act and Chapter 93A counterclaims to proceed to trial on certain challenged statements. The parties’ Daubert motions challenging expert witnesses were fully briefed as of October 9, 2026 and are pending with the Court. On October 8, 2026, Appian filed a motion for “realignment” of the parties to put Appian in the position of plaintiff and the Company in the position of defendant for the trial in this matter. A jury trial is currently scheduled to begin on November 30, 2026. The Company vehemently disagrees with Appian’s entitlement to any recovery, and remains confident in the merits of its claims against Appian and the damages claimed. The Company is unable to reasonably estimate likelihood of success for either party or a range of possible gain or loss given the uncertainty as to the likelihood, amount, and timing of any potential gain or loss related to its claims or Appian’s counterclaims.
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