Aarons 2015 Annual Report Download - page 21

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Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee
relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees,
usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with
franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the
consistency of our products and the customer experience. In addition, we may be subject to claims by our franchisees relating to our Franchise Disclosure
Document (the "FDD"), including claims based on financial information contained in our FDD. Engaging in such litigation may be costly, time-consuming
and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative
outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system and may
damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we
terminate or fail to renew a franchise relationship.
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One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not
responsible for the acts, omissions or liabilities of its franchisees. Recently, established law has been challenged and questioned by the plaintiffs’ bar and
certain regulators, and the outcome of these challenges and new regulatory positions remains unknown. If these challenges and/or new positions are
successful in altering currently settled law, it could significantly change the way we and other franchisors conduct business and adversely impact our
profitability.
For example, a determination that we are a joint employer with our franchisees or that franchisees are part of one unified system with joint and several
liability under the National Labor Relations Act, statutes administered by the Equal Employment Opportunity Commission, Occupational Safety and Health
Administration ("OSHA"), regulations and other areas of labor and employment law could subject us and/or our franchisees to liability for the unfair labor
practices, wage-and-hour law violations, employment discrimination law violations, OSHA regulation violations and other employment-related liabilities of
one or more franchisees. Furthermore, any such change in law would create an increased likelihood that certain franchised networks would be required to
employ unionized labor, which could impact franchisors like us through, among other things, increased labor costs and difficulty in attracting new
franchisees. In addition, if these changes were to be expanded outside of the employment context, we could be held liable for other claims against
franchisees. Therefore, any such regulatory action or court decisions could impact our ability or desire to grow our franchised base and have a material
adverse effect on our results of operations.
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Qualified franchisees who conform to our standards and requirements are important to the overall success of our business. Our franchisees, however, are
independent businesses and not employees, and consequently we cannot and do not control them to the same extent as our Company-operated stores. Our
franchisees may fail in key areas, which could slow our growth, reduce our franchise revenues, damage our reputation, expose us to regulatory enforcement
actions or private litigation and/or cause us to incur additional costs.
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We are subject to legal and regulatory proceedings from time to time which may result in material damages or place significant restrictions on our business
operations. For example, we are currently subject to settlements with the FTC as well as the State of California and the Commonwealth of Pennsylvania
regarding our business practices and compliance with privacy laws in those states. Although we do not presently believe that any of our current legal or
regulatory proceedings will ultimately have a material adverse impact on our operations, we cannot assure you that we will not incur material damages or
penalties in a lawsuit or other proceeding in the future. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending
an appeal or defense costs could materially and adversely affect our liquidity and capital resources. It is also possible that, as a result of a future governmental
or other proceeding or settlement, significant restrictions will be placed upon, or significant changes made to, our business practices, operations or methods,
including pricing or similar terms. Any such restrictions or changes may adversely affect our profitability or increase our compliance costs.
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