Chipotle 2013 Annual Report Download - page 58

9. Commitments and Contingencies
Purchase Obligations
The Company enters into various purchase obligations in the ordinary course of business, generally of short
term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts
owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under
construction, and marketing initiatives and corporate sponsorships.
Litigation
Notices of Inspection of Work Authorization Documents and Related Civil and Criminal Investigations
Following an inspection during 2010 by the U.S. Department of Homeland Security, or DHS, of the work
authorization documents of the Company’s restaurant employees in Minnesota, the Immigration and Customs
Enforcement arm of DHS, or ICE, issued to the Company a Notice of Suspect Documents identifying a large
number of employees who, according to ICE and notwithstanding the Company’s review of work authorization
documents for each employee at the time they were hired, appeared not to be authorized to work in the U.S. The
Company approached each of the named employees to explain ICE’s determination and afforded each employee
an opportunity to confirm the validity of their original work eligibility documents, or provide valid work
eligibility documents. Employees who were unable to provide valid work eligibility documents were terminated
in accordance with the law. In December 2010, the Company was also requested by DHS to provide the work
authorization documents of restaurant employees in the District of Columbia and Virginia, and the Company
provided the requested documents in January 2011. The Company has subsequently received requests from the
office of the U.S. Attorney for the District of Columbia for work authorization documents covering all of the
Company’s employees since 2007, plus employee lists and other documents concerning work authorization. The
Company believes its practices with regard to the work authorization of its employees, including the review and
retention of work authorization documents, are in compliance with applicable law. However, the termination of
large numbers of employees in a short period of time does disrupt restaurant operations and results in a
temporary increase in labor costs as new employees are trained.
In May 2012, the U.S. Securities and Exchange Commission notified the Company that it is conducting a
civil investigation of the Company’s compliance with employee work authorization verification requirements and
its related disclosures and statements, and the office of the U.S. Attorney for the District of Columbia advised the
Company that its investigation has broadened to include a parallel criminal and civil investigation of the
Company’s compliance with federal securities laws. The Company intends to continue to fully cooperate in the
government’s investigations. It is not possible at this time to determine whether the Company will incur, or to
reasonably estimate the amount of, any fines, penalties or further liabilities in connection with these matters.
Shareholder Derivative Actions
On July 12, 2012, Ralph B. Richey filed a shareholder derivative action in the U.S. District Court for the
District of Colorado alleging that the members of the Company’s Board of Directors breached their fiduciary
duties in connection with employee work authorization compliance matters. On September 21, 2012, Joanne
Nelson filed a shareholder derivative action in the same court alleging that the members of the Company’s Board
of Directors and the Company’s Chief Financial Officer breached their fiduciary duties, caused waste of
corporate assets, and were unjustly enriched in connection with employee work authorization compliance
matters, as well as in connection with the Company’s alleged failure to disclose material information about the
Company’s business results and prospects, and in connection with compensation paid to some of the Company’s
officers. On October 4, 2012, Francis Schmitz filed a shareholder derivative action in the same court, making
allegations substantially the same as those in the Nelson complaint. Each of these actions purports to state a
claim for damages on behalf of the Company, and is based on statements in the Company’s SEC filings and
related public disclosures, as well as media reports and Company records, in part regarding the matters described
above under “—Notices of Inspection of Work Authorization Documents and Related Civil and Criminal
Investigations.” On January 17, 2013, these three shareholder derivative actions were consolidated by the court
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Annual Report