Costco 2013 Annual Report Download - page 18

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Additionally, the use of individually identifiable data by our business and our business associates is regulated
at the national and local or state level in all of our operating countries. Privacy and information security laws
and regulations change, and compliance with them may result in cost increases due to necessary systems
changes and the development of new administrative processes. If we, or those with whom we share
information, fail to comply with these laws and regulations or experience a data security breach, our reputation
could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal
risk as a result of non-compliance.
Our security measures may be undermined due to the actions of outside parties, employee error,
malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data systems
and misappropriate business and personal information. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change frequently and may not immediately produce
signs of intrusion, we may be unable to anticipate these techniques or to implement adequate preventative
measures. Any such breach or unauthorized access could result in significant legal and financial exposure,
damage to our reputation, and potentially have an adverse effect on our business.
We are subject to payment related risks.
We accept payments using a variety of methods, including cash and checks, various select credit and debit
cards, and our proprietary cash card. As we offer new payment options to our members, we may be subject
to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment
methods, we pay interchange and other related card acceptance fees, along with additional transaction
processing fees which may increase over time and raise our operating costs. We rely on third parties to
provide payment transaction processing services, including the processing of credit and debit cards, and
our proprietary cash card, and it could temporarily disrupt our business if these companies become unwilling
or unable to provide these services to us. We are also subject to payment card association rules and network
operating rules, including data security rules, certification requirements and rules governing electronic funds
transfers, which could change over time. If we fail to comply with these rules or transaction processing
requirements, we may not be able to accept certain payment methods. In addition, if our internal systems
are breached or compromised, we may be liable for banks' compromised card re-issuance costs, subject to
fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our
members, and our business and operating results could be adversely affected.
We are subject to the risks of selling unsafe products which could result in illness or injury to our
members, harm our reputation and subject us to litigation.
If our merchandise offerings, including food and prepared food products for human consumption, drugs,
children's products, and pet products, do not meet or are perceived not to meet applicable safety standards
or our members' expectations regarding safety, we could experience lost sales, increased costs and be
exposed to legal and reputational risk. The sale of these items involves the risk of health-related illness or
injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties,
product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other
agents, or residues introduced during the growing, manufacturing, storage, handling and transportation
phases. Our vendors are generally contractually required to comply with applicable product safety laws, and
we are dependent on them to ensure that the products we buy comply with all safety standards. While we
are subject to governmental inspection and regulations and work to comply in all material respects with
applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-
related illness or injury in the future or that we will not be subject to claims, lawsuits or government
investigations relating to such matters resulting in costly product recalls and other liabilities that could
adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or
is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or
injury could adversely affect our reputation with existing and potential members and our corporate and brand
image and these effects could be long term.