IHOP 2009 Annual Report Download - page 40

Harm to our brands’ reputation may have a material adverse effect on our business. The success of
our restaurant business is largely dependent upon brand recognition and the strength of our franchise
systems. The continued success of our company-operated restaurants and our franchisees will be
directly dependent upon the maintenance of a favorable public view of the Applebee’s and IHOP
brands. Negative publicity (e.g., crime, scandal, litigation, on-site accidents and injuries or other harm to
customers) at a single Applebee’s or IHOP location can have a substantial negative impact on the
operations of all restaurants within the Applebee’s or IHOP system. Multi-unit food service businesses
such as ours can be materially and adversely affected by widespread negative publicity of any type, but
particularly regarding food quality, food-borne illness, food tampering, obesity, injury or other health
concerns with respect to certain foods, whether or not accurate or valid. The risk of food-borne illness
or food tampering cannot be completely eliminated. Any outbreak of food-borne illness or other
food-related incidents attributed to Applebee’s or IHOP restaurants or within the food service industry
or any widespread negative publicity regarding the Applebee’s or IHOP brands or the restaurant
industry in general could have a material adverse effect on our financial condition or results of
operations. Although the Company maintains liability insurance, and each franchisee is required to
maintain liability insurance pursuant to its franchise agreements, a liability claim could injure the
reputation of all Applebee’s or IHOP restaurants, whether or not it is ultimately successful.
We and our franchisees are subject to a variety of litigation risks that may negatively impact
performance. We and our franchisees are subject to complaints or litigation from guests alleging
illness, injury or other food quality, food safety, health or operational concerns. We and our franchisees
are also subject to ‘‘dram shop’’ laws in some states pursuant to which we and our franchisees may be
subject to liability in connection with personal injuries or property damages incurred in connection with
wrongfully serving alcoholic beverages to an intoxicated person. We may also initiate legal proceedings
against franchisees for breach of the terms of their franchise agreements. Such claims may reduce the
profits generated by company-operated restaurants and the ability of franchisees to make payments to
us. These claims may also reduce the ability of franchisees to enter into new franchise agreements with
us. Although our franchise agreements require our franchisees to defend and indemnify us, we may be
named as a defendant and sustain liability in legal proceedings against franchisees under the doctrines
of vicarious liability, agency, negligence or otherwise.
Ownership of real property exposes us to potential environmental liabilities. The ownership of real
property exposes us to potential environmental liabilities from U.S. Federal, state and local
governmental authorities and private lawsuits by individuals or businesses. The potential environmental
liabilities in connection with the ownership of real estate are highly uncertain. We currently do not have
actual knowledge of any environmental liabilities that would have a material adverse effect on the
Company. From time to time, we have experienced some non-material environmental liabilities
resulting from environmental issues at our properties. While we are unaware of any material
environmental liabilities, it is possible that material environmental liabilities relating to our properties
may arise in the future.
Matters involving employees at certain company-operated restaurants expose us to potential liability. We
are subject to U.S. Federal, state and local employment laws that expose us to potential liability if we
are determined to have violated such employment laws. Failure to comply with Federal and state labor
laws pertaining to minimum wage, overtime pay, meal and rest breaks, unemployment tax rates,
workers’ compensation rates, citizenship or residency requirements, child labor requirements, sales taxes
and other employment-related matters may have a material adverse effect on our business or
operations. In addition, employee claims based on, among other things, discrimination, harassment or
wrongful termination may divert financial and management resources and adversely affect operations.
The losses that may be incurred as a result of any violation of such employment laws are difficult to
quantify.
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