LensCrafters 2006 Annual Report Download - page 157

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |157 <
People v. Cole
In February 2002, the State of California commenced an action in the California Superior Court
for the County of San Diego against Cole and certain of its subsidiaries, including Pearle Vision,
Inc. and Pearle Vision Care, Inc. The claims allege various statutory violations related to the
operation of Pearle Vision Centers in California, including violations of California laws governing
relationships among opticians, optical retailers, manufacturers of frames and lenses and
optometrists, false advertising and other unlawful or unfair business practices. The action seeks
unspecified restitution of allegedly unjustly obtained sums, civil penalties and injunctive relief,
including an injunction that would prohibit defendants from providing eye examinations or other
optometric services at Pearle Vision Centers in California. In July 2002, the trial court entered a
preliminary injunction to enjoin defendants from certain business and advertising practices. Both
Cole and the State of California appealed that decision. On November 26, 2003, the appellate
court issued an opinion in which it stated that, because California law prohibited defendants
from providing eye examinations and other optometric services at Pearle Vision Centers, the trial
court should have enjoined defendants from advertising the availability of eye examinations at
Pearle Vision Centers. However, the appellate court ruled in Cole’s favor with respect to charging
dilation fees, which ruling partially lifted the preliminary injunction with respect to these fees that
had been imposed in July 2002. On March 3, 2004, the California Supreme Court granted Cole’s
petition for review of the portion of the appellate court’s decision stating that California law
prohibited defendants from providing eye examinations and other optometric services at Pearle
Vision Centers. The appellate court’s decision directing the trial court to enjoin defendants from
advertising these activities was stayed pending the Court’s resolution of the issue. A final
decision was rendered on June 12, 2006, which upheld the appellate court's November 26, 2003
decision and remanded the case to the lower court for further proceedings. Although we believe
that Cole’s operational practices and advertising in California comply with California law, Cole
and its subsidiaries may be compelled to modify or cease their activities in California. In
addition, Cole and its subsidiaries might be required to pay civil penalties, and/or restitution, the
amount of which might have a material adverse effect on the Company’s consolidated financial
statements. As with the other California litigation, the ultimate outcome of this case may depend
upon whether the federal district court’s ruling on the unconstitutionality of the California law
itself in NAOO v. Lockyer is upheld on appeal. Costs associated with the People v. Cole litigation
incurred for the years ended December 31, 2004, 2005 and 2006, were approximately Euro 0.2
million, Euro 0.3 million and Euro 0.5 million, respectively.There were no related amounts
recorded as liabilities reflected in the consolidated balance sheets as of December 31, 2005 and
2006, as the liability was not reasonably estimable and probable.
Cole consumer class action lawsuit
In June 2006, in Seiken v. Pearle Vision, Inc. et al. (Case no. GIC 867529),Cole and its subsidiaries
were sued by a consumer in a purported class action which alleges various statutory violations
related to the operation of Pearle Vision and its affiliated HMO, Pearle VisionCare in California. The
claims and remedies sought are similar to those asserted in the LensCrafters and EYEXAM case.
In December 2006, the court granted defendants’ motion to dismiss the complaint but allowed
plaintiff an opportunity to replead. Defendants moved to dismiss the amended complaint in
February 2007, and a hearing on the motion was held in March 2007. Such motion to dismiss was
denied. Although we believe that our operational practices in California comply with California law,
an adverse decision in this action might cause Pearle Vision or Pearle VisionCare to modify or
cease their activities in California. In addition, the Cole subsidiaries might be required to pay
damages and/or restitution, the amount of which might have a material adverse effect on the
Company’s consolidated financial statements. Costs associated with this Cole class action