Nutrisystem 2009 Annual Report Download - page 24

ITEM 3. LEGAL PROCEEDINGS
Commencing on October 9, 2007, several putative class actions were filed in the United States District
Court for the Eastern District of Pennsylvania naming Nutrisystem, Inc. and certain of its officers and directors
as defendants and alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
complaints purported to bring claims on behalf of a class of persons who purchased the Company’s common
stock between February 14, 2007 and October 3, 2007 or October 4, 2007. The complaints alleged that the
defendants issued various materially false and misleading statements relating to the Company’s projected
performance that had the effect of artificially inflating the market price of its securities. These actions were
consolidated in December 2007 under docket number 07-4215. On January 3, 2008, the Court appointed lead
plaintiffs and lead counsel pursuant to the requirements of the Private Securities Litigation Reform Act of 1995,
and a consolidated amended complaint was filed on March 7, 2008. The consolidated amended complaint raises
the same claims but alleges a class period of February 14, 2007 through February 19, 2008. The defendants filed
a motion to dismiss on May 6, 2008. The motion has been fully briefed, and oral argument was held on
November 24, 2008. On August 31, 2009, the Court granted defendants’ motion to dismiss. On September 29,
2009, plaintiff filed a notice of appeal, and the dismissal is currently on appeal. The Company believes the claims
are without merit and intends to defend the litigation vigorously.
Commencing on October 30, 2007, two shareholder derivative suits were filed in the United States District
Court for the Eastern District of Pennsylvania. These suits, which were nominally brought on behalf of
Nutrisystem, Inc., name certain of its officers and a majority of the current Board of Directors as defendants. The
federal complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
claims for breach of fiduciary duty, waste, and unjust enrichment against all defendants and insider selling
against certain defendants. The complaints are based on many of the same allegations as the putative class action
described above but add contentions regarding the Company’s buyback program. The two federal actions were
consolidated in December 2007 under docket number 07-4565, and an amended complaint was filed on
March 14, 2008 naming a majority of the current Board of Directors as defendants and certain current and former
officers. Defendants filed a motion to dismiss on May 13, 2008. The plaintiffs’ opposition was filed on July 14,
2008, and defendants’ reply was filed on August 13, 2008. The motion has been fully briefed, and oral argument
was held on November 24, 2008. On October 26, 2009, the Court granted defendants’ motion to dismiss.
A shareholder derivative action was also filed in the Common Pleas Court of Montgomery County,
Pennsylvania, in November 2007. Like the federal derivative action, the state court action is nominally brought
on behalf of the Company and names a majority of the current Board of Directors as defendants. This action has
been stayed. The Company believes that the claims are without merit and intends to defend the litigation
vigorously.
The Company received in November 2007 correspondence from an attorney purporting to represent a
Nutrisystem shareholder. This correspondence requested that the Company’s Board of Directors appoint a special
litigation committee to investigate unspecified breaches of fiduciary duty. The disinterested and independent
board members met to discuss this issue and responded to the attorney’s correspondence. Following receipt of
additional correspondence from the same attorney in February 2008, the Board of Directors was considering its
response when the shareholder represented by this attorney commenced a derivative lawsuit in the Court of
Common Pleas of Montgomery County, Pennsylvania in the name of the Company against the entire Board of
Directors at that time and certain current and former officers. The Board of Directors responded to the attorney’s
correspondence. The parties have reached an agreement to stay this matter pending the disposition of the
anticipated motion to dismiss the federal securities putative class action complaint. The Company believes that
the claims are without merit and intends to defend the litigation vigorously.
On March 28, 2008, a former Nutrisystem, Inc. sales representative filed a putative collective action
complaint in the United States District Court for the Eastern District of Pennsylvania, docket no. 08-1508,
alleging that the Company unlawfully failed to pay overtime in violation of the Fair Labor Standards Act. The
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