Nutrisystem 2010 Annual Report Download - page 25

breaches of fiduciary duties described above. The Board of Directors has appointed a special committee
consisting of three independent directors to investigate this demand. The committee has engaged independent
legal counsel to assist it in this investigation, and after the investigation is completed, the committee will provide
its recommendation to the entire Board of Directors, who will make the final decision with respect to the
Company’s response to the shareholder’s demand.
The Company also received in November 2007 correspondence from an attorney purporting to represent
another 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. The
complaint sought (1) judgment against all defendants, (2) equitable and/or injunctive relief as permitted by law,
equity and the state statutory provisions, (3) restitution to Nutrisystem from the individual defendants, (4) an
award to the plaintiffs of the costs and disbursements of the action and (5) such other relief as the court deemed
just and proper. Following receipt of additional correspondence from the same attorney in February 2008, the
Board of Directors was considering its response when the shareholder 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 parties reached an agreement to stay
this matter pending the disposition of the motion to dismiss the federal securities putative class action complaint
described above. On April 30, 2010, the Court sent the plaintiff a notice to terminate pursuant to Pennsylvania’s
Rules of Civil Procedure for inactive cases. The plaintiff took no action and, on October 1, 2010, the Court
closed this case.
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 him for overtime work in violation of the Fair Labor
Standards Act. The complaint purported to bring claims on behalf of a class of current and former sales
representatives who had been compensated by the Company pursuant to a commission-based compensation plan,
rather than on an hourly basis. The plaintiff filed an amended complaint on May 28, 2008, adding a state-law
class claim under the Pennsylvania Minimum Wage Act, alleging that the Company’s compensation plan also
violated state law. The plaintiff sought (1) that the action be certified as a collective action pursuant to
Section 216(b) of the Fair Labor Standards Act, (2) that the action be certified as a class action pursuant to Rule
23 of the Federal Rules of Civil Procedure, (3) actual damages for unpaid overtime, (4) liquidated damages,
(5) attorneys’ fees and costs and (6) pre- and post-judgment interest. The Court dismissed the state-law class
claim on July 25, 2008. On September 26, 2008, the Court granted plaintiff’s motion to proceed as a collective
action and to send class members notice under the Fair Labor Standards Act claim. On October 14, 2008,
plaintiff’s counsel mailed notice to potential class members. Including plaintiff, sixty-eight former and current
sales representatives opted-in to this litigation. On July 24, 2009, the Court heard oral argument on the motions
for summary judgment that the parties had previously filed, and on July 31, 2009, the Court entered an Order
granting the Company’s motion for summary judgment and denying plaintiffs’ cross-motion for summary
judgment. The plaintiffs filed an appeal of the Court’s Order, and several employee rights organizations and the
U.S. Department of Labor filed amicus curiae briefs in this matter. On June 21, 2010, the United States Court of
Appeals for the Third Circuit held oral argument on plaintiffs’ appeal and on September 7, 2010 affirmed the
District Court’s grant of summary judgment for the Company. On October 4, 2010, the Third Circuit denied
plaintiffs’ petition for rehearing by the original Third Circuit panel and a rehearing en banc. On October 12,
2010, the Third Circuit delivered its certified judgment to the District Court. On November 15, 2010, the District
Court granted summary judgment in favor of the Company against all plaintiffs. This matter is now closed.
The Company is also involved in other various claims and routine litigation matters. In the opinion of
management, after consultation with legal counsel, the outcome of such matters is not anticipated to have a
material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in
future years.
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