Shutterfly 2008 Annual Report Download - page 24

Legislation regarding copyright protection or content interdiction could impose complex and costly constraints on our business model.
Because of our focus on automation and high volumes, our operations do not involve, for the vast majority of our sales, any human-
based review of content. Although our
website’
s terms of use specifically require customers to represent that they have the right and authority to reproduce the content they provide and that the content is in full compliance
with all relevant laws and regulations, we do not have the ability to determine the accuracy of these representations on a case-by-
case basis. There is a risk that a customer may supply
an image or other content that is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered to be
defamatory, pornographic, hateful, racist, scandalous, obscene or otherwise offensive, objectionable or illegal under the laws or court decisions of the jurisdiction where that customer
lives. There is, therefore, a risk that customers may intentionally or inadvertently order and receive products from us that are in violation of the rights of another party or a law or
regulation of a particular jurisdiction. If we should become legally obligated in the future to perform manual screening and review for all orders destined for a jurisdiction, we will
encounter increased production costs or may cease accepting orders for shipment to that jurisdiction. That could substantially harm our business and results of operations.
Our practice of offering free products and services could be subject to judicial or regulatory challenge.
We regularly offer free products and free shipping as an inducement for customers to try our products. Although we believe that we conspicuously and clearly communicate all
details and conditions of these offers — for example, that customers are required to pay shipping, handling and/or processing charges to take advantage of the free product offer —
we
may be subject to claims from individuals or governmental regulators that our free offers are misleading or do not comply with applicable legislation. These claims may be expensive to
defend and could divert management’
s time and attention. If we become subject to such claims in the future, or are required or elect to curtail or eliminate our use of free offers, our
results of operations may be harmed.
Any failure by us to protect the confidential information of our customers and networks against security breaches and the risks associated with credit card fraud could damage our
reputation and brand and substantially harm our business and results of operations.
A significant prerequisite to online commerce and communications is the secure transmission of confidential information over public networks. Our failure to prevent security
breaches could damage our reputation and brand and substantially harm our business and results of operations. For example, a majority of our sales are billed to our customers’
credit
card accounts directly, orders are shipped to a customer’s address, and customers log on using their e-
mail address. We rely on encryption and authentication technology licensed from
third parties to effect the secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of
cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. In addition, any party who is able to
illicitly obtain a user’s password could access the user’
s transaction data, personal information or stored images. Any compromise of our security could damage our reputation and
brand and expose us to a risk of loss or litigation and possible liability, which would substantially harm our business and results of operations. In addition, anyone who is able to
circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to devote significant resources to protect against
security breaches or to address problems caused by breaches.
In addition, under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’
s signature. We do not currently carry
insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we continue to face the risk of significant losses from this type of fraud. Our failure
to adequately control fraudulent credit card transactions could damage our reputation and brand and substantially harm our business and results of operations.
Changes in regulations or user concerns regarding privacy and protection of user data could harm our business.
Federal, state and international laws and regulations may govern the collection, use, sharing and security of data that we receive from our customers. In addition, we have and post
on our website our own privacy policies and practices concerning the collection, use and disclosure of customer data. Any failure, or perceived failure, by us to comply with our posted
privacy policies or with any data-related consent orders, Federal Trade Commission requirements or other federal, state or international privacy-
related laws and regulations could
result in proceedings or actions against us by governmental entities or others, which could potentially harm our business. Further, failure or perceived failure to comply with our
policies or applicable requirements related to the collection, use or security of personal information or other privacy-
related matters could damage our reputation and result in a loss of
customers.
International expansion will require management attention and resources and may be unsuccessful, which could harm our future business development and existing domestic
operations.
To date, we have conducted limited international operations, but we intend to expand into international markets in order to grow our business. These expansion plans will require
significant management attention and resources and may be unsuccessful. We have limited experience adapting our products to conform to local cultures, standards and policies. We
may have to compete with local companies which understand the local market better than we do. In addition, to achieve satisfactory performance for consumers in international
locations it may be necessary to locate physical facilities, such as production facilities, in the foreign market. We do not have experience establishing such facilities overseas. We may
not be successful in expanding into any international markets or in generating revenues from foreign operations. In addition, different privacy, censorship and liability standards and
regulations and different intellectual property laws in foreign countries may cause our business to be harmed.
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