LifeLock 2013 Annual Report Download - page 26

new technology that permits us to provide proactive protection against identity theft and identity fraud. The FTC investigation of our advertising and
marketing activities occurred during the time that we relied significantly on the receipt of fraud alerts from the credit reporting agencies for our members. The
FTC believed that such alerts had inherent limitations in terms of coverage, scope, and timeliness. Many of the allegations in the FTC complaint, which
accompanied the FTC Order, related to the inherent limitations of using credit report fraud alerts as the foundation for identity theft protection. Because the
injunctive provisions in the FTC Order are tied to these complaint allegations, these injunctive provisions similarly relate significantly to our previous reliance
on credit report fraud alerts as reflected in our advertising and marketing claims. The FTC Order also imposes on us and Mr. Davis certain injunctive
provisions relating to our data security for members’ personally identifiable information. At the same time, we also entered into companion orders with 35
states’ attorneys general that impose on us similar injunctive provisions as the FTC Order relating to our advertising and marketing of our identity theft
protection services.
Our or Mr. Davis’ failure to comply with these injunctive provisions could subject us to additional injunctive and monetary remedies as provided for
by federal and state law. In addition, the FTC Order imposes on us and Mr. Davis certain compliance requirements, including the delivery of an annual
compliance report. We and Mr. Davis have timely submitted these annual compliance reports, but the FTC has not accepted or approved them to date. If the
FTC were to find that we or Mr. Davis have not complied with the requirements in the FTC Order, we could be subject to additional penalties and our
business could be negatively impacted.
The FTC Order provided for a consumer redress payment of $11 million, which we made in 2010 to the FTC for distribution to our members. The
FTC Order also provided for an additional consumer redress payment of $24 million, which was suspended based on our then-current financial condition on
the basis of financial information we submitted to the FTC. The FTC Order specifies that in the event the FTC were to find that the financial materials
submitted by us to the FTC at the time of the FTC Order were not truthful, accurate, and complete, the court order entering the settlement could be re-opened
and the suspended judgment in the amount of the additional $24 million would become immediately due in full.
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From time to time, we have been, and in the future may become, subject to litigation, claims, and regulatory proceedings, including class action
litigation and litigation arising from contract disputes with vendors, partners, and customers. We cannot predict the outcome of any actions or proceedings,
and the cost of defending such actions or proceedings could be material. Furthermore, defending such actions or proceedings could divert our management and
key personnel from our business operations. If we are found liable in any actions or proceedings, we may have to pay substantial damages or change the way
we conduct our business, either of which may have a material adverse effect on our business, operating results, financial condition, and prospects. There may
also be negative publicity associated with litigation or regulatory proceedings that could harm our reputation or decrease acceptance of our services. Moreover,
we utilize contractors and third parties for various services, including certain advertising, which may increase these risks. A former service provider claimed
that she was misclassified as an independent contractor, and we may be subject to other claims of this nature from time to time. These claims may be costly to
defend and may result in imposition of damages, adverse tax consequences, and harm to our reputation.
We believe there has been a recent increase in whistleblower claims across our industry, including whistleblower claims arising after employee
terminations, which will likely continue, in part because of the provisions enacted by the Dodd-Frank Act that may entitle persons who report alleged
wrongdoing to the SEC to cash rewards. We anticipate that these provisions will result in a significant increase in whistleblower claims, and dealing with such
claims could generate significant expenses and take up significant management and board time, even for frivolous and non-meritorious claims. Any
investigations of whistleblower claims may impose additional expense on us, may require the attention of senior management and members of our board of
directors, and may result in fines and/or reputational damage whether or not we are deemed to have violated any regulations. We believe there also has been a
recent increase in claims made to regulatory agencies by former employees. Often the allegations underlying such claims to regulatory agencies lead to meetings,
inquiries, or investigations by the regulatory agencies about such claims.
On January 17, 2014, we met with FTC Staff, at our request, to discuss issues regarding allegations that have been asserted in a whistleblower claim
against us relating to our compliance with the FTC Order. Following this meeting, we expect to receive either a formal or informal investigatory request from the
FTC for documents and information regarding our policies, procedures, and practices for our services and business activities. Given the heightened public
awareness of data breaches and well as attention to identity theft protection services like ours, it is also possible that the FTC, at any time, may commence an
unrelated inquiry or investigation of our business practices and our compliance with the FTC Order. We endeavor to comply with all applicable laws and
believe we are in compliance with the requirements of the FTC Order. We believe the increased regulatory scrutiny will continue in our industry for the
foreseeable future and could lead to additional meetings or inquiries or investigations by the agencies that regulate our business, including the FTC. Inquiries
or investigations by regulatory agencies about such claims could generate significant expenses and take up significant management and board time.
We do not believe the nature of any pending legal proceeding will have a material adverse effect on our business, operating results, and financial
condition. However, our assessment may change at any time based upon the discovery of facts or circumstances
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