Nutrisystem 2008 Annual Report Download - page 23

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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. 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. 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 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 NutriSystem unlawfully failed to pay overtime 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 were
compensated by NutriSystem 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
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