Nutrisystem 2010 Annual Report Download - page 22

businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging
that the Nutrisystem weight loss program in use at that time led to gall bladder disease. This publicity was a
factor that contributed to the bankruptcy of our predecessor businesses in 1993. More recently, our predecessor
businesses were severely impacted by significant litigation and damaging publicity related to their customers’ use
of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997.
The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to
close all of their company-owned weight loss centers.
Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity
and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that is
perceived as unfavorable or that question certain weight loss programs, products or methods could result in a
decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with
illness or other undesirable effects resulting from the consumption of our products or similar products by
competitors, whether or not accurate, could also damage customer confidence in our weight loss program and
result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with
weight loss products or services resulted from the user’s failure to use such products or services appropriately.
Our industry is subject to governmental regulation that could increase in severity and hurt results of
operations.
Our industry is subject to federal, state and other governmental regulation. For example, some advertising
practices in the weight loss industry have led to investigations from time to time by the Federal Trade
Commission, or FTC, and other governmental agencies. Many companies in the weight loss industry, including
our predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and
other advertising practices. We continue to be subject to these consent decrees, which restrict how we advertise
the successes our customers have achieved in losing weight through the program and require us to include the
phrase “results not typical” together with a statement as to what the typical weight loss a customer can expect to
achieve on our program in advertisements. In October 2009, the FTC published its revised Guides concerning the
Use of Endorsements and Testimonials in Advertising. Regulation of advertising practices in the weight loss
industry may increase in scope or severity in the future, which could have a material adverse impact on our
business.
Other aspects of our industry are also subject to government regulation. For example, food manufacturers
are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in
foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food
preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any
reason, then we may be required to incur significant expenses, as well as modify our operations to comply with
new regulatory requirements, which could harm our operating results. Additionally, remedies available in any
potential administrative or regulatory actions may include requiring us to refund amounts paid by all affected
customers or pay other damages, which could be substantial.
The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability
claims if the use of our products results in illness or injury. The foods that we resell in the U.S. are subject to
laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices
and quality standards for food products. Product liability claims could have a material adverse effect on our
business as existing insurance coverage may not be adequate. Distributors of weight loss food products, vitamins,
nutritional supplements and minerals, including our predecessor businesses, have been named as defendants in
product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a
significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by
adding costs to the business and by diverting the attention of senior management from the operation of the
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