Sprouts Farmers Market 2015 Annual Report Download - page 34

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relabeled certain of their products and we have revised certain provisions of our sales and marketing
program.
We cannot predict the nature of future laws, regulations, interpretations or applications, or determine
what effect either additional government regulations or administrative orders, when and if promulgated, or
disparate federal, state and local regulatory schemes would have on our business in the future. They
could, however, increase our costs or require the reformulation of certain products to meet new
standards, the recall or discontinuance of certain products not able to be reformulated, additional
recordkeeping, expanded documentation of the properties of certain products, expanded or different
labeling and/or scientific substantiation. Any or all of such requirements could have a material adverse
effect on our business, financial condition and results of operations.
Legal proceedings could materially impact our business, financial condition and results of
operations.
Our operations, which are characterized by a high volume of customer traffic and by transactions
involving a wide variety of product selections, carry a higher exposure to consumer litigation risk when
compared to the operations of companies operating in some other industries. Consequently, we may be a
party to individual personal injury, product liability, intellectual property, employment-related and other
legal actions in the ordinary course of our business, including litigation arising from food-related illness or
product labeling. The outcome of litigation, particularly class action lawsuits, is difficult to assess or
quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts,
and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial
periods of time. While we maintain insurance, insurance coverage may not be adequate, and the cost to
defend against future litigation may be significant. There may also be adverse publicity associated with
litigation that may decrease consumer confidence in our business, regardless of whether the allegations
are valid or whether we are ultimately found liable. As a result, litigation may materially adversely affect
our business, financial condition, and results of operations.
We may be unable to adequately protect our intellectual property rights, which could harm our
business.
We rely on a combination of trademark, trade secret, copyright and domain name law and internal
procedures and nondisclosure agreements to protect our intellectual property. In particular, we believe
our trademarks, including SPROUTS FARMERS MARKET®, SPROUTS®and HEALTHY LIVING FOR
LESS!®, and our domain names, including sprouts.com, are valuable assets. However, there can be no
assurance that our intellectual property rights will be sufficient to distinguish our products and services
from those of our competitors and to provide us with a competitive advantage. From time to time, third
parties may use names and logos similar to ours, may apply to register trademarks or domain names
similar to ours, and may infringe or otherwise violate our intellectual property rights. There can be no
assurance that our intellectual property rights can be successfully asserted against such third parties or
will not be invalidated, circumvented or challenged. Asserting or defending our intellectual property rights
could be time consuming and costly and could distract management’s attention and resources. If we are
unable to prevent our competitors from using names, logos and domain names similar to ours, consumer
confusion could result, the perception of our brand and products could be negatively affected, and our
sales and profitability could suffer as a result. We also license the SPROUTS FARMERS MARKETS
trademark to a third party for use in operating two grocery stores. If the licensee fails to maintain the
quality of the goods and services used in connection with this trademark, our rights to, and the value of,
this and similar trademarks could potentially be harmed. Negative publicity relating to the licensee could
also be incorrectly associated with us, which could harm the business. Failure to protect our proprietary
information could also have a material adverse effect on our business.
We may also be subject to claims that our activities or the products we sell infringe, misappropriate
or otherwise violate the intellectual property rights of others. Any such claims can be time consuming and
costly to defend and may distract management’s attention and resources, even if the claims are without
merit. Such claims may also require us to enter into costly settlement or license agreements (which could,