CONTINGENCIES-LEGAL MATTERS | 9 Months Ended |
Sep. 30, 2014 |
CONTINGENCIES-LEGAL MATTERS | ' |
CONTINGENCIES-LEGAL MATTERS | ' |
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12. CONTINGENCIES—LEGAL MATTERS |
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In June 2011, Memory Lane, Inc., a California corporation, filed a complaint in United States District Court, Central District of California, against Classmates International, Inc., Classmates Online, Inc. and Classmates, Inc. (then known as Memory Lane, Inc.) ("Classmates"), alleging false designation of origin under the Lanham Act, 15 U.S.C. section 1125, and state and common law unfair competition. The complaint included requests for an award of damages and for preliminary and permanent injunctive relief. Notwithstanding the request for preliminary injunctive relief, no motion for such relief was filed. Classmates responded to the complaint in September 2011. In October 2011, the plaintiff amended its complaint to, among other things, dismiss Classmates International, Inc. and add United Online, Inc. as a defendant. In February 2014, the jury issued a verdict for the defendants, concluding that the defendants did not infringe plaintiff's trademark and the court entered judgment in favor of the defendants. In March 2014 plaintiff filed a notice of appeal of the judgment in favor of defendants. The plaintiff's appeal brief was filed in November 2014. The appeal has not yet been argued before the court. |
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In March 2012, Hope Kelm, Barbara Timmcke, Regina Warfel, Brett Reilly, Juan M. Restrepo, and Jennie H. Pham filed a purported class action complaint (the "Kelm Class Action") in United States District Court, District of Connecticut, against multiple defendants, including United Online, Inc., Classmates, Inc., Classmates International, Inc., and FTD Group, Inc. The complaint alleges (1) violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"), and aiding and abetting violations of such act; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes; (3) violations of the Electronic Communications Privacy Act ("ECPA"), and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment. |
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In March 2012, Debra Miller and William Thompson filed a purported class action complaint (the "Miller Class Action") in United States District Court, District of Connecticut, against multiple defendants, including Classmates International, Inc., FTD Group, Inc., Classmates, Inc., and United Online, Inc. The complaint alleges (1) violations of RICO, and aiding and abetting violations of such act; (2) aiding and abetting violations of federal mail fraud, wire fraud and bank fraud statutes; (3) violations of the ECPA, and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment. In April 2012, the Kelm Class Action and the Miller Class Action were consolidated with a related case under the case caption In re Trilegiant Corporation, Inc. |
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In addition, in December 2012, David Frank filed a purported class action complaint (the "Frank Class Action") in United States District Court, District of Connecticut, against multiple defendants, including Classmates International, Inc., FTD Group, Inc., Classmates, Inc., and United Online, Inc. The complaint alleges (1) violations of RICO, and aiding and abetting violations of such act; (2) aiding and abetting commissions of mail fraud, wire fraud and bank fraud; (3) violation of the ECPA, and aiding and abetting violations of such act; (4) violations of the Connecticut Unfair Trade Practices Act, and aiding and abetting violations of such act; (5) violation of California Business and Professions Code section 17602; and (6) unjust enrichment. In January 2013, the plaintiff moved to consolidate the Frank Class Action with the In re Trilegiant Corporation, Inc. action. In March 2014, the Court granted the motion to consolidate the Frank Class Action with the In re Trilegiant Corporation, Inc. action, with the latter designated as the lead case. The plaintiffs in the Kelm Class Action, the Miller Class Action and the Frank Class Action seek class certification, restitution and disgorgement of all amounts wrongfully charged to and received from the plaintiffs, damages, treble damages, punitive damages, preliminary and permanent injunctive relief, attorneys' fees, costs of suit, and pre- and post-judgment interest on any amounts awarded. |
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On March 28, 2014, the Court issued an order in the In re Trilegiant Corporation, Inc. action dismissing for lack of Article III standing, and inadequately pled corporate parent liability for its subsidiary's actions, Plaintiffs' claims against United Online, Inc., Memory Lane, Inc. (subsequently renamed Classmates, Inc.), FTD Group, Inc., and Classmates International, Inc. The Court ruled that because none of the named Plaintiffs alleged they used services from or were otherwise injured by any of those defendants, the claims against them are dismissed. The Court's dismissal was without prejudice. The deadline for Plaintiffs to file a motion for reconsideration of the Court's Order expired on April 11, 2014, without any such motion being filed. On April 28, 2014, the Plaintiffs filed a motion seeking entry of partial final judgment on, and certification for interlocutory appeal of, the Court's March 28, 2014 orders dismissing the RICO claims and RICO conspiracy claims, the claims against certain credit card company defendants, the nationwide Connecticut Unfair Trade Practices Act class action allegations, and the claims of plaintiffs Warfel, Reilly, Restrepo and Brian Schnabel based on their participation in a previous class action settlement. On May 5, 2014, the Court summarily granted Plaintiff's motion for entry of partial final judgment and certification for interlocutory appeal, but subsequently vacated that order and set a May 23, 2014 deadline for the remaining defendants to file their oppositions to Plaintiff's motion. On May 23, 2014, the remaining defendants filed their opposition briefs to the motion for interlocutory review and, on June 5, 2014, the Plaintiff filed a reply brief. No date has been set for a hearing on Plaintiff's motion. The Plaintiffs' motion did not seek entry of a partial final judgment on, nor certification for interlocutory review of, the Court's dismissal of Plaintiffs' claims against United Online, Inc., Memory Lane, Inc. (subsequently renamed Classmates, Inc.), FTD Group, Inc., and Classmates International, Inc., for lack of Article III standing and inadequately pled corporate parent liability for its subsidiary's actions. |
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In January 2013, Unified Messaging Solutions LLC filed a complaint in United States District Court, Northern District of Illinois, against United Online, Inc., Juno Online Services, Inc., NetZero, Inc. and Memory Lane, Inc. (subsequently renamed Classmates, Inc.) alleging patent infringement of five patents related to email index lists. This case is part of a 58 case multidistrict litigation in Chicago, Illinois with two separate "waves" of defendants. In March 2013, United Online, Inc. was dismissed from the action. In March 2014, the plaintiff agreed to stipulate that the remaining defendants had not infringed, and did not infringe, the asserted claims of the patents, and agreed to consent to the entry of judgment in defendants' favor on that basis without prejudice to plaintiff's right to re-assert its claims against defendants if the United States Court of Appeals for the Federal Circuit reversed or modified, in whole or in part, any of the court's rulings on claim construction. On June 13, 2014, the court entered a final judgment dismissing plaintiff's claims of infringement in favor of defendants Juno Online Services, Inc., NetZero, Inc. and Memory Lane, Inc. |
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In March 2014, Modern Telecom Systems LLC filed a complaint in the United States District Court for the Central District of California, Southern Division, against Juno Online Services, Inc. and NetZero, Inc. alleging infringement of certain patents relating to the commercial operation of their dial-up internet services. The complaint seeks an injunction, damages and other relief. On July 10, 2014, Juno Online Services, Inc. and NetZero, Inc. were served with the complaint. On July 23, 2014, Juno Online Services, Inc. and NetZero, Inc. were served with an amended complaint in the same matter. The court has set a trial date of January 26, 2016. |
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The Company has been cooperating with certain governmental authorities in connection with their respective investigations of its former post- transaction sales practices and certain other current or former business practices. |
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In 2010, Classmates, Inc. and FTD.COM Inc. received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a Multistate Work Group that currently consists of the Attorneys General for the following states: Alabama, Alaska, Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, Nebraska, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Washington and Wisconsin. The inquiry concerns certain post-transaction sales practices in which these companies previously engaged with certain third-party vendors and certain auto-renewal practices of Classmates, Inc. In the second quarter of 2012, the Company received an offer of settlement from the Multistate Work Group consisting of certain injunctive relief and the consideration of two areas of monetary relief: (1) restitution to consumers and (2) a $20 million payment by Classmates, Inc. and FTD.COM for the violations alleged by the Multistate Work Group and to reimburse the Multistate Work Group for its investigation costs. The Company rejected the Multistate Work Group's offer. The Company has since had ongoing discussions with the Multistate Work Group regarding a negotiated resolution. In December 2013, Classmates, Inc. and FTD.COM, Inc. proposed to the Multistate Work Group to resolve the matter without admitting liability by making a settlement payment of $2.2 million. In February 2014, the Multistate Work Group responded to the Company's settlement offer of $2.2 million with a counter offer of (1) $17.5 million plus (2) restitution by Classmates, Inc. to a group of purchasers of its subscription services. The Multistate Work Group did not provide an explanation as to how the $17.5 million was determined or the proposed allocation of such counter offer between Classmates, Inc. and FTD.COM Inc. In addition, the Multistate Work Group did not propose a limit on the amount of such restitution. The parties continued settlement discussions and offers and in June 2014, Classmates, Inc. and FTD.COM, Inc. proposed to the Multistate Work Group to resolve the matter without admitting liability by making a settlement payment of $5 million plus an additional total $1 million payment for making restitution to a group of purchasers of Classmates, Inc.'s subscription services. In July 2014 the Multistate Work Group sent Classmates, Inc. and FTD.COM a revised Consent Decree containing a demand for a cash payment of $12.5 million plus restitution to a group of purchasers of Classmates, Inc.'s subscription services up to a maximum of $5 million as part of the relief provided for. However, to the extent the restitution claims exceed $2 million, the $12.5 million payment would be reduced dollar for dollar up to a maximum credit of $3 million. In September 2014 Classmates, Inc. and FTD.COM provided the Multistate Work Group with a counter-proposal in the amount of $7 million plus a restitution payment to a group of purchasers of Classmates, Inc.'s subscription services of up to $2 million, and to the extent restitution payments to consumers total less than $2 million, then Classmates, Inc. shall remit the balance of the restitution account to the Attorneys General. In October 2014 the Multistate Work Group sent Classmates, Inc. and FTD.COM a revised Consent Decree containing a demand for a cash payment of $9 million plus restitution to a group of purchasers of Classmates, Inc.'s subscription services up to a maximum of $4 million as part of the relief provided for. The Consent Decree further provides that if Classmates, Inc.'s payments to consumers total less than $4 million, then Classmates, Inc. shall, remit the balance of the restitution account to the Attorneys General. While settlement discussions are ongoing, there can be no assurances as to the terms on which the Multistate Work Group and Classmates, Inc. may agree to settle this matter (and how such settlement may affect Classmates, Inc.'s ongoing business), or that any settlement of this matter may be reached. If no settlement is reached, certain Attorneys General of the Multistate Work Group may file litigation against Classmates, Inc. and, in the event of litigation, Classmates, Inc. intends to vigorously defend itself. |
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In 2011, Classmates, Inc. received a civil investigative demand from the Attorney General for the State of Washington regarding its marketing, refund, cancelation, and renewal practices. Prior to that, in 2009, Classmates, Inc. had received a civil investigative demand from the Attorney General for the State of Washington regarding certain post-transaction sales practices in which it had previously engaged with certain third-party vendors. In 2012, the Attorney General for the State of Washington joined the aforementioned Multistate Work Group. The Company believes that by joining the Multistate Work Group, the Attorney General's investigation may have been consolidated into the Multistate Work Group's inquiry. |
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The Company cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for its business. In addition, the Company, at times, has negotiated resolutions related to certain governmental investigations. For example, in 2010, Classmates, Inc. (then known as Classmates Online, Inc.) paid $960,000 to resolve an investigation of the Attorney General for the State of New York related to its former post-transaction sales practices; and in July 2013, Classmates, Inc. (formerly known as Memory Lane, Inc.) paid $300,000 to resolve an investigation of the Attorney General for the District of Columbia related to its former post-transaction sales practices. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with the Company's former post- transaction sales practices or other current or former business practices. |
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The Company records a liability when it believes that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued, and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if the proceedings are in early stages; (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements; (iv) if there are significant factual issues to be determined or resolved; and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. At September 30, 2014, the Company had reserves totaling $6.6 million for estimated losses related to certain of the matters noted above. With respect to the legal matters described above, excluding the Multistate Work Group's inquiry of Classmates, Inc., the Company has determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company's control. As such, even though the Company intends to vigorously defend itself with respect to its legal matters, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows. |
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