Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

Note 12 Commitments and Contingencies

General Litigation

From time to time, we are involved in a variety of claims, lawsuits, investigations and proceedings that arise in the ordinary course of business.

As previously disclosed, on April 19, 2010, the Federal Trade Commission (“FTC”) issued a Civil Investigative Demand requesting the production of documents and information, regarding the marketing of the Ab Circle Pro fitness product, to Direct Entertainment Media Group, Inc. (“DEMG”), a subsidiary of The Reader’s Digest Association, Inc., as well as certain third parties involved in the manufacture and promotion of the product.  DEMG provided its initial responses by August 23, 2010 and had not heard from the FTC until June 2011, at which time the FTC indicated it would seek authority to enter into consent negotiations with DEMG regarding the terms of a Consent Order.  On October 5, 2011, the FTC indicated that it had received authority from the Bureau of Consumer Protection to enter into consent negotiations.  The FTC also indicated that its proposed Consent Order would include The Readers Digest Association, Inc. and Direct Holdings Americas, Inc. as parties to the settlement and injunctive relief regulating certain marketing activities in the future, and that it would seek restitution.  We are currently in consent negotiations with the FTC and both parties are working toward reaching a mutually agreeable settlement.  However, if we are unsuccessful in reaching a mutually agreeable settlement with the FTC, the matter will result in litigation.  If litigation results, we intend to vigorously defend our position; however, we cannot predict the outcome or the timing of litigation.  Although the Company believes that the amounts reserved are adequate based on currently available information, the estimation process involves a considerable amount of judgment by management and ultimate amounts could vary materially.  Either a settlement with the FTC or litigation over the matter could have a material impact on our financial condition and liquidity.

On June 2, 2011, the Polish Office for the Protection of Consumers and Competition (“UOKiK”) issued a ruling to initiate a consumer protection proceeding against Reader’s Digest Przeglad Sp. z o.o. (Reader’s Digest Poland, “RDP”).  UOKiK’s ruling claims that RDP’s sweepstakes-based direct mail marketing model makes use of practices which may mislead consumers and/or fail to provide clear and complete information on the details of the distance-selling contracts executed between RDP and the consumers.  RDP has replied to UOKiK’s ruling and appealed directly to the relevant civil court, refuting the factual and legal allegations presented by UOKiK and raising procedural arguments concerning UOKiK’s actions to date.  Under administrative guidelines, UOKiK should issue a decision within 60 days; however this time frame is not binding on UOKiK.  Although no decision has been issued yet, we expect UOKiK to issue a decision by December 31, 2011.  In the decision to be issued at the close of its proceeding, UOKiK may: (i) order RDP to stop or modify the disputed sweeps-based marketing activities, and, (ii) impose a financial penalty.  RDP would be entitled to appeal any UOKiK decision to the consumer protection/competition court, and UOKiK’s decision would not become binding prior to the consumer protection/competition court’s ruling on appeal.  Although we cannot predict the final outcome of this matter, based on the information presently available to us, management does not believe that the ultimate resolution of this investigation will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In August 2011, an adverse decision against the Company was rendered in the Brazilian Federal Court of Appeals that overturned a favorable decision in the lower court rendered in 2007 in which the Company challenged the constitutionality of a 2004 law change in the method of determining the tax base and the applicable tax rate used to assess local operating taxes related to certain federal social contribution programs.  The Court of Appeals ruled unfavorably on the issue of constitutionality of the tax rate, but did not address the tax base.  As of September 30, 2011, the cumulative amount of the disputed tax is $4.0 ($5.8 with interest and penalty).  Together with local counsel, the Company believes it is likely to ultimately succeed in this matter and has asked the Court of Appeals to clarify its ruling in respect of the tax base.  The Company has not recognized a liability for the disputed portion of the tax.  A decision on the ruling clarification is expected by the first quarter of 2012.