Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies

Commitments and Contingencies

Note 8                    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.  If a settlement is reached, we expect it to occur in the second or third quarter of 2012.  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 December 30, 2011, the Polish Office for the Protection of Consumers and Competition (“UOKiK”) issued a decision in its consumer protection proceeding against Reader’s Digest Przeglad Sp. z o.o. (Reader’s Digest Poland, “RDP”). UOKiK’s takes the position 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. The decision requires RDP to (i) pay a fine of approximately $1.3, (ii) announce the decision on its website and in two national papers and (iii) change certain of its promotional materials. RDP filed an appeal on January 16, 2012, with the consumer protection/competition court, and UOKiK’s decision is not binding prior to the consumer protection/competition court’s ruling on appeal. A ruling by the appellate court is expected in six to twelve months. 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 that was 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, and specifically the Company’s ability to claim certain offsets in the form of credits against the tax. The Company asked the Court of Appeals to clarify its ruling in respect of the tax base and in February 2012, the Court of Appeals issued an adverse ruling that prevents the Company from claiming the aforementioned tax credits. The Company is in the process of appealing the decision to the Superior Court of Brazil, and together with local tax counsel, believes it is possible that it will ultimately prevail in this litigation. However, based on the facts and circumstances, the Company has elected to pay the tax under protest while it appeals the decision, and therefore has paid approximately $4.5 related to taxes in dispute in April 2012, as accrued at March 31, 2012 and December 31, 2011.