In its 10Q filing with the Securities & Exchange Commission filed last Thursday, Skechers USA Inc. indicated that it expects to be found liable by the Federal Trade Commission for false and deceptive advertising in connection with its toning products. It said it anticipates a “comparable, or higher” fine as the $25 million Reebok had to pay in its settlement with FTC over toning claims.
Skechers wrote in the filing, “Based on discussions with the FTC staff, the company does not believe that the FTC's pending inquiry into the company’s toning products will likely end in a closure letter assuring no further regulatory action.”
Noting that Reebok recently reached a $25 million settlement with the FTC after a similar dispute, Skechers said, :It is reasonably possible that [we] could be subject to a comparable, or higher, exposure as a result of these proceedings … [and] it is possible that costs associated with them could have a material adverse impact on the company’s consolidated earnings, financial position, or cash flows.”
Skechers said it intends to defend this matter vigorously and “will be meeting with each commissioner in the fourth quarter to present evidence and arguments against filing a complaint.”
The full statement follows:
“The company’s claims and advertising for its toning products including for its Shape-ups are subject to the requirements of, and routinely come under review by regulators including the U.S. Federal Trade Commission (“FTC”), states’ Attorneys General and government and quasi-government regulators in foreign countries. The company is currently responding to requests for information regarding its claims and advertising from regulatory and quasi-regulatory agencies in the United States and several other countries and are fully cooperating with those requests. While the company believes that its claims and advertising with respect to its core toning products are supported by scientific tests, expert opinions and other relevant data, and while the company has been successful in defending its claims and advertising in several different countries, the company has discontinued using certain test results and periodically reviews and updates its claims and advertising. The regulatory inquiries may conclude in a variety of outcomes, including the closing of the inquiry with no further regulatory action, settlement of any issues through changes in its claims and advertising, settlement of any issues through payment to the regulatory entity, or litigation.
Based on discussions with the FTC staff, the company does not believe that the FTC’s pending inquiry into the company’s toning products will likely end in a closure letter assuring no further regulatory action. The FTC’s Director of the Bureau of Consumer Protection has referred the matter to the FTC Commissioners for consideration of whether to bring an action against the company for false and deceptive advertising in connection with its toning products. The company intends to defend this matter vigorously and will be meeting with each Commissioner in the fourth quarter to present evidence and arguments against filing a complaint. The company notes that one of its competitors, which also sells toning products, recently settled a matter with the FTC and related consumer class actions regarding the claims and advertising of its toning products for the payment of $25 million, plus an additional $4.6 million in attorneys’ fees. While the company believes that the facts with regard to the FTC inquiry into the company’s toning products and its consumer class actions are different from its competitor’s, it is reasonably possible that the company could be subject to a comparable, or higher, exposure as a result of these proceedings.
In accordance with U.S. GAAP, the company records a liability in its consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. As it is still too early in the process to predict the final outcomes of the FTC inquiry into the company’s toning products or any other pending inquiries (or any resulting regulatory action) or the related consumer class actions, we cannot conclude that a loss related to the outcomes of these proceedings is probable and cannot reasonably estimate the range of loss, if any, that may result from these matters at this time. Consequently, the company has not accrued a loss in connection with these matters. While it is not possible to predict the outcomes of the FTC inquiry, any other pending inquiries, or the related consumer class actions, it is possible that costs associated with them could have a material adverse impact on the company’s consolidated earnings, financial position, or cash flows.”
