| Commitments and Contingencies |
COMMITMENTS AND CONTINGENCIES Guarantees The Company has guaranteed certain debt obligations of some of the franchisees under a franchisee loan program with several banks. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the franchisee loan program, which would be due in full within 90 days of the event of default. At September 30, 2019, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $29.8 million. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchisee loan program in 1994, the Company's losses associated with the program have been immaterial. The Company believes the likelihood of any future amounts to be funded by the Company in connection with these guarantees to be immaterial. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheets, is $0.3 million as of September 30, 2019 and December 31, 2018. The maximum facility commitment amount under the franchisee loan program was $55.0 million at September 30, 2019, including a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) of CAD $25.0 million. On October 11, 2019, the Company amended its franchise loan facility to (i) reduce the total commitment amount from $55.0 million to $40.0 million; and (ii) extend the maturity date to October 22, 2020. The Company is subject to financial covenants under the franchisee loan program that are consistent with the Revolving Credit and Term Loan Agreement, which are more fully described in Note 7 to the consolidated financial statements in the 2018 Annual Report. The Company is in compliance with all covenants at September 30, 2019 and believes it will continue to be in compliance in the future. Legal and Regulatory Proceedings From time to time, the Company is party to various legal and regulatory proceedings arising in the ordinary course of business. Some of the proceedings to which the Company is currently a party are described below. The Company believes it has meritorious defenses to all of the claims described below, and intends to vigorously defend against the claims. However, these proceedings are still developing and due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, there can be no guarantee that the Company will ultimately be successful in these proceedings, or in others to which it is currently a party. Substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon the Company's business, financial position and results of operations. The Company establishes an accrued liability for legal and regulatory proceedings when it determines that a loss is both probable and the amount of the loss can be reasonably estimated. The Company continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. At September 30, 2019 and December 31, 2018, the Company had accrued $5.7 million and $1.4 million, respectively, for pending legal and regulatory matters for which it believes losses are probable and is the Company's best estimate of its exposure to loss. Of the amount accrued as of September 30, 2019, the Company expects to recover $4.8 million via payments received from insurance proceeds. The Company records these liabilities in accounts payable and accrued expenses in the condensed consolidated balance sheets. The corresponding expected insurance recovery is recorded within prepaid expenses and other assets in the condensed consolidated balance sheet. The Company estimated that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between $0 and $1.0 million as of September 30, 2019. At September 30, 2019, the Company estimated that the aggregate range of loss for all material pending legal and regulatory proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in the preceding paragraph), is between $0 and $1.0 million. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent the Company's maximum loss exposure. The Company’s estimates for legal and regulatory accruals, aggregate probable loss amounts and reasonably possible loss amounts are all subject to the uncertainties and variables described above. Privacy and Related Matters In Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC, filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania, plaintiffs allege the Company and its independently owned and operated franchisee Aspen Way Enterprises ("Aspen Way") knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act ("ECPA") and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called "PC Rental Agent." Plaintiffs filed an amended complaint, asserting claims under the ECPA, common law invasion of privacy, seeking an injunction, and naming additional independently owned and operated Company franchisees as defendants. Plaintiffs sought monetary damages as well as injunctive relief. After a protracted period of litigation, in August 2019, the Company reached a global settlement of the Byrd case, and of the Winslow and Price cases described below. The Company anticipates that the trial courts will dismiss the Company as a defendant in each of these cases in the near future. In Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC, filed on March 5, 2013 in the Los Angeles Superior Court, plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs sought injunctive relief and damages as well as certification of a putative California class. In August 2019, the Company reached a global settlement of this case, along with the Byrd and Price cases. In Lomi Price v. Aaron's, Inc. and NW Freedom Corporation, filed on February 27, 2013, in the State Court of Fulton County, Georgia, an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff sought compensatory and punitive damages. This case has been stayed pending resolution of the Byrd litigation. In August 2019, the Company reached a global settlement of this case, along with the Byrd and Winslow cases. Regulatory Inquiries In July 2018, the Company received civil investigative demands ("CIDs") from the Federal Trade Commission (the "FTC") regarding disclosures related to lease-to-own and other financial products offered by the Company through the Aaron’s Business and Progressive Leasing and whether such disclosures violate the Federal Trade Commission Act (the "FTC Act"). The Company submitted a significant amount of documentation from both the Aaron’s Business and Progressive Leasing in October 2018 and continued to work with the staff of the FTC during the course of its inquiry. In October 2019, the staff of the FTC informed us that it had recommended to the FTC that it commence an enforcement action against Progressive Leasing for alleged violations of the FTC Act and the Restore Online Shoppers’ Confidence Act ("ROSCA") with respect to Progressive Leasing’s marketing and sales of its lease-to-own products. Notwithstanding this recommendation, the staff of the FTC continues to engage with us on terms for a possible settlement with the FTC, including with respect to the scope of possible monetary relief as well as various changes in the manner in which Progressive Leasing markets its lease-to-own products. We believe that we conduct our Progressive Leasing business in compliance with the FTC Act and ROSCA and are prepared to vigorously defend our position. There can be no assurance, however, that we will reach a settlement with the FTC in connection with this matter or, if we fail to reach a settlement, that the FTC will not commence an enforcement action against Progressive Leasing. The Company has incurred and, continues to incur, substantial legal and other fees related to this inquiry. Any settlement of this matter, or defense against any enforcement action, could involve substantial costs to the Company, including legal fees, fines, penalties, and remediation expenses, as well as changes in the manner in which Progressive Leasing markets its lease-to-own products, which could have a material adverse impact on our results of operations, cash flows or financial position. While the Company believes it is probable that it will incur a loss from this matter, in view of the complexity and ongoing nature of the matter, we are unable to estimate the reasonably possible loss or range of loss that we may incur to settle this matter or defend against any enforcement action potentially brought by the FTC. In April 2019, the Aaron’s Business, along with other rent-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements, and whether such transactions violated the FTC Act. Although we believe such transactions were in compliance with the FTC Act, in August 2019, the Company reached a proposed consent agreement with FTC staff that prohibits such contingent purchases and sales in the future. The Company is awaiting final approval of the consent agreement by the FTC. Other Contingencies The Company is a party to various claims and legal proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors the Company's litigation and regulatory exposure with the Company's attorneys and evaluates its loss experience. The Company also enters into various contracts in the normal course of business that may subject it to risk of financial loss if counterparties fail to perform their contractual obligations. Off-Balance Sheet Risk The Company, through its DAMI business, had unfunded lending commitments totaling $262.3 million and $316.4 million as of September 30, 2019 and December 31, 2018, respectively. These unfunded commitments arise in the ordinary course of business from credit card agreements with individual cardholders that give them the ability to borrow, against unused amounts, up to the maximum credit limit assigned to their account. While these unfunded amounts represent the total available unused lines of credit, the Company does not anticipate that all cardholders will utilize their entire available line at any given point in time. Commitments to extend unsecured credit are agreements to lend to a cardholder so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The reserve for losses on unfunded loan commitments is calculated by the Company based on historical usage patterns of cardholders after the initial charge and was approximately $0.5 million as of September 30, 2019 and December 31, 2018. The reserve for losses on unfunded loan commitments is included in accounts payable and accrued expenses in the condensed consolidated balance sheets. See Note 9 to the consolidated financial statements in the 2018 Annual Report for further information.
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