Adidas has avoided defeat on appeal this week, as the U.S. Ninth Circuit Court of Appeals upheld a lower court’s decision to dismiss a shareholder lawsuit accusing the company of misleading investors about its troubled partnership with Ye, formerly known as Kanye West. On December 3, the Ninth Circuit upheld an earlier ruling that dismissed the case, affirming that HRSA-ILA Funds failed to plausibly allege that adidas mislead shareholders or violated securities laws in connection with its lucrative-but-tumultuous Yeezy partnership.
The Background in Brief: In the lawsuit that it filed in a federal court in Portland in April 2023, HRSA-ILA Funds accused adidas AG, its chief financial officer Harm Ohlmeyer, and former chief executive officer Kasper Rorsted of running afoul of the Securities Exchange Act by “misrepresent[ing] and fail[ing] to disclose … adverse facts pertaining to the company’s business,” namely, the risks associated with its Yeezy deal with West, thereby, inflating adidas’ stock price.
When adidas terminated its relationship with Ye in October 2022 following a string of antisemitic outbursts, the company’s stock price dropped, resulting in alleged losses for shareholders, including HRSA-ILA.
adidas Prevails (Again) on Appeal
Both the district court and the appellate court found that HRSA-ILA failed to adequately plead that adidas’ public disclosures were materially misleading. The district court dismissed the lawsuit in August 2024, finding that the company’s risk disclosures were broad, hypothetical, and in line with industry standards. Adidas had routinely warned in its annual reports that partnerships with celebrities carried reputational risks, which the court determined was sufficient.
In a memorandum issued on December 3, a panel of judges for the Ninth Circuit echoed that view, stating that a “reasonable investor” would understand that working with high-profile figures like Ye inherently involves risk. The appeals court also held that HRSA-ILA failed to plead scienter, finding the complaint lacked particularized facts showing Adidas acted with intent to defraud. It further concluded that Adidas’s disclosures did not imply that no misconduct had occurred, but instead served as generalized warnings about the potential reputational risks of celebrity partnerships.
The ESG Aspect
The court also upheld the dismissal of HRSA-ILA’s claim that adidas violated European non-financial reporting requirements, specifically the EU’s Non-Financial Reporting Directive (“NFRD”) and the Global Reporting Initiative (“GRI”). The pension fund claimed that adidas’ failure to disclose Ye’s alleged mistreatment of employees conflicted with its statements in annual non-financial reporting disclosures under the NFRD that it complied with the GRI’s “Core” standards.
However, the Ninth Circuit affirmed that adidas’ statement about complying with the GRI “Core” standards could not support a securities fraud claim because it was not “capable of objective verification,” a key legal requirement for any alleged misstatement or omission to be considered materially misleading under Section 10(b) of the Securities Exchange Act. In other words, because the GRI framework is broad, flexible, and lacks precise, enforceable criteria, adidas’ general claim of compliance could not be proven true or false in any definitive way.
The court further emphasized that HRSA-ILA had acknowledged it was unclear whether any regulatory body even exists to authoritatively interpret the meaning of GRI compliance, which only reinforced the conclusion that the statement was too subjective and aspirational to mislead a reasonable investor under U.S. securities law.
This ruling aligns with a broader trend in U.S. courts, where general or aspirational ESG-related disclosures – especially those grounded in voluntary frameworks like the GRI – often fail to support securities fraud claims unless they are specific, measurable, and objectively verifiable. While the court did not question the importance of ESG frameworks, such as the NFRD and GRI, it concluded that adidas’ particular statement lacked the clarity and specificity required to constitute a material misrepresentation under the heightened pleading standards of the Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b).
The adidas-Yeezy collaboration, which began in 2013, had been one of the brand’s most profitable ventures, generating over $1.7 billion in sales in 2021 alone. At its peak, Yeezy accounted for roughly 8% of adidas’ overall revenue and over 40% of its profits. Following the split, adidas began selling off remaining Yeezy inventory in 2023, pledging to donate part of the proceeds to organizations combating antisemitism.
The case is HRSA-ILA Funds v. adidas AG, et. al., 3:23-cv-00629 (D. Or.)
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