Adidas Beats Securities Fraud Case Over Ye Partnership

Adidas and one of its executives have successfully fended off a securities fraud lawsuit that accused them of misleading investors in connection with adidas’s fraught relationship with former partner Ye. In the headline-making suit, HRSA-ILA Funds accused the German sportswear giant of duping investors by failing to disclose the “problematic conduct” of Ye, formerly known as Kanye West, that occurred between 2013 and 2018. However, in a recently-issued order, Judge Karin J. Immergut of the U.S. District Court for the District of Oregon granted adidas and chief financial officer Harm Ohlmeyer’s motions to dismiss the claims waged against them. 

In her August 16 opinion and order, Judge Immergut stated that HRSA-ILA, a pension fund and adidas shareholder, “failed to sufficiently plead that adidas’s Business Partner Risk disclosures [and] other risk disclosures,” as well as its Diversity, Equity, and Inclusion (“DEI”) statements were “materially misleading.”

At the same time, Judge Immergut also took issue with HRSA-ILA’s claim that adidas was not in compliance with the European Union’s Non-financial Reporting Directive and Global Reporting Initiative as a result of its alleged failure to disclose Ye’s “routine mistreat[ment] of Yeezy and adidas employees,” which allegedly saw him subject them to “anti-Semitic comments and other workplace misconduct.” In particular, the court determined that the pension fund fell short of the pleading standards set out by the Private Securities Litigation Reform Act, which requires that a plaintiff show that the disclosures at issue were “materially misleading.” Judge Immergut held that assertations like the plaintiff’s, which “conflate differently worded risk disclosures made in different factual contexts,” are not sufficient. 

One of the critical aspects of the court’s decision revolves around the nature of adidas’s risk disclosures and DEI statements. According to the court’s opinion, adidas regularly included risk disclosures in its annual reports, in which it warned investors of the potential for reputational harm due to improper behavior of its business partners. The court determined that these warnings are broad, hypothetical, and consistent with industry practices, and they do not imply that no misconduct had occurred at adidas, as the plaintiffs had alleged. 

In siding with adidas, Judge Immergut cited precedent from the U.S. Court of Appeals for the Ninth Circuit, which has held that statements lacking “concrete description” and verifiable facts are not actionable under securities laws. With this in mind, she found that adidas’s risk disclosures and statements about the company’s “zero-tolerance approach” to discrimination are aspirational rather than guarantees of specific outcomes, and as such, they are not likely to be “materially misleading” to a “reasonable investor.”

Adidas and Ohlmeyer both filed motions in February to get the Ye-centric lawsuit tossed out. In those motions, they successfully argued that the statements about adidas’ partnerships and its DEI policies are aspirational and not concrete enough to serve as the basis for securities fraud causes of action. Furthermore, adidas maintained that it has no legal obligation to disclose every internal concern about its partners, particularly since much of Ye’s controversial behavior was already publicly known. (Among other things, HRSA-ILA argued that adidas had a duty to reveal Ye’s misconduct in accordance with the European Union’s Non-Financial Reporting Directive (“NFRD”) – which requires large entities to publicly disclose non-financial ESG information – and the Global Reporting Initiative, a reporting framework that companies can use to comply with the NFRD’s disclosure requirements.) 

Judge Immergut agreed with adidas on this front, stating that the company’s allegedly misleading risk disclosures and diversity policies, and its statements about compliance with European Union regulations were too broad and general to be actionable under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In her decision, she emphasized that federal securities law does not require companies to disclose every potential risk, particularly when those risks are widely known to the public. 

Delving further into the plaintiffs’ arguments, Judge Immergut wrote that an actionable material misrepresentation or omission has two components in federal securities law: (1) A plaintiff must allege a misrepresentation or a misleading omission with “particularity” and “explain why it is misleading;” and (2) allege “under an objective standard” that the misrepresentation or omission “must have been material to investors.” Comparing the case at hand to similar securities fraud suits lodged against the likes of Alphabet and Facebook, Judge Immergut noted that adidas’ Business Partner Risk disclosures “did not contain language implying the non-existence of ‘improper behavior.’”

“In other words, adidas’s disclosures did not refer to ‘improper behavior’ as potentially ‘unfounded,’ as an ‘if,’ or as an event that ‘may’ or ‘could’ occur,” as opposed to disclosures in the Alphabet or Facebook cases that described similar risks, per Judge Immergut. “These distinctions matter,” she stated, noting that the PSLRA “demands” that securities fraud complaints specify each misleading statement.

“Assertions like the plaintiff’s – which conflate differently worded risk disclosures made in different factual contexts – are insufficient under these pleading standards,” she wrote.

A Little Bit of Background: The roots of the case date back to the beginning of adidas’s partnership with Ye, which started 2013 and flourished over the following years. The collaboration produced the immensely popular Yeezy line, which brought in more than $1.7 billion in sales by 2021, alone, according to the filing. At its peak, the Yeezy brand accounted for eight percent of adidas’s total revenue and more than 40 percent of its profits, making the partnership one of adidas’s most valuable assets. 

The problem, according to HRSA-ILA’s lawsuit, is that behind the scenes, Ye was engaging in erratic and antisemitic behavior, which included drawing a swastika on a shoe, playing pornography during business meetings, and making offensive statements about Jewish people. Some of these alleged incidents were reported to adidas executives, including Ohlmeyer. HRSA-ILA argued in its complaint, which was originally filed in April 2023, that adidas failed to disclose to investors these issues and the risks that they posed to its business, thereby, artificially inflating adidas’ stock price. 

In its complaint, HRSA-ILA zeroed in on adidas’s alleged omission of these events from its public disclosures between 2018 and 2021, during which time the company reassured investors about its risk management, diversity policies, and inclusion efforts, despite what was allegedly happening in the background. The Norfolk, Virginia-based pension fund argued that these omissions misled shareholders, and ultimately, resulted in “significant” financial losses in violation of the Securities Exchange Act when adidas terminated its relationship with Ye in October 2022.

The Future: Looking forward, Judge Immergut expressed skepticism that the plaintiff, which have 30 days to refile their complaint (which she dismissed without prejudice), could cure the deficiencies in its complaint, stating that “this Court believes that any amendment would likely be futile.” She went on to signal that unless the plaintiffs could present new, more compelling facts that addressed the legal issues raised in the dismissal – such as the broad and aspirational nature of adidas’s risk and DEI disclosures – any further attempt to bring the case would likely fail.

The case is HRSA-ILA Funds v. adidas AG, et. al., 3:23-cv-00629 (D. Or.)