The Ninth Circuit has affirmed the dismissal of a proposed securities fraud class action against Adidas AG, finding that investors failed to adequately plead that the company misled the market over its long-running partnership with Ye and his Yeezy brand, or that executives acted with the intent or extreme recklessness required under U.S. securities law.
Background of the lawsuit
- HRSA-ILA Funds, an Adidas shareholder, filed a putative class action on behalf of “all others similarly situated” against Adidas AG and Harm Ohlmeyer, with Kasper Rorsted named as a defendant in the district court.
- The fund alleged that Adidas had a “significant partnership” with Ye and Yeezy, which it terminated in Fall 2022 after public backlash to Ye’s antisemitic and other improper behavior, and that the fallout and end of the partnership contributed to a drop in Adidas’s share price.
Legal standards the court applied
- To survive dismissal, a section 10(b) claim must meet heightened pleading standards under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995, including stating with particularity what was said, why it was misleading, and facts supporting a strong inference of scienter.
- A section 10(b) claim also requires six elements: a material misrepresentation or omission, scienter, a connection with the purchase or sale of a security, reliance, economic loss, and loss causation; failure on material misrepresentation or scienter alone is enough to dismiss.
Why the Ninth Circuit rejected the business partner risk theory
The fund focused first on Adidas’s “Business Partners Risk” language in multiple annual reports, which warned that unethical conduct by business partners or improper behavior by athletes, influencers, or entertainment partners could negatively impact the company’s reputation, costs, and operations. HRSA-ILA argued this wording was misleading because it presented misconduct as a hypothetical risk even though Adidas allegedly already knew about Ye’s antisemitic and improper behavior.
The Ninth Circuit held that this theory failed at the threshold element of a “material misrepresentation or omission” under section 10(b). The panel read the disclosure as warning investors about the negative spillover effects of improper behavior, not as a representation that such behavior had never occurred, and concluded that a reasonable investor would understand that a partnership with a controversial celebrity like Ye inherently carried reputational risk.
No actionable misstatement on EU reporting compliance
The second key theory centered on Adidas’s statements that it fulfilled the Global Reporting Initiative standards’ “Core” option as part of compliance with the EU’s Non-Financial Reporting Directive. HRSA-ILA claimed this was misleading because the company allegedly failed to disclose negative aspects of its internal culture and Ye’s repeated misconduct.
The court held that such statements were not “capable of objective verification,” a requirement for securities fraud liability, especially given HRSA-ILA’s own concession that it did not know of any enforcement body that could definitively interpret the broad, discretionary GRI provisions. Without an objectively verifiable standard to measure Adidas’s compliance, the panel found no materially false or misleading statement about the company’s non-financial reporting.
Failure to plead scienter and control person liability
Even assuming a misstatement, the panel held that HRSA-ILA did not “state with particularity facts giving rise to a strong inference” that Adidas or its executives acted with scienter, defined as intent or “deliberate recklessness,” which the court described as an “extreme departure from the standards of ordinary care.”
- Because a corporation like Adidas can only have scienter through its employees and agents, and the complaint did not show that any particular agent acted with deliberate recklessness, the scienter allegations fell short of PSLRA requirements.
- The court also affirmed dismissal of the section 20(a) “control person” claims, explaining that this provision requires a primary violation of federal securities law plus control by the defendant, and where a plaintiff fails to plead a viable section 10(b) claim, section 20(a) liability necessarily fails as well.
The judgment of the District of Oregon, which had dismissed the complaint, was therefore fully affirmed and remains in place.
