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…
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