Adidas has defeated a lawsuit that accused it of misleading investors about its disastrous big bucks partnership with Kanye West.
Judges in the US Ninth Circuit Appeals Court concluded this week that a “reasonable investor” should have known that West’s dodgy conduct had the potential to cause reputation damage for the sportswear brand, without Adidas bosses needing to specifically highlight those risks to them.
West, judges write in their judgement, “already had public notoriety for his improper behaviour even prior to the partnership” between Adidas and the rapper’s Yeezy brand.
In fact, any “reasonable investor” should have realised that “a partnership with a celebrity partner like West would come with inherent risks relating to improper behaviour”, without those risks having to be spelt out to investors in the company’s ‘business partners risk’ disclosures filing.
Adidas had a long-running and incredibly lucrative brand partnership with West and his Yeezy company between 2013 and 2022, which had generated in the region of a billion dollars by 2021 and accounted for about 8% of Adidas revenue.
However, the alliance came to a sudden halt in 2022 amid the onslaught of racist and antisemitic statements made by the rapper during that year, with the Adidas share price taking a hit as a result.
Investor HRSA-ILA Funds filed a class action lawsuit against Adidas in 2023, claiming that management at the company had failed to communicate the risks associated with its West partnership to shareholders, and in doing so violated rules in the US Securities Exchange Act and Exchange Act. A judge then dismissed those claims in August 2024, but the investors took their lawsuit to the Ninth Circuit.
Adidas did have a general ‘business partners risk’ statement in the investor reports that were published during its partnership with West, and which applied to its work with the rapper.
It stated that, “unethical business practices on the part of business partners or improper behaviour of individual athletes, influencers or partners in the entertainment industry could have a negative spill-over effect on the company’s reputation, lead to higher costs or liabilities or even disrupt business activities”.
HRSA-ILA argued that that statement misled investors, because it presented those risks as being “hypothetical”, even though Adidas management knew that there was already problematic behaviour on the part of West.
However, the Ninth Circuit judges say, the risk outlined in that statement was the possible “negative spill-over effect” of West’s conduct - which at that time was hypothetical - rather than the conduct itself.
The investors also tried to equate Adidas’s failure to declare West’s problematic conduct with cases where tech giants Alphabet and Meta had allegedly concealed data breaches from their investors.
And that’s where West’s “public notoriety” was key. Alphabet and Meta investors could not have known about the data security issues without that information being provided to them by the companies themselves, whereas the problems with West’s conduct were already known to the public.
Which means investors should have known about the “inherent risks relating to improper behaviour” by the rapper, and as a result “a reasonable investor would not be misled by the ‘business partners risk’ disclosures” made by the sportswear firm.