A lawsuit accusing Lululemon Athletica Inc of defrauding shareholders by hiding defects in its yoga pants that led to a costly recall should be dismissed, a U.S. judge has concluded.
Investors accused Lululemon of intending to mislead them by hiding defects in its black yoga pants, falsely touting its quality control, covering up an inability to address shortfalls, using deep discounts to boost market share, and concealing plans to replace the since-departed Christine Day as chief executive.
- Lululemon founder Chip Wilson says pants 'don't work' for some bodies
- Lululemon recalls pants for being see-through
The case arose after shoppers found that their yoga pants containing the company's proprietary Luon fabric were too sheer. That culminated in a March 2013 recall and a loss of roughly $2 billion of market value.
In a draft decision released on Friday, U.S. District Judge Katherine Forrest in Manhattan said the investors' case boiled down to an argument that if Lululemon had only properly tested the pants before selling them, it would have realized that the pants were sheer and that the colours bled.
"We are not yet at a point when an apparel company's failure to employ testing by live models renders statements touting high quality false and misleading," she wrote. "It is only reasonable to assume that if Lululemon secretly knew that the [alleged] fix for its quality issues was simply to employ more people to wear its yoga pants and exercise, it would have done so — rather than the alternative of losing $2 billion in market capitalization."
The draft decision by Forrest says many of the statements about quality were "simple puffery" by the company and that no reasonable investor would base their decisions on them.
The judge also issued a draft decision dismissing two other lawsuits seeking to hold Day, founder Dennis "Chip" Wilson and 11 other current and former executives and directors liable for damages for not having addressed "red flags." She said the plaintiffs can try to bring these cases again.
Forrest is expected to hold a hearing to review whether she should make the decisions final.
Neither Vancouver, British Columbia-based Lululemon nor lawyers for the plaintiffs immediately responded to requests for comment.
Lululemon has denied dragging its feet on addressing quality control. It has also said that while Wilson's comment in November that some women's body shapes "just actually don't work" with its yoga pants prompted much negative press, it didn't constitute securities fraud.