Sportswear Giant Fends Off Shareholder Suit Over Ye Misconduct

SAN FRANCISCO: Adidas has successfully defeated a significant appeal in a class-action lawsuit filed by shareholders who alleged the company concealed misconduct by rapper-entrepreneur Kanye West, also known as Ye, before their immensely lucrative partnership dissolved in 2022.

The 9th US Circuit Court of Appeals in San Francisco affirmed a prior district court ruling on Wednesday, concluding that the sportswear manufacturer did not mislead investors. The ruling dismisses claims from shareholders who sought damages after Adidas’ stock price plummeted following the breakdown of the Yeezy collaboration.

The appeal was filed by HLSA-ILA Funds, which accused Adidas of having “internally grappled” with Ye’s increasingly controversial behaviour for years but failing to disclose the looming risk to shareholders in its financial reports.

However, the Appeals Court ultimately sided with Adidas, establishing a key legal position. The court stated that a reasonable investor would know that a partnership with a highly visible celebrity figure like Ye carries “inherent risks relating to improper behaviour.” This sentiment suggests that the volatility of celebrity endorsements is a publicly understood factor that companies are not strictly required to spell out as hidden corporate risk.

The Yeezy collaboration had been a crucial success driver for Adidas, generating an estimated €1.5 billion ($1.17 billion) in sales in 2021 alone. The partnership was unilaterally terminated in October 2022 following Ye’s repeated antisemitic comments and promotion of conspiracy theories.

The collapse left Adidas facing a massive inventory problem, with over €1 billion worth of unsold Yeezy shoes in storage. The financial repercussions contributed significantly to the German firm’s share price tanking in 2023. Last year, Adidas announced it would sell the remaining products, committing to donate a portion of the proceeds to charities dedicated to combating hate, effectively attempting to mitigate the brand damage and address the root cause of the crisis.