If Nike Lied, Is It Fraud or Free Speech?

In a surprising twist that only the American court system would allow, Nike's (NKE) imbroglio regarding the alleged abusive working conditions in its Indonesian factories has left the company in the midst of a First Amendment case currently being heard by the Supreme Court.

Social activist Marc Kasky filed suit against Nike in the California courts five years ago, essentially accusing the company of lying in its public defense of its Asian factories. But before that case can be heard, it must first be determined how the First Amendment applies to business (or transactional) speech.

"This case is not about sweatshops, and it is not about whether Nike lied," says Adam Kanzer, general counsel and director of shareholder advocacy for Domini Social Investments, a socially responsible investment firm that filed an amicus brief on behalf of Kasky. "It is about the ability of consumers and investors to obtain accurate information from corporations."

In other words, it's a free-speech issue -- one that has pitted the socially responsible investors against the American Civil Liberties Union, or ACLU.

The result of the Supreme Court decision could have broad implications as to what corporations are able to say in the general course of doing business, without risk of a lawsuit alleging dishonesty.

Speech -- be it that of an individual, nonprofit group or hulking multinational corporation -- isn't only protected if it's true. Lying is not against the law -- that's part of what makes our speech "free."

But there are two exceptions: defamation and slander, which is not applicable in this case; and product advertising, which is the core issue in this debate.

So-called commercial speech doesn't enjoy the full protection of the First Amendment. There is a legal requirement regarding truth in advertising. Factual information regarding a product's price, warranty and safety must indeed be true. If that information is suspected to be false, a lawsuit is allowed.

But this issue here isn't Nike's shoes. It's whether Nike can be sued for allegedly lying, according to Kasky, in its defense of its labor practices.

Nike, not surprisingly, is arguing that it should be entitled to participate in the public debate over this issue, and as such a participant in this debate, its speech should not be restricted.

"Nike was not promoting a product with this speech," says Mark Lopez, the ACLU attorney who wrote the amicus brief on behalf of Nike. "It was defending itself against serious charges. It was a public relations campaign, not an advertising campaign."

But since, even by Nike's admission in the company's brief, virtually all speech the company makes affects its bottom line, opponents argue that means all its speech should be considered commercial, and therefore must be truthful.

"Granting full First Amendment protection to corporate speech," Kanzer says, "would undercut disclosure and reporting requirements imposed by the Securities and Exchange Commission, and would make it easier for companies to sidestep antifraud regulations."

But legally mandating honesty would send a chilling effect among all types of speech, the ACLU argues. "If every speaker is held to such a strict level of accuracy, no one would ever speak because they'd be subject to criminal and civil penalty," Lopez says. "The basic working principle here is that we're opposed to government attempts to shut down any speaker on issues of public importance. If all public statements were fodder for lawsuits, that would take a toll on newspapers and magazines, unions, nonprofits -- everyone."

Nike and the ACLU are arguing that the law doesn't treat different speakers differently -- Nike has as much right to defend itself (even if it is lying, a determination which is far beyond the scope of this article) as you or I would.

Domini's rather novel approach to the argument, though, is that while its portfolio managers may not be deciding whether to purchase a pair of sneakers based on Nike's speech, it is determining whether to purchase the company's stock. As such, all of Nike's speech becomes advertising, and therefore subject to the truthfulness test.

Indeed, Domini's social research providers, KLD Research & Analytics, considered the sweatshop accusations and ensuing firestorm of debate reason enough to remove Nike from the Domini 400 Social Index.

But that's just the point, the ACLU's Lopez says. People can reach their own decisions through participating in the public debate, and engaging all sides. Domini wasn't swayed by Nike's speech because it wasn't its sole source of information.

"People making investing decisions will have to sort out the truth base on competing reports," Lopez says. "Investors are perfectly capable of making these decisions. It's not like any opposing movement is being drowned out by Nike's speech."

Kasky also acknowledges that Nike's position wouldn't be as strong if the company had initiated such speech, rather than it being retaliatory. "The case might be different if this were about a public relations campaign Nike launched, saying it was environmentally friendly and a benevolent employer," Lopez says. "If it had been unsolicited speech, those circumstances would create a very different case. But you can't prevent a company from responding to charges."

If the Supreme Court determines that Nike's defense is commercial speech subject to the truthfulness test, Kasky's case charging Nike with dishonest advertising will be allowed to continue in California. The penalty, if Nike is found guilty, is the disgorgement of all its profits in that state.

More broadly, though, a Supreme Court decision in Kasky's favor could mean that all corporate speech is considered advertising, even if it doesn't fit the traditional definition of marketing a product. In that case, it's possible that every time a chief executive makes a graduation speech at a local college, or whenever a company lends its name on behalf of a nonprofit organization or even simply wants to defend itself against public charges of improper conduct, every word can be scrutinized and tested for truthfulness. It would allow a flood of lawsuits challenging the veracity of all sorts of corporate speech, even if that speech is actually found to be true.

And given the high stakes, if -- due to willful deceit or a simple mistake -- some part of this corporate speech is rendered false, many observers predict that a decision in Kasky's favor wouldn't simply force honesty. Rather, it would also (or instead) encourage corporations to become even less forthcoming.

The Supreme Court is expected to render a decision by the end of June.

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