Nike Inc. will pay $1.5 million to settle charges that it lied about its reliance on sweatshop labor, leaving intact a California Supreme Court ruling that companies can be sued under state law for making allegedly false statements.
The settlement announced Friday amounts to a nick for Nike, a company with $10.7 billion in annual revenue. But the resolution of the case leaves Nike and other companies doing business in California vulnerable to lawsuits over their public statements.
The Beaverton, Ore., athletic wear company said the $1.5 million would go to the Fair Labor Assn. for factory monitoring worldwide. Nike said it would rather spend the money to improve factory labor conditions in developing countries than on litigation with an uncertain outcome.
Shares of Nike fell 11 cents Friday to $55.68 on the New York Stock Exchange.
San Francisco activist Marc Kasky sued Nike five years ago under California's unfair competition law, which bans false claims and advertising.
The suit attacked Nike news releases and other statements responding to charges that its athletic shoes were made in Asian sweatshops.
Nike said its comments were protected free speech under the 1st Amendment.
Advertising agencies and business groups rallied behind the company, saying a law intended to protect consumers from false advertising should not be used to attack a company for statements made in news releases.
Consumer, labor and environmental groups weighed in for Kasky, arguing that the 1st Amendment does not extend to false public statements -- in any forum -- aimed at making products more palatable to consumers.
Kasky agreed to drop the suit because he was satisfied that Nike had improved factory conditions and had accepted outside scrutiny.
"Nike did make a lot of changes," said Patrick J. Coughlin, Kasky's lawyer. "It brought their attention to a lot of things, and that was the point of the case. That said, we thought this was a good time to settle. We get to keep the California Supreme Court decision, which we think is fabulous."
Auret van Heerden, executive director of the Fair Labor Assn., which is financed through dues paid by the companies it monitors and by almost 200 universities, said the change within Nike was part of a larger shift among name-brand apparel companies.
"In the mid-'90s Kathie Lee Gifford was saying she didn't know what the conditions were in supplier factories; she didn't own them," said Van Heerden. "A company like Nike has moved way beyond that and has agreed that even though it doesn't own the factories, it will be responsible for conditions in any supplier plant."
Like Nike, Gifford later welcomed factory monitoring.
Kasky's suit was not the first to challenge product statements under California law. But Nike was one of the first to assert the 1st Amendment in its defense.
Nike persuaded the trial court to throw out the suit, but the California Supreme Court waved it forward.
"When a business enterprise makes factual representations about its own products or its own operations, it must speak truthfully," the court said.
Nike went to the U.S. Supreme Court, which in January agreed to take the case. At its heart was whether Nike's statements were part of a public debate, and therefore entitled to 1st Amendment protections, or whether they were merely claims about a product. The latter, as commercial speech, would not enjoy such a broad shield.
The case posed what Justice John Paul Stevens called "novel 1st Amendment questions." Even so, the high court decided June 27 that a ruling on the free speech issue before a trial on the truthfulness of Nike's statements would be premature. The case was sent back to a trial court in California.
The settlement announced Friday "leaves in place a 4-3 decision of the California Supreme Court that continues to be very troublesome for companies that participate in debate on public issues," said Walter Dellinger, an appellate lawyer for Nike.
"As much as Nike cared about the 1st Amendment issues," he said, "we realized there was no way to get the 1st Amendment issue back to the U.S. Supreme Court unless Nike were to lose at trial and all the way up the ladder, which is not a very attractive or likely prospect."
The suits are part of a recent expansion in the type and volume of claims brought under California's unfair business practices law, said Theodore J. Boutrous Jr., a partner who represents defendant companies at the Los Angeles law firm of Gibson, Dunn & Crutcher.
Many cases settle, Boutrous said. "The costs of litigation dwarf any public benefit."
Kristin Henry, a San Francisco-based lawyer for the Sierra Club, which filed a friend-of-the-court brief for Kasky, said the settlement was good news for consumers and for workers in factories abroad.
As for corporations, Henry said: "They are going to be held accountable for what they say about these products."