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Lululemon Shareholder Lawsuit Dismissed, No Fraud Just Puffery

By Gabriella Khorasanee, JD on April 22, 2014 | Last updated on March 21, 2019

Back in February we mentioned a pending shareholder lawsuit brought by Lululemon shareholders against the company. They claimed that during the class action period, September 7, 2012 and January 10, 2014, Lululemon mislead and defrauded shareholders, reports Reuters.

Last Friday, District Judge Katherine B. Forrest, of the District Court for the Southern District of New York, issued her opinion dismissing the complaint against Lululemon.

Can we get a collective Namaste?

Alleged Misleading Statements

In May 2013, Lululemon had to recall its signature pants made from its proprietary Luon fabric after complaints that the pants were sheer when worn, resulting in a "loss of roughly $2 billion of market value," reports Reuters. Plaintiffs pointed to statements made by Lululemon in a variety of sources including the company website, public filings such as Form 10-Qs and Form 10-Ks, press releases and investor phone calls. The allegedly misleading statements spoke to the quality, standards, and respect and high ranking in the industry.

The Complaint

Plaintiffs claimed violations of Section 10(b) of the Securities Exchange Act (and the underlying Rule 10b-5), and Section 20(a) Control Person Liability Standard of the Securities Exchange Act of 1934. To succeed on the 10(b) claim, the plaintiffs had to plead that the statements were false and material; made with intent to deceive; and must show causation between the statements and the loss.

The District Court's Reasoning

Here, the court found that plaintiffs failed to adequately plead any of the elements to succeed on a 10(b) claim. First, she found that the allegedly misleading statements when taken in context, were not misleading, but statements of belief or puffery. Judge Forrest found scienter and causastion lacking as well. Because a finding of liability under 20(a), requires an underlying violation of 10(b), and none was found here, the 20(a) claim was also dismissed.

It's How You Say It

Many of the statements were deemed not misleading because of the context and the way they were phrased. For any lawyer advising clients that are public companies, and that make any sort of quality and standard statements public, this opinion is a good read for determining the fine line between puffery and falsity.

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