The California Supreme Court delivered a stiff warning to businesses Thursday, ruling that a San Francisco man can sue Nike Inc. for false advertising for allegedly lying about working conditions at Asian factories where its athletic shoes and clothes are made.
In a major free-speech decision, a divided court found that public statements the sportswear giant made in defending its treatment of overseas workers were "commercial speech" and subject to lawsuits under the state's consumer protection law.
By a 4-3 vote, the justices rejected Nike's argument that it was protected by constitutional guarantees of free speech because it was defending itself against critics accusing the company of maintaining sweatshop conditions at its factories in Vietnam, China and Indonesia.
The company's statements denying those conditions were made in the mid- 1990s in press releases and in letters to newspaper editors, heads of universities and athletic departments.
Nike's attorney, David Brown of San Francisco, said the company is deeply disappointed with the ruling and may ask the U.S. Supreme Court to review the case.
The state court said it was not preventing a business from defending its labor practices. "It means only that when a business enterprise, to promote and defend its sales and profits, makes factual representations about its own product or its own operations, it must speak truthfully," wrote Justice Joyce Kennard in the court's opinion.
Legal experts say the decision will severely limit what companies can say publicly about their working conditions by leaving them vulnerable to litigation.
"Free speech is the loser here," said Ann Brick, an attorney with the American Civil Liberties Union in San Francisco, which filed a brief in support of Nike. "It opens businesses up to false advertising suits whenever they speak out on an issue of public debate when it has to do with their business practices."
However, Nike's Brown said the company takes comfort from the fact that the high court did not rule on the merits of the case -- whether Nike made false statements about working conditions at its Asian factories. Nike insists its statements were true.
The company, which is headquartered in Oregon, has more than 700 factories around the world, run by contractors, with more than 550,000 workers.
Nike officials say they have taken several measures in recent years to improve workplace conditions, which include requiring workers to be at least 18 years old, maintaining cleaner air in the factories and increasing wages more than 40 percent for some Indonesian workers.
Decision for Consumer Rights
In ruling against Nike, the court adopted a new standard in defining what is unprotected "commercial speech."
"When a corporation, to maintain and increase its sales and profits, makes public statements defending labor practices and working conditions at factories where its products are made," Kennard wrote, "those public statements are commercial speech that may be regulated to prevent consumer deception."
The ruling prompted angry dissents from the three most conservative justices.
Justice Ming Chin said the majority had "unduly trammeled basic constitutional freedoms" of businesses responding to public criticisms. "When Nike tries to defend itself from these attacks, the majority denies it the same First Amendment protection Nike's critics enjoy," the justice said in an opinion joined by Justice Marvin Baxter.
In a separate dissent, Justice Janice Rogers Brown accused the court of essentially muzzling companies by adopting a simple standard for defining commercial speech. The court "creates an overbroad test that, taken to its logical conclusion, renders all corporate speech commercial speech," she said.
The ruling is a setback for companies that rely on "image" advertising, in which a firm focuses on selling its good reputation -- including its working conditions -- and not just a product.
S.F. Man's Suit Proceeds
Thursday's decision allows San Francisco resident Marc Kasky to pursue his lawsuit against Nike, challenging the company's statements that it maintained safe, clean working conditions at its overseas factories and paid its workers local minimum wages.
Alan Caplan, the attorney for Kasky, said the ruling is a vindication for his client. "If a corporation is going to talk about its labor practices or the working conditions at its factories, they cannot be deceptive," he said.
Kasky, former executive director of Fort Mason Center, filed his lawsuit in 1998. The suit demanded that Nike give up any profits gleaned from its allegedly false commercial statements and tell the public the truth about its overseas factories. San Francisco Superior Court Judge David Garcia threw out the suit, ruling that Nike's statements were protected by the First Amendment. A state appeals court agreed with Garcia. But the state Supreme Court, reversing that decision, sent Kasky's case back to the trial court.
San Francisco attorney Michael Rubin said the ruling will help a group of garment workers and sweatshop critics he is representing who have accused Gap Inc., J.C. Penney Corp. Inc. and other companies, in a separate Superior Court lawsuit, of using misleading advertising.
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