Free speech may prove costly for corporations

Sunday, September 28, 2003

A company known for urging us to “just do it” took a different approach when faced with a troubling and costly lawsuit. Nike just dumped it.

A lawsuit that could have forever altered the free-speech rights of corporations disappeared when Nike decided this month to pay $1.5 million to a workers’ rights group to settle the case.

A case that once looked like it would make First Amendment history in the U.S. Supreme Court became just one more debit on Nike’s books, leaving America’s businesses with real questions about the limits of corporate speech.

The case arose when Marc Kasky, a consumer activist, filed a lawsuit saying Nike had violated a California law against misleading and inaccurate speech.

Nike had drawn criticism from both the press and the public for its alleged mistreatment of workers in Third World countries. Accusations of safety violations, abuse and unfair wages took their toll on Nike’s corporate image, so it responded with its own public-relations campaign. In letters to newspapers, in press releases and in advertisements, Nike painted a positive picture of its business conduct and rebutted the accusations.

Kasky’s suit alleged that Nike’s efforts to rebuild its image included misleading statements and constituted deceptive advertising.

If a corporation defends itself with inaccurate or exaggerated statements, is it guilty of false advertising? Or is it merely exercising the same free-speech rights that every American enjoys?

Two lower courts in California decided that Nike could not be sued for false advertising because its comments were not commercial speech – communication designed to sell products. Instead, the courts stated that Nike was engaged in political speech – free speech that addresses public issues and enjoys a higher level of constitutional protection under the First Amendment.

The California Supreme Court reversed the lower court decisions and concluded that Nike’s efforts to defend its reputation would encourage more shoe sales. In the state high court’s view, Nike was engaging in commercial speech, punishable under state law if it contained misstatements.

The case was then destined for a historic outcome in the U.S. Supreme Court. After agreeing to hear the case, accepting briefs and hearing arguments, the justices took the highly unusual step of deciding that the appeal had come to them prematurely and sent the case back to California.

Faced with climbing the ladder back to the U.S. Supreme Court and the substantial costs inherent in another fight, Nike took the economical way out. By agreeing to a settlement, Nike did not have to admit to any misstatements and was able to put a cap on its costs.

The clear winner here was Marc Kasky and workers’ rights organizations. The lawsuit certainly got Nike’s attention, embarrassed the corporation and brought in $1.5 million.

The list of losers in this case, however, is not limited to Nike. Every corporation doing business in California now has to think long and hard about any public statement concerning its company. An honest mistake or an overly boastful comment can lead to a lawsuit by an activist alleging deceptive advertising, even if the plaintiff is not a customer and the statement doesn’t directly pitch a product.

More than 40 news-media companies, the Chamber of Commerce and the American Civil Liberties Union had asked the U.S. Supreme Court to recognize that corporations have full First Amendment protection when addressing public issues. Leaving corporations this vulnerable to litigation chills companies’ participation in the marketplace of ideas, they argued.

Effects of the settlement already are apparent. Nike has decided not to issue its annual corporate responsibility report and plans to reduce its visibility on public issues, particularly those tied to California.

Quentin Riegel, vice president of litigation for the National Association of Manufacturers, told The (Portland) Oregonian that other companies were likely to retreat from public debate.

“It’s an indication the issue will recur, and companies will be pressured into cutting back their participation and dialogues on important issues,” he said.

Although it can be difficult to sympathize with powerful corporations, it’s important to remember that corporations are made up of citizens who have a real stake in being able to express themselves, individually and collectively.

Can corporations address important issues like the environment, working conditions and employment practices without being held to the more-stringent standards of consumer advertising? Can companies speak out without fear of costly litigation? We may not know until the Supreme Court addresses this free-speech issue. This was one settlement that didn’t settle anything at all.

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