Lululemon Athletica inc. (NASDAQ:LULU) could emerge triumphant against the lawsuits filed against it alleging it intentionally misled investors regarding the defects of its yoga pants, which led to a costly recall.
United States District Judge Katherine Forrest in Manhattan concluded that the lawsuit against Lululemon Athletica inc. (NASDAQ:LULU) for allegedly defrauding its shareholders by concealing the defects of its yoga pants should be dismissed.
The shareholders argued in their complaint that the yoga pants retailer deceived them by falsely promoting its quality control, hiding the defects of its product, covering up its inability to resolve the problem and its plan to replace its CEO Christine day who resigned in June. The shareholders also accused Lululemon Athletica inc. (NASDAQ:LULU) of misleading the investors by using deep discounts to improve its market share.
Lululemon Athletica recalls yoga pants
In March of last year, Lululemon Athletica inc. (NASDAQ:LULU) was forced to recall its Luon brand yoga pants because they were too sheer due to a production defect. It offered exchanges and full refunds to customers who bought the product after March 1.The black Luon yoga pants accounted for 17% of the total pants revenue of the company, and the recall negatively affected the company’s stock price as analysts downgraded their price targets for the stock. Lululemon lost approximately $2 billion in market value due to the recall.
Judge Forrest wrote in her draft decision released on Friday that the shareholder lawsuit centered on the argument that Lululemon Athletica inc. (NASDAQ:LULU) failed to properly test the quality of its yoga pants that it was too sheer and the color bled. If the company had only tested the yoga pants properly, it would not have ended up selling the product.
“We are not yet at a point when an apparel company’s failure to employ testing by live models renders statements touting high quality false and misleading. It is only reasonable to assume that if Lululemon secretly knew that the (alleged) fix for its quality issues was simply to employ more people to wear its yoga pants and exercise, it would have done so — rather than the alternative of losing $2 billion in market capitalization,” wrote Judge Forrest.
Judge Forrest also issued draft decision recommending the dismissal of two other lawsuits against the executives of the Lululemon Athletica inc. (NASDAQ:LULU) including former CEO Day and founder Dennis Wilson. The judge is expected to hold a review hearing before making her draft decision final.