Nike said late last week that it had would settle the case brought by activist Mark Kasky under California’s controversial false advertising statute, but in reality the agreement between the two parties settled nothing, leaving companies and their public relations advisors in limbo, and allowing a ruling that severely curtails corporate free speech to stand uncontested.
Nike had taken its appeal against a decision by the California Supreme Court all the way to the Supreme Court in Washington, D.C., supported by amicus briefs from corporations; news outlets including The New York Times and The Wall Street Journal; the Public Relations Society of America and the Council of Public Relations Firms.
In response to a suit from Kasky accusing Nike of misleading consumers about its record on child labor issues, the California Supreme Court ruled that the company’s press releases and letters to the editor constituted commercial speech, making them subject to the false advertising statute in the same way claims about product ingredients or safety would be. (The court did not rule on the central factual issue of whether Nike’s statements were false.)
But the U.S. Supreme Court declined to rule on the case until a lower court had ruled on the facts of the case, leaving Nike with a difficult choice. Says Nike general counsel Jim Carter, “After the Supreme Court said it would not decide the case, it became apparent that it would be difficult to get the issue before the court again. If we went to trial and won, we would have no chance to get it reversed. The only way to get it back before the court would be to lose at trial, and that would involve all the bad things involved in losing a trial.”
Adds Kirk Stewart, Nike’s senior vice president of corporate communications, “We wanted to get the First Amendment issue resolved. But if you look at our options going forward, logically we had to find a way to settle in a way that benefits workers and everyone involed. The downside is we are now stuck with the California Supreme Court’s definition of free speech. We are all subject to that interpretation.”
That interpretation essentially strips corporations of any First Amendment protection for speech that addresses public policy and other controversial issues—protection enjoyed by activists and other critics of corporate behavior—by defining commercial speech more broadly than ever before.
The Public Relations Society of America, which was unusually vocal in the wake of the Supreme Court’s decision to pass the buck (a press release pronounced the society “devastated”) expressed disappointment that the settlement brought an end to the lawsuit without resolving fundamental issues related to First Amendment protection for corporate speech.
“Nike has been tied up with this costly litigation for more than five years now, so we certainly understand its business decision to put the case to rest,” says PRSA president and CEO Reed Bolton Byrum. “But we are extremely disappointed that this litigation did little to clarify constitutional protections for free expression in institutional communications.”
There are several aspects of the California law that trouble corporate lawyers—and ought to trouble public relations professionals:
· First, it treats public relations the same way it treats advertising. Press releases distributed to a select media audience, letters to the editor, even off-the-cuff responses to a reporter’s question, are all regarded as commercial speech.
· Second, it holds corporate statements to an alarmingly subjective standard. Plaintiffs do not have to prove that the offending statements are false, only that they were likely to leave a misleading impression. Companies can be sued for honest errors, and even for omitting pertinent facts. If a company claims to be a good corporate citizenship, but doesn’t mention that it has been accused of discriminating against minorities, it could be liable.
· Third, plaintiffs do not have to demonstrate that they were misled, or that they bought a company’s products as a result. In fact, they don’t have to demonstrate that anyone was misled. They only have to show that the potential for misleading existed. Any individual can bring a suit, claiming to act on behalf of the general public.
· Fourth, the law does not apply only to companies headquartered in California, or only to statements made in California. Any company that does business in the state—that sells any of its products or services to citizens of California—is subject to the law and could be forced to part with any profits from California attributable to the misleading statement, and to pay for a publicity campaign to correct any resulting misperceptions.
Corporations have always argued that they are entitled to the same constitutional protection as individuals and other institutions when discussing issues such as labor practices or environmental performance, allowing them to debate on a level playing field with their critics. Critics, on the other hand, argue in essence that all corporate speech is commercial, that when Nike is discussing its labor practices, it is doing so only so that it can persuade consumers to buy more sneakers—or dissuade them from buying someone else’s sneakers instead.
The activists have made the case that if the First Amendment protects Nike’s claims, companies would enjoy a “right to lie” about social issues. A cosmetics company, for instance, could put out press releases denying that it tests its product on animals even if it does so routinely. Consumers would have no legal recourse.
But the big question is whether charges and countercharges about corporate social responsibility should be decided in a court of law or in the court of public opinion. One of the important philosophical principles underpinning the practice of public relations is that the court of public opinion is an appropriate and competent forum for deciding controversial issues—a belief that encourages the free flow of ideas and a lively (if occasionally messy) debate.
By transferring that debate to the legal forum, the California statute stifles public debate and discourages public participation in these discussions. (It’s almost as though the activists don’t trust the public to reach the right conclusions or do the right thing.)
Already, there are indications that companies will respond to the California ruling by curtailing their communications efforts in the state. Nike, for its part, has decided not to issue its corporate responsibility report externally for its fiscal year 2002 and says it will “continue to limit its participation in public events and media engagement in California.”
Other companies are likely to follow suit, some because they genuinely fear legal action, others because they are unconvinced of the value of social responsibility reporting and view the California ruling as a convenient excuse to avoid discussing an issue that’s suddenly more trouble than its worth.
That may be exactly what the activists are hoping for, but if so it’s a misguided strategy. Efforts to enhance corporate social responsibility are enhanced when there’s a reason for companies to improve, when they see value in leadership—and that value will be defined by the extent to which they can communicate their activities. They’re unlikely to want to communicate in an environment where every claim is a lawsuit waiting to happen.
That concern may be partially offset by the ability of companies to rely on third parties to communicate on their behalf—something Nike will do as a result of this settlement.
As part of its settlement with Kasky, for example, Nike has agreed to make additional investments in workplace programs, donated $1.5 million to the Washington, D.C. based Fair Labor Association, which promotes adherence to a code of conduct based on international labor standards; conducts independent monitoring of practices in supplier factories by accredited monitors; and coordinates public reporting of the findings. Its membership includes 179 colleges and universities, human rights organizations, consumer groups and companies.
The money will be used for worker development programs focused on education and economic opportunity. Over the next three years, the funds will specifically address three areas:
· Increased training and local capacity building to improve the quality of independent monitoring in manufacturing countries;
· Worker development programs focused on education and economic opportunity, and;
· A collaborative effort to develop a common global standard to measure and report on corporate responsibility performance among companies.
The latter effort will create an independent ratings organization—something that will clearly benefit companies genuinely committed to social responsibility. Arguably, companies should have been relying on more trustworthy third parties anyway, rather than bragging about their own efforts. Now, the possibility of legal action may force them to adopt a strategy that will be more helpful to their long-term credibility.
If that’s a potential benefit of the California law, it’s more than outweighed by the downside. There’s nothing in this settlement that discourages the filing of further suits in the future. Indeed, Nike’s counsel Jim Carter concedes that another activist could turn around and file charges against Nike tomorrow—although not on the same statements that provoked Kasky’s ire, because the California law includes a three-year statute of limitations.
Remember, activists don’t need to have been harmed by a company’s claims, or have definitive proof that the company’s statements are false. In fact, Kasky didn’t know whether Nike lied when he brought his suit. As the case wound its way through the courts, he still had not begun the legal fact-finding process. He based his initial filing on a comparison between Nike’s pronouncements and reports by third parties—labor activists and human rights advocates—claiming to have inspected the company’s factories.
As Nike demonstrated this week, companies will prefer to settle rather than fight, even if they believe the charges are false. That means an activist with an agenda, or a favorite organization like the Fair Labor Association in need of funds, can bring a suit, sit back, and wait for the corporate donation check to arrive in the mail.
That’s a model pioneered by Jesse Jackson, who has used the threat of bad publicity to persuade companies charged with discrimination to spend money with minority suppliers, advertising agencies, and charities. And Jackson’s only threat is public opprobrium, not a law that’s highly subjective and has the potential to relieve a company of millions of dollars in profits.
It’s no surprise then, when Stewart says, “I’m sure there will be other cases. And I’m sure there will be efforts to modify the statute.”
In the meantime, everyone is trying to put a happy face on the settlement. Says Kasky attorney Patrick Coughlin, “Ultimately, both Nike and Mr. Kasky agreed that this resolution benefits two key groups: factory workers and consumers. Given the FLA’s collaboration across a wide spectrum of companies, universities and NGOs, it is an excellent vehicle for Nike to further develop its corporate responsibility efforts and allow interested consumers to measure the performance of Nike and other companies through public reporting.
“Mr. Kasky is satisfied that this settlement reflects Nike’s commitment to positive change where factory workers are concerned.”
“This contribution will be beneficial towards our core mission of improving workers’ lives by increasing our monitoring, remediation and training capabilities,” said Auret van Heerden, the FLA’s executive director. “The proceeds of the settlement will also be a long-term plus for corporate accountability and improved consumer information.”
The PRSA sought to find a silver lining also. Byrum says the society is pleased that the settlement addressed the overall issue of corporate transparency in business operations and corporate accountability.
“This underscores the contention of PRSA that consumers throughout the world demand, and are entitled to, better information from corporations and other institutions, in order to help us all understand the institutions’ performance and involvement in public policymaking,” says Byrum. “Achieving a greater level of transparency and candor from our institutions was PRSA’s primary motivation for entering the Nike case.”
And Nike says the settlement simply formalizes commitments it had already made to improve working conditions.
“We have learned a great deal in the five years since this case was first filed about the challenges we and others face in addressing issues in manufacturing environments,” says Maria Eitel, vice president and senior advisor for corporate responsibility. “Our approach to addressing these issues, our business and stakeholder engagement are continually evolving. Nike’s integration of corporate responsibility into the framework of its business is integral to who we are as a company.”
The company says it will continue to advocate for corporate transparency, even though it won’t be publishing its social responsibility report.
But it’s hard to see how increased transparency can result from a law that penalizes companies for communicating their perspectives, opinions, and positions.