As often happens when companies are hit with securities class action lawsuits, Lululemon, which in August was sued in a securities suit, was hit with a parallel shareholder derivative lawsuit. The derivative suit allegations not only largely track the allegations in the prior securities suit, but the derivative suit complaint expressly refers to the prior securities lawsuit filings. However, there is an unusual twist. In addition to tracking the same allegations as the securities suit, the Lululemon derivative suit complaint contains an entirely new and different set of allegations – and the new set of allegations are interesting in their own right.
The new allegations relate to the Lululemon’s DEI program (or what Lululemon called its IDEA program, standing for Inclusion, Diversity, Equity, and Action). DEI programs have been the recent focus of attention, with, for example, some companies facing litigation for even having a DEA program, and other companies (such as Ford and Harley-Davidson) having to publicly back away from their DEI program in response to political pressure. The allegations in the new Lululemon derivative complaint do not seek to challenge the company for having adopted this kind of program; the allegations instead question the company’s actions for doing too little to combat discrimination and eliminate racial issues at the company. In the context of a changing environment surrounding ESG issues in general, and DEI issues in particular, the new Lululemon lawsuit represents an interesting development, as discussed below. The derivative complaint in the new lawsuit can be found here.
Background
The allegations in the complaint relating to Lululemon’s IDEA program open with a recital of the push toward DEI in the wake of the shootings of George Floyd and others. In October 2020, the company announced a new “Impact Agenda” that would include an “area of focus” called IDEA. (The company’s Impact Agenda also referred to its goal to become a more sustainable business and to minimize its environmental impact.) The stated goal was to have the company reflect the diversity of communities in which it operates by 2025. The company also hired a global head of IDEA. In its subsequent disclosure documents, the company referred to its IDEA goals and commitment.
On November 20, 2023, an article appeared in the Business of Fashion magazine entitled “At Lululemon, Being Black is ‘Off-Brand’” (here). The article, which claimed to be based on interviews with current and former Lululemon employees, alleged that the company’s IDEA initiative failed to achieve its stated goals and, in some cases, perpetuated discriminatory treatment of company employees.
Among other things, the article described the IDEA effort as “a misguided initiative.” Subsequent news articles also questioned the company’s IDEA efforts. The complaint alleges that the company’s share price declined 1% on the news. The complaint also alleges that the company’s board “suffered from an apparent lack of racial diversity,” as it “never had more than two racially diverse members of the board,” and for much of the time period discussed in the complaint, had only one racially diverse member.
While these allegations concerning the company’s IDEA program are featured in the complaint, the bulk of the complaint is related to unrelated inventory allocation issues, which are in fact the same allegations that appear in the securities class action lawsuit complaint that was filed against the company in September 2024. The derivative complaint’s allegations concerning the inventory issues are substantially the same as in the prior securities lawsuit complaint.
The Lawsuit
On November 20, 2024, a plaintiff shareholder filed a derivative lawsuit against certain current and former directors and officers of Lululemon. With respect to the IDEA-related allegations, the complaint alleges that at relevant times the defendants failed to disclose that: “(i) IDEA was not structured so as to meaningfully combat discrimination within Lululemon; and (ii) as a result, Lululemon employees continued to experience discriminatory treatment.” The complaint also contains allegations relating to inventory mismanagement issues, paralleling the similar allegations in the prior securities lawsuit complaint.
The complaint alleges, both with respect to the IDEA-related allegations and with respect to the inventory misallocation issues, that the defendants breached their fiduciary duties; and engaged in gross mismanagement and corporate waste. The complaint also contains allegations against the defendants for unjust enrichment and insider trading, as well as aiding and abetting. In addition, the complaint alleges violations of Section 14 of the Securities Exchange Act of 1934 based on alleged misrepresentations in proxy statements, and also alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the company.
Discussion
There are several unusual features of this complaint. First and foremost, as far as I am concerned, is the odd and unexpected way that the totally unrelated IDEA-related allegations are kind of bolted onto what is otherwise just a standard, run-of-the-mill derivative lawsuit following on to the previously filed securities lawsuit. It really feels in reading the complaint as if we are dealing with two completely separate suits here. At a minimum, the derivative suit unusually presents two completely unrelated sets of allegations.
Another unusual thing about this complaint is that it seems to go against the current run of DEI-related agitation. As I noted at the outset of this post, the current stream of DEI related activity has been the steady stream of anti-ESG activity that conservative activists have pursued, resulting in a number of U.S companies walking back their ESG commitment. These efforts have only gained in momentum after the U.S. Supreme Court’s Date decision in the Harvard College case (as discussed here). This case, against the general current run of play, alleges that this company did not do enough to advance its IDEA goals.
The complaint, as I noted above, contains allegations that the company’s has had insufficient diversity on its corporate board. The timing on these kinds of allegations is also unusual. Long-time readers on this site will recall that in 2020-2021, there was a series of board diversity derivative suits filed (as discussed for example here). These lawsuits were uniformly unsuccessful (as discussed for example here). Given this prior history, it is both unusual and unexpected to see these kinds of allegations raised here and now.
One final observation has to do with the filing of this lawsuit in the context of the overall recent history about ESG-related developments in general. This lawsuit, in addition to being DEI-related is also ESG-related. The company’s original IDEA action plan included statements not only about diversity, but also about sustainability and the environment. The statement, which the company made way back in 2020, reflected the push at the time for companies to be more proactive on ESG-related issues. In the interim, companies have indeed faced litigation on ESG-related issues, but the lawsuits have largely been not about companies being insufficiently proactive on ESG issues, but rather for the companies’ taking an overactive approach or overstating the ESG credentials.
This lawsuit is unusual because it is not about the company going overboard on its ESG efforts; to the contrary, this lawsuit is about the company allegedly not doing enough to live up to its aspirational ESG goals.
At a minimum, this new lawsuit underscores that fact that, from a litigation perspective, the ESG-related concerns that companies face remain multi-faceted and difficult to predict. It is not doubt that for some time now many companies have found it expedient to keep their heads below the parapet when it comes to ESG issues (in a process that has come to be known as “greenhushing”). There definitely is a certain damned-if-you-do-damned-if-you-don’t feeling for companies to the whole panoply of ESG-related issues.