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Domini Files Amicus Brief with Supreme Court Nike v. Kasky

Socially Responsible Investors Argue that Nike’s Position Threatens Securities Regulation

New York, NY – Domini Social Investments LLC today announced that it has filed an amicus brief with the U.S. Supreme Court that supports San Francisco activist Marc Kasky in his effort to hold Nike accountable for its statements concerning the company’s use of sweatshop labor.
 
Kasky argues that Nike’s statements should be considered “commercial speech” akin to advertising, and therefore subject to California’s consumer protection statutes, while Nike maintains that they are “noncommercial” or “political speech” because they touch on matters of public concern, and therefore benefit from stricter protection under the First Amendment.
 
In its own brief, however, Nike concedes that “virtually everything a company does is ultimately intended to improve its financial bottom line” (emphasis in original, Nike’s brief p.22). Nike has also conceded that allegations about sweatshop practices contributed to its disappointing financial performance in 1997 and 1998. “Both of these concessions are important, and in our view, demonstrate that these types of statements should rightly be considered commercial speech,” said Adam Kanzer, General Counsel and Director of Shareholder Advocacy for Domini Social Investments. “These statements were not made during a debate about political philosophy – they were made by a company defending its reputation and its bottom line.”
 
Domini believes that Nike v. Kasky is a critical case for all investment firms that practice socially responsible investing (SRI). Domini Social Investments is the manager of the Domini Social Equity Fund (NASDQ: DSEFX), the nation’s oldest and largest socially and environmentally screened index fund.
 
“The SRI community depends upon the accurate flow of corporate social and environmental performance data,” said Mr. Kanzer. “All investors depend on government regulators to ensure that information from corporations is provided on a timely and accurate basis. If any of this information is deemed to be ‘political speech,’ it will severely undercut these regulatory efforts. Nike’s definition of political speech — any commercial speech that also touches upon matters of public concern — is alarmingly broad, potentially affecting nearly every aspect of a corporation’s business, from treatment of stock options to compliance with environmental regulations.
 
“It is important to note that this case has no bearing on Nike’s actual practices regarding its overseas contractors, or whether its statements were in fact false or misleading,” Mr. Kanzer continued. “It addresses only the constitutional question of whether companies like Nike can claim full First Amendment protection for public statements regarding their own business practices that also touch upon matters of public concern.”
 
The principal author of Domini’s amicus curiae or “friend of the court” brief is Cynthia A. Williams, Associate Professor of Law at the University of Illinois College of Law. The brief is co-authored by Michael R. Siebecker, Adjunct Assistant Professor at Hunter College. KLD Research & Analytics, Domini’s social research provider, and Harrington Investments, a Northern California–based social investment firm, also signed onto the brief. James Pfander, Prentice R. Marshall Professor of Law at the University of Illinois College of Law, was counsel of record.
 
Domini’s involvement in Nike v. Kasky follows its successful campaign for new rules by the Securities and Exchange Commission requiring mutual funds and investment advisers to disclose their proxy voting policies and voting records. This is the first brief Domini has filed with the Supreme Court.
 
Professor Williams said, “Our brief asks the Court to recognize as a legal principle that we ought to treat companies’ statements about social and environmental facts precisely as we treat their statements of financial facts. These factors are critical to investors and consumers, but they are only valuable if they are true. A broad ruling in Nike’s favor would seriously undermine the SEC and other regulators’ abilities to ensure that these statements are accurate and not misleading.”
 
According to John Harrington, president and CEO of Harrington Investments, “Corporations, certainly including Nike, spend hundreds of millions of dollars on advertising and public relations to sell their products and establish their trade name, logo or brand. A corporation’s statements about its own business practices are clearly commercial speech and should never be confused with the freedom of speech guaranteed to individuals by the First Amendment of the U.S. Constitution. Corporations have a duty to speak in a way that is accurate and not misleading, and they should not be given free rein to use the First Amendment to evade that duty.”

Domini’s Argument

Domini argues that granting full First Amendment protection to corporate speech would undercut disclosure and reporting requirements imposed by the Securities and Exchange Commission, and would make it easier for companies to sidestep antifraud regulations. Domini’s brief maintains that a ruling in favor of Nike could have serious implications “at a time when restoring investor confidence in the markets is crucial.”
 
Domini also argues that Nike’s position would threaten investors’ ability to obtain information from corporations on issues of public concern, such as information about use of child labor, toxic releases, or expensing stock options. Because the U.S. Supreme Court has struck down laws compelling political speech, corporations could claim that compelled disclosure of noncommercial information is unconstitutional. This may also threaten shareholders’ ability to file shareholder resolutions on social, environmental or corporate governance matters (because the SEC might not have the authority to compel corporations to include such “political” speech in their proxy statements). Domini, Harrington, and many other socially responsible investors regularly file such resolutions each year.
 
Supporters of Nike’s position have argued that to regard corporations’ statements on their environmental and social performance as commercial speech would have a chilling effect on their willingness to disclose such information. Nike itself has refused to release its most recent report on corporate social responsibility.
 
Domini, however, maintains that companies like Nike will continue to discuss their practices because it is in their interests to do so. This information is demanded by consumers, federal regulators, nonprofit organizations, some national governments, and by socially responsible investors and research organizations.
 
Nike has argued that it has a right to defend itself when its labor practices are attacked. In its brief, Domini argued “of course Nike or any other company must be able to respond to criticisms of their labor policies by providing facts about those policies ….Yet that reassurance needs to be based on truthful, accurate and non-misleading information. Nike or any other company should not be able to ‘plead the First’ so that the truth of the facts they assert about their social and environmental records cannot be tested in litigation — just as they would not be able to plead the First to preclude an examination of their statements of fact about their financial results of operation or about product quality, price or safety.”
 
Domini pointed out that Nike’s position could have implications for financial statements as well: “Indeed, given recent events, that financial statements are accurate is itself a matter of public concern, suggesting that on Nike’s theory even statements of fact about a company’s financial results would not be commercial speech.”

Background of the Case

Nike, along with other corporations, was criticized in the late 1990s for using sweatshop factories in Asia to manufacture its running shoes and other products. In 1998, California consumer Marc Kasky sued Nike under California statutes prohibiting false and misleading advertising.
 
Kasky challenged statements Nike had made to newspaper editors, university professors, and investors, such as that the company paid “on average, double the minimum wage as defined in countries where its products are produced” and that its workers “are protected from physical and sexual abuse.”
California state law allows anyone to sue a company for “false advertising” in statements that are deemed to be “commercial speech.” Commercial speech receives a far lower level of protection under the First Amendment than political speech.
 
California state and appellate courts agreed with Nike that its statements were protected as noncommercial speech. The California Supreme Court, however, ruled in Kasky’s favor, holding that Nike’s statements are “commercial speech for the purposes of applying state laws barring false and misleading commercial messages.” Nike then appealed the case to the U.S. Supreme Court. The Court is scheduled to hear oral arguments on April 23.
 
In 1997 Nike became the first of two companies to be removed from the Domini 400 Social IndexSMbecause of concerns over its international labor standards. (Wal-Mart was dropped for the same reason in 2001.) The Index is maintained by KLD. The Domini Social Equity Fund is a fully replicating index fund based on the Index.

About Domini Social Investments

Domini manages more than $1.3 billion in assets for individual and institutional investors seeking to create positive change in society by integrating social and environmental criteria into their investment decisions. Its flagship fund, the Domini Social Equity Fund (NASDQ: DSEFX), is the nation’s oldest and largest socially responsible index fund. The Fund seeks to include companies with positive records in community involvement, the environment, diversity and employee relations, and excludes companies deriving significant revenues from alcohol, tobacco, gambling, nuclear power, and weapons contracting. In addition to the Domini Social Equity Fund, the company also offers the Domini Social Bond Fund (NASDQ: DSBFX) and an FDIC-insured money market account (in partnership with ShoreBank), both of which focus on community economic development.
 
Additional information on Domini Social Investments is available on the firm’s website,www.domini.com. A copy of Domini’s amicus brief is also available online.

About Harrington Investments

Harrington Investments, Inc. (HII) is a registered investment adviser, managing assets for individual and institutional clients that require a comprehensive social and environmental as well as a financial criteria portfolio management and investment service. HII manages approximately $120 million in assets. HII not only manages socially screened portfolios, but introduces shareholder resolutions on issues of public concern and discusses such issues with corporate managers.

About KLD Research & Analytics

Headquartered in Boston, Massachusetts, KLD Research & Analytics Inc. supplies social investment research, benchmarks, compliance, and consulting services to leading investment institutions worldwide. KLD is the creator of SOCRATES, a comprehensive online social research database, and the Domini 400 Social Index,SM the established benchmark for socially screened portfolio performance.