In a potentially ground-breaking decision, the California Supreme Court has ruled that corporations may be held liable for misleading advertising or public statements they make about their operations as part of their public-relations efforts.

The ruling, which came in a case challenging Nike Inc's statements about conditions in Asian factories where the company's shoes and apparel were produced, is likely to be appealed to the US Supreme Court, according to Oregon-based Nike, which contracts with some 700 plants in more than 50 countries around the world.

Corporate-accountability and labour activists praised the decision as a major breakthrough in countering sophisticated public-relations campaigns by corporations on issues ranging from their treatment of workers to environmental protection.

This puts corporate 'greenwashers' on notice that what they say needs to reflect what they actually do, rather than be a diversion from their true practices, said Josh Karliner, director of the California-based corporate watchdog, CorpWatch.

It opens the door to challenging all kinds of representations made by corporations and their surrogates, said Jeff Ballinger, a labour activist at Harvard University who was one of the first to expose sweatshop conditions in Indonesian factories used by Nike.

Nike and its backers, including the American Civil Liberties Union (ACLU) contended that its statements were protected by free-speech guarantees under the First Amendment of the US Constitution.

It essentially shuts business speakers out of the public debate on any issue that affects them, the ACLU's Ann Brick told The Legal Times .

That kind of analysis is absolutely antithetical to the basic First Amendment principle that we let the people, not the government, decide who's right and who's wrong on an issue of public dispute.

The case has ramifications far beyond California's borders. Virtually every major company in the world sells to California's 35 million consumers, and any false advertising or statements about their products or operations on their part could give rise to a lawsuit in the state under the court's ruling, legal experts say.

Sweatshop conditions

The case arose out of the growing public controversy over globalisation, specifically the use by US apparel and shoemakers like Nike of overseas factories and assembly plants where, according to labour activists, sweatshop conditions prevail.

Nike, whose sales had skyrocketed during the 1980s and early 1990s due partly to its phenomenal success in advertising, found itself a major target of the globalisation debate and launched an aggressive public-relations effort to rebut attacks against it in the mid-1990s.

In ads, press releases, letters to the editor, and public speeches, Nike executives insisted that its subcontractors scrupulously adhered to local minimum wage and overtime laws, as well as environmental and health and safety regulations.

The firm even hired Goodworks International, a consultancy company owned by former UN ambassador Andrew Young, to audit some of its factories, then touted its favourable conclusions in full-page newspaper ads.

But activists charged that these claims  and Young's audit  were not only misleading, but demonstrably untrue.

In 1998, California environmentalist Marc Kasky filed suit claiming that Nike had engaged in unfair business practices by making false statements about conditions in its Asian factories.

Under California's sweeping consumer-protection laws, the most far-reaching in the United States, members of the public can bring such suits without having to prove that they personally suffered as a result of misleading statements.

The case hinged on whether Nike's public-relations efforts to respond to its critics amounted to a form of commercial speech, which is not protected by the First Amendment, or non-commercial speech, which is.

The trial court sided with Nike and dismissed the suit. The Court of Appeal agreed, arguing that Nike's PR campaign amounted to non-commercial speech because it dealt with a topic of public interest.

Speak truthfully

But four of the seven Supreme Court justices disagreed. When a corporation makes factual representations about its own products or its own operations, it must speak truthfully, wrote Justice Joyce Kennard for the majority.

She said courts should apply a three-pronged, limited-purpose test in determining whether speech is commercial and hence not entitled to First Amendment protections.

The speaker must be engaged in commerce; the intended audience should be actual or potential customers; and the content of the message must be commercial in character.

Speech is commercial in its content if it is likely to influence consumers in their commercial decisions, she wrote. For a significant segment of the buying public, labour practices do matter in making consumer choices.

Three justices disagreed. Two of the dissenters argued that the majority's ruling was fundamentally unfair. If Nike utters a factual misstatement, unlike its critics, it may be sued for restitution, civil penalties and injunctive, they wrote. When Nike tries to defend itself from these attacks, the majority denies it the same First Amendment protection Nike's critics enjoy.

Nike is expected to appeal the case to the US Supreme Court, which may accept it, says Don Falk, a partner at Mayer, Brown Rowe and Maw in California.

It's not an easy case, he said, adding that three of the Court's justices believe that commercial speech should be given the same First Amendment protections as non-commercial speech.

But unless they believe they can get a solid majority to agree with them on this case, the Court may pass on it until it can offer a clear-cut decision.

The decision is pretty darn significant for companies operating in this state, he said. It's something that's got to have corporate communications departments everywhere pretty nervous.