Lululemon Athletica Inc. is the target of a new shareholder derivative lawsuit, accusing the company and key executives and board members of breaching their fiduciary duties, engaging in mismanagement, and misleading shareholders about the company’s inclusion and diversity efforts. The complaint, filed by James Wong on behalf of the company, accuses Lululemon’s management and board of failing to disclose key facts surrounding the company’s “Inclusion, Diversity, Equity, and Action” (“IDEA”) initiative, including that it “was not structured to meaningfully combat discrimination within Lululemon” and that as a result, non-white Lululemon employees “continued to experience discriminatory treatment.”
Wong alleges in the Lululemon-focused lawsuit he filed with the U.S. District Court for the Southern District of New York on November 18 that the “truth regarding the IDEA” initiative emerged in November 2023, when Business of Fashion published an article, titled, “At Lululemon, Being Black is ‘Off- Brand.’” In the article, the fashion publication detailed accounts from fourteen former Lululemon employees, who maintained that the Vancouver-headquartered company possesses “a corporate culture that is unwelcoming of Black people and leaders regularly use stereotypes to define and ostracize minority employees, who face barriers to career advancement that don’t seem to apply to white colleagues.”
Moreover, the article asserted that Lululemon employees “who drew the company’s attention to these issues … were passed over for promotions, reprimanded, and, in several cases, had their employment terminated.”
Against this background, Wong maintains that Lululemon and its leadership “knowingly or recklessly” made “false and misleading” statements about the company’s commitment to diversity and its internal controls for “identifying and managing material risks,” which served to conceal systemic issues over the company’s “discriminatory culture” and allow its Nasdaq-listed stock to trade at inflated prices. In fact, Wong asserts that the defendants – including Calvin McDonald, Meghan Frank, Martha Morfitt, David Mussafer, Michael Casey, Shane Grant, Kathryn Henry, Alison Loehnis, Isabel Mahe, Jon McNeill, Emily White, and Teri List – “had actual or constructive knowledge that the company issued materially false and misleading statements regarding the IDEA initiative and failed to correct [these] public statements … for the purpose and effect of artificially inflating the price of the company’s securities.”
On the heels of BoF’s article, Yahoo Finance published a report of its own in January that detailed the alleged reality behind Lululemon’s IDEA initiative and its alleged discrimination against non-white employees. Upon release of Yahoo’s article, Lululemon’s stock price “fell $4.90, or roughly 1%, from a close of $496.00 on January 4, 2024, to a close of $491.10 on January 5, 2024,” Wong alleges.
In addition to their efforts to hide the alleged ineffectiveness of the highly-publicized IDEA program, Wong claims that the defendants “caused the company to conceal significant issues with [its] inventory allocation methods.” Shareholders were further damaged when Bloomberg published back-to-back articles in July, detailing issues with Lululemon’s newly-released Breezethrough leggings. The reports, which alleged “inconsistent” inventory allocation and pricing, caused Lululemon’s stock price to drop by “$9.31, or more than 3%, to close at $272.06 per share on July 24, 2024,” and then by “$24.74, or more than 9%, to close at $247.32 per share on July 25, 2024.”
In a nutshell: Wong asserts that “in breach of their fiduciary duties owed to Lululemon, the defendants willfully or recklessly made and/or caused the company to make false and misleading statements and omissions of material fact that failed to disclose that: (i) the company was experiencing issues with its inventory allocation and color palette execution; (ii) as a result, the Breezethrough legging launch underperformed; (iii) due to the foregoing, the company’s sales in the Americas began to stall; (iv) the company failed to maintain internal controls; (v) the IDEA program was not structured so as to meaningfully combat discrimination within Lululemon; and (vi) as a result, Lululemon employees continued to experience discriminatory treatment.”
Not finished there, Wong goes on the claim that Calvin McDonald, CEO of Lululemon, and Meghan Frank, the company’s Chief Financial Officer, “while in possession of material, non- public information, capitalized on the artificially inflated stock price by selling significant portions of their holdings of Lululemon common stock” to earn a combined $13 million.
With the foregoing in mind, Wong accuses the defendants of violating Section 10(b) and Rule 10b-5 of the Exchange Act; Section 14(a) of the Exchange Act and Rule 14a-9; and Section 20(a) of the Exchange Act, and also breaching their fiduciary duties, engaging in unjust enrichment, and wasting corporate assets.
THE BIGGER PICTURE: The outcome of the lawsuit could reverberate beyond Lululemon, serving as a cautionary tale for corporations touting diversity initiatives potentially without substantive backing. For companies navigating the complex intersection of social responsibility and corporate governance, this case underscores the critical need for transparency, accountability, and genuine action.
A representative for Lululemon was not immediately available for comment about the lawsuit.
The case is James Wong v. Calvin McDonald, et al., 1:24-cv-08752 (SDNY).
