“Nike and the Free-Speech Knot,”

by Eugene Volokh,

from the Wall Street Journal, June 30, 2003, at A16

When may businesses be sued for making allegedly false or misleading claims? This is a surprisingly complex question. The Supreme Court was supposed to answer it in the Nike v. Kasky case, which arose from Nike's making of allegedly false and misleading statements when responding to critics of its overseas labor practices. Last Thursday, though, the justices dismissed the matter on procedural grounds.

In most public debate, honest mistakes and statements that are true but misleading are constitutionally protected. A journalist or scientist who writes "Studies show product X cures baldness" can't be sued, at least unless his statement is a knowing lie. If speakers could be sued based on allegedly misleading assertions, the risk and cost of litigation would often deter them from saying even true things. So under the First Amendment, the remedy for error is rebuttal, not litigation.

But if the same statement appears in an ad for product X, the advertiser can be held legally liable. If you warrant something about your product, your warranty better not be mistaken or misleading. This is traditionally referred to as the "commercial speech" exception to full First Amendment protection: Accurate "commercial speech" is usually constitutionally protected (though not as much as other speech), but false or misleading commercial speech is unprotected.

"Commercial speech" has always been an ambiguous label. It sounds like speech sold in commerce, or speech about commerce, but that's not right. This newspaper qualifies on both those counts, and it's fully protected speech, not commercial speech. Rather, the commercial speech doctrine is generally limited to speech that directly or indirectly proposes a commercial transaction with the speaker -- commercial advertising, more or less. A billboard saying "Buy Nike shoes: Made with high-paid labor," for instance, would be commercial speech.

So honest mistakes and misleading statements in public debate are protected by the First Amendment. Similar statements aimed at getting people to buy your products are unprotected.

But what happens when these two categories overlap? In Nike v. Kasky, critics claimed Nike products were made in sweatshop conditions and urged the public not to buy the products. Not so, Nike responded, using press releases, letters to the editor and letters to institutional buyers. Nike was participating in public debate -- but also trying to get readers to keep buying Nike products.

The California Supreme Court concluded, by a 4-3 vote, that Nike's statements were "commercial speech," and so could be punished if they were false or misleading. Many observers expected the U.S. Supreme Court to reverse that decision, but the question was close. It seems wrong to let Nike's critics play under one set of rules (because they're not commercial advertisers), but force Nike to play under another. But it also seems wrong to let Nike make misleading statements (if they are indeed misleading) to dupe customers into buying its shoes.

The U.S. Supreme Court agreed to hear the case, but then refused to decide it. Usually, the justices consider cases only after state courts render a final decision; and here, the state court had only said the speech was commercial speech, and sent the case back down for further proceedings -- likely including a trial on whether the statements were indeed misleading. The justices originally thought this case fit into an exception to this "finality" requirement, but then changed their minds. They might hear the case again after the state court decision is final, for instance if Nike is found liable at trial; but they don't want to hear it now.

Justice Stephen Breyer, joined by Justice Sandra Day O'Connor, however, disagreed with the others on this procedural point, and expressed a view on the substance as well: Because the commercial message (buy our shoes) was mixed with a political message (our political opponents are wrong), and was presented outside a traditional advertising medium, it should have been treated as fully protected.

Moreover, Justice Breyer suggested, the particular structure of the California false advertising law was unconstitutional as well. The law lets any citizen sue over allegedly false or misleading statements by a business. In this respect, the law differs from traditional false advertising laws used by government agencies, or by people who actually bought a company's products in reliance on the ads. This, Justice Breyer said, lets "a large and hostile crowd freely . . . bring prosecutions designed to vindicate their beliefs," without facing the practical constraints that keep prosecutors focused on genuinely economically harmful conduct -- and, he reasoned, the risk of such lawsuits may deter businesses from participating in public debates.

Justice Breyer might not be right on this second point: There would probably be a similar deterrent effect even without the special California law. Nike's adversaries could probably find consumers who would say they personally bought Nike shoes because of Nike's assurances, and who could therefore sue under a traditional fraud theory. But Justice Breyer's first point is probably sound, though the line he proposes to draw may be hard to administer.

More importantly, Justices Breyer and O'Connor are among the justices who usually take the narrowest view of the Free Speech Clause. If even they think Nike should win here, then some of the other justices would probably agree, and may have voted to dismiss just because they thought the case wasn't procedurally ready. That would bode well for businesses should the court consider the issue again.

But in the meantime, the problem remains unresolved. And businesses, unfortunately, don't have much of an answer to the question with which this article started -- except to be extra careful about any statement that some might construe as misleading, especially in California.