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Shareholders Bring Novel Suits Over Workforce

Publication Date: 
February 03, 2011
Daily Journal
Gabe Friedman

Professor Ronald J. Gilson comments on the proposed class action suit against American Apparel Inc., alleging that the company did not publicly share the risks involved with its high reliance on immigrants in its factory workforce. The Associated Press's Gabe Friedman reports:

American Apparel workers at the company's downtown L.A. factory.LOS ANGELES - "Legalize Immigration" was the brazen statement printed on a popular line of pricey cotton t-shirts by clothing manufacturer American Apparel Inc. Now, shareholders are claiming company executives should have been less brazen in their hiring practices or more blatant in their disclosures to investors.

Several large shareholder suits - including a class action and derivative suit in federal court - take aim at the company for having used illegal workers in its downtown Los Angeles factory.

In what experts called a novel legal theory, securities plaintiffs' lawyers are accusing American Apparel's top management of securities fraud for not disclosing the risks associated with its immigrant workforce. They argue the company's stock dropped precipitously as a result of a U.S. Customs and Immigration Enforcement investigation in 2009 that forced American Apparel to fire nearly a third of its factory workforce, which the company later said lead to a drop in revenues.


Ronald J. Gilson, a professor at Stanford Law School, said shareholders never brought a similar securities claim to his knowledge. Ultimately, the case will depend on the materiality of the company's statements about its workforce's immigration status, and whether the risks were public knowledge, Gilson said.

He recalled another case years ago that targeted Nike Inc. for its labor practices. That case involved unfair business practice claims, not a securities claims and concerned its labor practices in overseas factories.