By Jonathan Stempel and Joseph Ax
NEW YORK (Reuters) - A lawsuit accusing Lululemon Athletica Inc of defrauding shareholders by hiding defects in some yoga pants that led to a costly recall and caused the retailer's stock price to fall should be dismissed, a U.S. judge said.
Investors accused Lululemon of failing to disclose how its black Luon yoga pants were too sheer, falsely touting its quality control, covering up an inability to address shortfalls, using deep discounts to boost market share, and concealing plans to replace its then-chief executive, Christine Day.
The case arose after shoppers found that pants containing Lululemon's proprietary Luon fabric were see-through when worn.
That culminated in a March 2013 recall and loss of roughly $2 billion of market value for the Vancouver, British Columbia-based company.
In a draft decision released on Friday, U.S. District Judge Katherine Forrest in Manhattan said statements made by the company, Day and founder Dennis "Chip" Wilson touting the superior quality of Lululemon's products were "puffery," and neither intended to mislead nor untrue when they were made.
Laurent Potdevin replaced Day in January as chief executive. Wilson is stepping down this year as non-executive chairman.
The judge said the investors' case boiled down to an argument that if Lululemon had only properly tested the pants before selling them, it would have realized that the pants were see-through, and that colors bled when used during exercise.
"We are not yet at a point when an apparel company's failure to employ testing by live models renders statements touting high quality false and misleading," she wrote. "It is only reasonable to assume that if Lululemon secretly knew that the (alleged) fix for its quality issues was simply to employ more people to wear its yoga pants and exercise, it would have done so - rather than the alternative of losing $2 billion in market capitalization."
Forrest also issued a draft decision dismissing two other lawsuits seeking to hold Day, Wilson and 11 other current and former executives and directors liable for damages for ignoring "red flags" about quality control. She said the plaintiffs could try to bring these cases again.
At a hearing on Friday afternoon, Forrest told the shareholders' lawyers she was "inclined" not to change her rulings, but would review their objections before issuing final decisions.
The lead plaintiff in the lawsuit against the company is the Louisiana Sheriffs' Pension & Relief Fund in Baton Rouge, Louisiana. Two individuals, Thomas Canty and Tammy Federman, lead the lawsuits against Lululemon officials.
Lawyers for the plaintiffs did not immediately respond to requests for comment. Lululemon did not immediately respond to similar requests.
Lululemon has denied dragging its feet in addressing quality control. It also said that while there was a negative backlash to Wilson's comment in November that some women's body shapes "just actually don't work" with its yoga pants, that did not show that the company committed securities fraud.
On March 27, Lululemon projected lower-than-expected full-year results, but investors were comforted by its focus on attracting and retaining loyal customers.
Lululemon shares rose 28 cents to $54.42 in afternoon trading on the Nasdaq.
The cases are in the U.S. District Court, Southern District of New York. They are In re: Lululemon Securities Litigation, No. 13-04596; Canty v. Day et al, No. 13-05629; and Federman v. Day et al, No. 13-05977.
(Additional reporting by Bernard Vaughan.; Editing by Jeffrey Benkoe, Bernadette Baum and David Gregorio)