Skechers sues Adidas for false advertising, unfair competition over alleged player payments

Footwear company Skechers sued Adidas in federal court Thursday, claiming its competitor created false advertising and unfair competition by funneling hundreds of thousands of dollars in secret payments to high school and college basketball players and their families to wear its products.

The federal lawsuit, which was filed in U.S. District Court in Los Angeles, alleges that illicit payments made by Adidas and its employees "effectively blocked Skechers and other companies from competing on a level playing field for young, NBA-level endorsers, and unfairly bolstered consumer perception of adidas' overall brand quality and image well beyond the basketball footwear market."

Skechers, based in Manhattan Beach, California, is seeking recovery of Adidas' "ill-gotten profits, damages for lost sales and diminished brand value and increased advertising and marketing costs, and an injunction preventing adidas from making further illegal, undisclosed endorsement payments to amateur basketball players," according to the lawsuit.

An Adidas spokesperson called Skechers' complaint "frivolous and nonsensical" and said "it should be summarily dismissed."

Adidas executive Jim Gatto and employee Merl Code were among 10 men arrested by FBI agents in late September, following a two-year investigation into bribes and other corruption in college basketball. Among other charges, the government alleges Gatto, Code and Christian Dawkins, a runner for former NBA agent Andy Miller, conspired to make improper payments to ensure that high school players signed with Adidas-sponsored colleges and then inked endorsement deals with the shoe company once they turned pro.

Last month, federal prosecutors filed additional charges against the men, alleging they also conspired to provide cash payments to the families of former basketball players at Kansas, Louisville and NC State.

They are scheduled to go on trial at U.S. District Court in New York in October.

Also last month, Thomas "T.J." Gassnola, an Adidas consultant from Springfield, Massachusetts, was indicted and pleaded guilty to one felony count of wire fraud conspiracy for his role in the alleged bribery schemes. The former director of the Adidas-sponsored New England Playaz has agreed to cooperate with prosecutors in the federal government's investigation, according to court records.

Skechers' lawsuit claims that Adidas' alleged misbehavior has irreparably harmed its footing in the basketball marketplace.

"The competitive harm of adidas' egregious misconduct is substantial," the lawsuit says. "The market for basketball shoes is driven as much by brand perception, attitude, and style as it is by shoe performance. The ability to develop 'street credibility' by having talented players and trendsetters wear a company's shoes can make or break a brand's reputation.

"Some of the key ways that law-abiding shoe companies get their products on players' feet are through sponsoring youth basketball programs, sponsoring college/university sports programs, and through endorsement deals with professional players in the NBA. adidas' illicit bribery program, however, has corrupted all of these channels, tipping the scales unfairly in adidas' favor to the detriment of competitors, including Skechers."

Adidas and Skechers have struggled to keep up with Nike in the $1 billion performance basketball market. According to data from research firm NPD Group, Nike owned 73.5 percent of the performance basketball market in 2017, followed by Under Armour at 12.1 percent and Nike-owned Jordan Brand at 7.8 percent. Adidas was fourth with a 4.8-percent share.

Sales figures for Skechers in the performance basketball market weren't immediately available.

In the lawsuit, Skechers' lawyers said NBA players Jamal Crawford (who left for a more lucrative deal with Adidas) and Josh Smith wore its shoes in the past. Dallas Mavericks owner Mark Cuban and former NBA stars Karl Malone, Kareem Abdul-Jabbar and Larry Bird have also endorsed Skechers' shoes, according to the lawsuit.

Adidas and Skechers have had an acrimonious relationship over the past two decades. On Thursday, a U.S. appeals court ruled that Adidas can protect its famous Stan Smith tennis shoe and decided that an alleged Skechers knockoff looked too much like the famous all-white shoe. The court did reverse a similar injunction that banned Skechers from selling a shoe that mimicked Adidas' three-stripe design.

"We had no doubt the Ninth Circuit Court of Appeals would affirm that Skechers has engaged in unlawful and infringing behavior," the Adidas spokesperson said in a statement. "The Court also recognized that Skechers did so in bad faith and with full knowledge of adidas' prior rights. We will not stand by and allow others to blatantly copy our products and infringe on our valuable intellectual property. We remain invested in protecting our rights and committed to bringing a complete end to Skechers' pattern of unlawful conduct at next month's trial."