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Peloton faces false advertising lawsuit over cutting classes it offered

Yahoo Finance legal reporter Alexis Keenan highlights the lawsuit exercise equipment developer Peloton is facing from continuing to advertise classes it had previously cut.

Video Transcript

[MUSIC PLAYING]

AKIKO FUJITA: Well, shares of Peloton seeing some huge gains here in the session on reports of a sweeping overhaul at the company. The connected fitness company slashing nearly 800 jobs and raising prices for its Bike+ and tread machines as it navigates a dramatic slowdown in its business.

In a memo to employees, CEO Barry McCarthy said the company also plans to close a handful of retail locations to lower costs. All of this comes as the company faces a class action lawsuit by customers who say Peloton misled them about the growth of its fitness classes. Let's bring in Yahoo Finance's Alexis Keenan, who's on top of that story for us today. Alexis.

ALEXIS KEENAN: Hi, Akiko. Yes, so more bad news for Peloton today. This is a lawsuit in New York that is from Peloton subscribers, their memberships that-- pay those monthly fees. They say that the company defrauded them and that they wouldn't have paid so much for their subscriptions, but for Peloton's misrepresentation, they say.

What that misrepresentation or alleged misrepresentation has to do with is it stems from a 2019 lawsuit. And that was the one with the National Music Public-- National Music Publishers Association. That's where Peloton got into trouble using copyrighted music, supposedly unauthorized. They reached a settlement there, but what it did is it caused the company to have to slash by more than half the number of classes that they were offering because they were paired with that music.

So these subscribers say we would never have paid so much for our memberships had we known. And they want damages. They want money damages. They want an injunction. So I don't know at this point how many of the subscribers are New York subscribers. The subscription at issue, it's a $39 per month subscription. So you would have to take that number, multiply it out to get to somewhere near the damages figure.

So this is a little bit preliminary for that. But as of March 31 of this year, the company was reporting that it had 2.96 million of those subscribers. So it's just a matter of figuring out how many of those are in New York because this lawsuit is limited to those subscribers that paid in New York.

RACHELLE AKUFFO: So, Alexis, how strong is this case, do you think?

ALEXIS KEENAN: It's hard to say. It's a preliminary stage. This lawsuit, it's now been brought about three times, actually. And finally, these plaintiffs, this would-be class of plaintiffs-- they don't have class certification quite yet-- they have tried on other occasions, but the judge has dismissed the other lawsuit, saying that they didn't have really the right set of facts and the right set of plaintiffs to make their case. Now the case will go forward. And that's the problem for Peloton here.

So certainly, we'll have to see what the pleadings are. Peloton is going to get opportunities to respond again to this lawsuit to make their case. But not a good look certainly if the subscribers were thinking that they were getting one thing and got something else. The argument here is that the company continued to market that they had a growing set of classes when, in fact, they knew or should have known that they were going to be actually slashing the number of classes. So it could be strong, but we'll have to wait and see. There's a lot of pleadings still to come.

AKIKO FUJITA: Certainly, investors are going to be looking to see what the hit is going to be for Peloton as they follow this case. In terms of the case itself, what are those customers who brought forward this lawsuit, seeking in damages?

ALEXIS KEENAN: So they specifically don't specify the actual amount of money that they want, but they do say that we would never have paid these fees. So you can guess there that they're going to want maybe their membership money back, or at least, part of it. They also want disgorgement. They say that the company was unjustly enriching itself on the backs of customers. So they'll want sort of a penalty there. They want the money that Peloton got to go back into their coffers.

And also, they're looking for an injunction. Not super specific there, but usually an injunction is to stop the offending behavior. So to the extent that the company is offending and then still is offending, then they'll want that behavior to not go on any longer. But the company, as you can see today, facing some tough choices with having to change its fees for its equipment, its hardware, its software, and also all of these employees losing their jobs. So I think, together, all of these things just put the company in a really tough spot right now.

AKIKO FUJITA: Yeah, a story we'll continue to follow, I'm sure. Thanks so much for that, Alexis. Rachelle, you know, let's go back to the news that we got today about these cuts because in many ways, I mean, you sort of saw the writing on the wall. This is Barry McCarthy. He stepped in really to turn the company around after a hypergrowth period over the last two years.

I mean, certainly a tough day for the company when you look at where things stand in terms of the job cuts, in terms of the price increases. But I mean, you could argue that it was necessary, as tough as it is for those employees, because they grew just too fast too quickly.

RACHELLE AKUFFO: It really was that enthusiasm during the pandemic, a lot of people stuck at home. I think Peloton's mistake was not thinking what happens after the reopening, after people go back to work. They were having issues with supply. They've obviously had to now update their logistics, which is why they're streamlining some of their staff now. Having issues with hardware, having issues now with the classes as well.

And this sort of really comes back to, does this make Peloton good for acquisition? We saw that Nike, Amazon, and Apple were listed as potentially being interested back in February when the company was first getting into trouble. So it'll be interesting to see where things go from here. And Peloton has really been trying to find its way forward with the consumers.

I know a lot of people sold their Pelotons, including myself, once the sort of novelty wore off. So how are they going to be able to sort of get growth while also being in the headlines for these layoffs? I think it's going to be an uphill battle-- no pun intended for Peloton.

AKIKO FUJITA: It's interesting you mentioned you sold your Peloton. I never bought a Peloton, but I have been taking those exercise classes. I mean, all throughout the pandemic, right? We're talking about, what, $14 a month roughly.

And it's still, to me, the value in that is still there when you consider it to, like, a gym membership. It's much lower in cost. You get unlimited classes. But to your point, at the end of the day, it's those machines and the membership that makes the money. And people just aren't seeing the value now that they have many other options outside of their home.