Supply Chain Accountability - The News Just Keeps Coming

If anyone needed a reminder of the eternal vigilance required of those doing business in a global marketplace, a series of class action law suits recently filed in federal court in California would fit the bill. 

The California Transparency in Supply Chains Act directs companies that do business in California to disclose on their websites what steps they have taken to ensure the elimination of human trafficking and slavery in their supply chains, using a format laid out in the law (see Resource Guide). The Act went into force at the beginning of January 2012, but many companies have not taken it very seriously. The only enforcement authority under this law is injunctive action by the California Attorney General, which has yet to be invoked. However, in three sets of class action lawsuits filed in August and September 2015, plaintiffs have come up with creative ways to sue companies they believe are not properly complying with the California law or are otherwise making false or fraudulent claims related to the use of forced labor in their supply chains. These developments bear watching.

In Sud v. Costco Wholesale Corp., et al., filed in federal district court in the Northern District of California on August 19, 2015, plaintiff Monica Sud claims, on behalf of herself and similarly situated Californians, that Costco knowingly purchased farm-raised prawns from certain Thai companies that use forced labor. According to the complaint, the disclosures Costco made pursuant to the California statute, saying it adheres to a Code of Conduct that prohibits human trafficking and slavery, are false and misleading, therefore constituting unlawful business practices, misleading and deceptive advertising claims, and unfair and deceptive practices, in violation of three California laws.

A second set of class actions related to supply chain disclosures was filed by California residents who allege false advertising, although not tied specifically to reporting under the California Transparency in Supply Chains Act. In Wirth v. Mars, No. 8:15-cv-1470, filed in the Central District of California on September 10, 2015, and a similar suit against Nestlé, plaintiffs allege fraudulent claims and false advertising in the two companies' failures to disclose the use of slave labor in their production of seafood-based cat food, contrary to their publicized codes of ethics.

California consumers filed three additional class action lawsuits on September 28, 2015, against Mars, Nestlé, and Hershey, alleging that these companies use forced child labor in the production of cocoa products in West Africa, again contrary to representations in their codes of ethics. These cases – Hodsdon v. Mars, Case No. 3:15-cv-04450, McCoy v. Nestlé, USA, Inc., Case No. 3:15-cv-04451, and Dana v. The Hershey Company, Case No 3:15-cv-04451 – are pending in the Northern District of California. The complaints allege violations of California's Unfair Competition Law, Consumers Legal Remedies Act, and False Advertising Law. 

This proliferating litigation should prompt businesses that have operations or sales in California to take a close look at the representations on their websites, labels, and advertising, to ensure that claims relating to supply chain responsibility are not open to challenge under the California Transparency in Supply Chains Act or broader consumer protection and false claims laws. Companies that operate internationally should also be aware that the UK recently adopted legislation modeled on the California Act, which requires businesses to produce an annual report identifying their efforts to eradicate slavery and human trafficking in their supply chains. The UK Modern Slavery Act 2015 was enacted in March 2015 and goes into effect in October 2015 (see UK Modern Slavery Act 2015). 

Supply chain accountability regimes pose an expanding area of business risk that companies must take active steps to manage. Other transparency and reporting obligations apply in the area of conflict minerals. These are already in force in the U.S. and in the proposal stage in the European Union. Beyond these specific requirements, other risks loom: companies conducting conflict minerals diligence, for example, have discovered reportable offenses under U.S. sanctions laws, and violations of the Foreign Corrupt Practices Act – and its foreign counterparts – may emerge in the course of upstream sourcing inquiries. These laws carry serious criminal penalties, and businesses should be working to coordinate internal compliance efforts and ensuring that effective management programs, including provision for external audits and required disclosures, are in place. Additional risks fall in the category of reputational or brand risk and, although less tangible than strict legal risk, are equally important. Watchdog consumer and investor groups are actively monitoring corporate supply chain disclosures, and businesses must expect pressure from these sources as well as downstream commercial customers that are demanding information and assurances to meet their own transparency obligations.

Clark Hill's attorneys are actively monitoring these developments and advising clients on effective approaches to managing these risks. For assistance, contact Jane Luxton at (202) 572-8674 | jluxton@clarkhill.com, or your Clark Hill attorney.