California ushered in the New Year with the usual fanfare and revelry. But 2012 also uncorked new state disclosure requirements for retailers and manufacturers concerning the businesses’ efforts to eradicate human trafficking and slave labor from their supply chains.
At first blush the California Transparency in Supply Chains Act[1], which went into effect on Jan. 1, appears to be confined to the 3000-plus retailers and manufacturers doing business in California and who have annual worldwide gross receipts of $100 million or more. However, each business subject to the new reporting requirements must disclose its efforts to analyze and assess forced labor risks throughout its supply chain—often involving dozens or more independent suppliers of component parts and materials.
The Act requires a business to provide a link to its human trafficking and slave labor disclosure on its company website.[2] The object of the law is to enable discerning socially-conscious consumers—armed with details concerning companies’ efforts to ensure their products are not tainted by forced labor—to make informed purchasing decisions.
In addition to the steps taken by a business to avoid slave labor in its supply chain, the disclosure must identify whether a business offers training in human trafficking risk mitigation, maintains internal accountability standards, conducts audits of its suppliers and requires its suppliers to certify their components or materials are not associated with slave labor.
The Act also contains an enforcement provision. A business that fails to comply could face a lawsuit from the California Attorney General seeking injunctive relief to remedy alleged violations. Unfortunately, a stigmatizing lawsuit of this kind can lead not only to damaging legal exposure but, irrespective of the ultimate merits of such allegations, a PR nightmare and scores of fleeing customers.
While the law certainly has an honorable intention, suppliers can expect that much of the cost and other burdens of compliance faced by large retailers and manufacturers will be pushed downstream.
What does a supplier need to know?
The Act will spur businesses subject to the law to implement comprehensive and stringent procedures for policing their direct suppliers. Suppliers should take steps now to investigate, track and document their own efforts to avoid the use of slave labor, so that they are ready when manufacturers and retailers come calling, especially in the event of a surprise audit. Even if they are not located in California, suppliers will be asked to guarantee that the materials or parts they provide comply with slavery and human trafficking laws in the country of origin. Suppliers that are unable to trace their components’ provenance could find themselves at a serious competitive disadvantage as compared with those companies that are able to comply.
Suppliers doing business with large California retailers and manufacturers also can expect to be presented with newly rewritten supply agreements, through which those manufacturers and retailers will seek contractual indemnity from their suppliers and a certification of a lack of human rights abuses. Failure to comply with these new terms could expose a supplier to litigation or simply a loss of business relationship with its retailers or manufacturers.
Suppliers must be cognizant of this new law and be prepared for their manufacturing and retailing customers doing business in California to push them to implement potentially costly and burdensome internal procedures, or risk jeopardizing profitable upstream relationships. Many suppliers, particularly those with bargaining power, will be prepared to push back against absorbing these added costs. But suppliers can also get ahead of this pressure by identifying and enhancing existing procedures now and, by doing so, proactively position themselves as industry leaders in compliance as compared with their competitors.
[1] The full text of the law is available at http://info.sen.ca.gov/pub/09-10/bill/sen/sb_0651-0700/sb_657_bill_20100930_chaptered.html
[2] Or, if the company does not maintain a web presence, it must provide consumers with a copy of its disclosure upon request (within 30 days).
Eric Eastham and Mitch Danzig are San Diego-based attorneys with Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.. Attorneys Ben Tymann and Cynthia Larose, who are based in Mintz Cohn's Boston office, also contributed to this article.
