Large local retailers and manufacturers have been adding elements to their websites in recent weeks: prominent links explaining the steps they’ve taken to identify and eliminate any forced labor in their supply chains.
They’re doing it because they must comply with a state law that took effect Jan. 1. But some businesses are concerned that by following the new law, they’re making themselves targets for lawsuits.
The new California Transparency in Supply Chains Act requires retailers and manufacturers with more than $100 million in annual revenue and a significant presence in the state to disclose publicly their efforts to identify any suppliers or subsuppliers that use forced labor or human trafficking, and what the company is doing to eradicate it. They don’t necessarily have to do anything other than disclose what steps they’ve taken, if any.
But some local businesses and lawyers say the new act allows citizens and activists to sue companies under the law, which means the companies could be hit with big bills if there’s any discrepancy in their disclosures or if any problems in their supply chains are exposed later.
“The statute is eye-opening and to that extent it serves a worthy purpose, but it’s tough enough to do business in California and the risks that you run are escalated by creative (plaintiff’s) lawyers who find a way to turn that into money for them,” said Richard Reinis, a partner at the Century City office of Steptoe & Johnson LLP who advised several clients on the new law.
Lonnie Kane, president of downtown L.A. clothing company Karen Kane Inc., said his biggest concern about the law is what he calls its “bounty hunter” method of enforcement. His company doesn’t have to comply this year, but its annual revenues hover near the $100 million cutoff and he also supplies larger companies that may be prompted by the law to make sure he is compliant, too. The company put up a statement on its website this month.
Kane said the law invites trial attorneys to attack companies.
“The government doesn’t even have the wherewithal to implement and support its own laws,” he said. “Whatever good they’re doing by having some standards on supply chains gets completely lost in the sloppiness of the business of the state.”
Kay Buck, executive director of the Coalition to Abolish Slavery and Trafficking, an L.A. non-profit that pushed for the new law, said such concerns are secondary to the law’s larger goals.
“Stopping modern-day slavery through supply chains is a more important issue than any (concern over a) lawsuit,” she said. “That really should be prioritized over any lack of detail or the vagueness that corporations may see in the law.”
Anti-human-trafficking organizations estimate that there are as many as 12 million slaves in the world, and as many as 1 million in the United States. They are forcibly detained and made to work, and are threatened if they try to leave. Many are moved across national borders.
Victoria’s Secret, as one example, has been accused of buying cotton that was allegedly harvested by forced child labor in Africa. The Department of Homeland Security is investigating.
New requirements
The law, Senate Bill 657, is the first of its kind in the United States, and aims to keep large companies that do business in California publicly accountable for labor quality in their supply chains. It was signed in September 2010 by former Gov. Arnold Schwarzenegger after years of lobbying by human rights and other non-profit organizations.
The law says that companies with websites should put a “conspicuous and easily understood link” to a statement outlining any internal steps taken to eliminate forced labor, including auditing, supplier certifications and employee training.
Those companies without websites must send the information to anyone who makes a written request for it within 30 days. The act is estimated to apply to more than 3,200 businesses that together account for more than 87 percent of the state’s total sale of goods.
Local companies that have already complied include Mattel Inc., Big Five Sporting Goods Corp., Sport Chalet Inc., Cheesecake Factory Inc. and 99 Cents Only Stores.
Although the law applies only to larger companies doing business in California, it has much wider impact. That’s because many smaller companies and ones outside the state that are part of a California company’s supply chain could be forced to report about their practices and possibly audit their suppliers.
For a large California company, the consequence for not complying with the law is a lawsuit by the state attorney general. If the company still doesn’t comply, it could then face fines.
But Susan Kohn Ross, an attorney with the L.A. office of Mitchell Silberberg & Knupp LLP, said the Attorney General’s Office has limited resources and has not hired anyone to take on the responsibility of enforcing it. Instead, the office will rely in part on concerned consumer advocates and citizens to bring attention to companies that are not in compliance. Under California’s Private Attorney General Act of 2004, citizens can file lawsuits and seek damages.
Companies say that opens them up to lawsuits from activists or corporate rivals.
“It’s clear the office does not have the money nor the manpower to do anything to enforce this act,” Kohn Ross said. “However, if a company were to come to the attention of the attorney general, it would be reasonable to think they might check to see if the company is compliant as a routine.”
Enforcement by lawsuit
Ilse Metchek, president of the California Fashion Association, said many L.A. apparel companies are concerned that consumer attorneys will be aggressive about filing suits.
“If you were a class-action attorney, all you will have to do as of January is look at any manufacturer’s website, and if they don’t have a disclosure, that’s cause for a letter,” said Metchek. “And if you do have a disclosure, they can then request to see the audited responses from suppliers.”
An attorney might then be able to attack the veracity of the audits. If something is found to be inaccurate, that could open up the company to damages – in addition to the legal costs.
It’s something of a Catch-22 situation for companies, said Steptoe & Johnson’s Reinis.
“It’s damned if you do, damned if you don’t,” he said. “The risk of compliance and the risk of noncompliance are two separate risks that have to be evaluated, and it’s not always that easy given the hyperactivity of consumer attorneys in California.”
What’s more, attorneys advising local companies on the new law say it’s not completely clear how much information companies need to report.
“The law provides for several areas that the company is supposed to report in, but it’s not specific as to what you’re supposed to do in each of these areas,” said Tanya Viner, an attorney at downtown L.A. law firm Buchalter Nemer.
Examine practices
Sport Chalet’s statement says the company believes its supply chain is “relatively free of human rights abuses compared with other sporting goods retailers who are more dependent on value pricing.”
Buck at the anti-slavery coalition said that the point of the law is to be a starting point for businesses to examine their practices – and to provide information to consumers. Her organization will likely start keeping a scorecard or list of companies that it thinks are being especially scrupulous to promote their products.
“Could the law be more detailed? Yes,” she said. “But at the same time, I think corporations are very creative and can also reach out to the resources available to them to engage in a meaningful dialogue about how they can adjust to this issue.”
Dov Charney, founder and chief executive of downtown L.A.’s American Apparel Inc. said that vouching for a complex supply chain can be difficult.
“Sometimes it’s hard to get to the bottom of it all, but I think this law is about making a good-faith attempt, not about knowing immediately where everything is from,” Charney said. “All laws are subject to abuse by the lawsuit culture that we have, and it depends on how it’s all interpreted, but I think the spirit of the law is good.”
One lawyer emphasized that the law does not require any action, it only requires disclosure.
“The penalty is for not disclosing, not for embracing human trafficking,” said Peter Menard, a partner at downtown L.A. firm Sheppard Mullin Richter & Hampton LLP. “A company could very well say, ‘We endorse slavery because. …’”
The law also figures to impact companies differently depending on size and industry.
Apparel companies, for example, have long been plagued by the issue of forced and child labor, and so, ironically, may find it easier to comply. Many large L.A. apparel companies are members of the Customs-Trade Partnership Against Terrorism and their direct suppliers have already been validated.
Though the law is aimed at companies reporting $100 million in revenue or more each year, experts say smaller businesses will be under more scrutiny, and may even be forced to take on the cost of compliance by larger companies they supply.
Smaller companies that can’t afford to send auditors to foreign factories may have to rethink their business operations, said attorney Viner.
Lori Nembirkow, in-house counsel for L.A. denim company Joe’s Jeans, said one of the company’s biggest concerns about the law is cost of compliance. Its gross sales were just over $100 million in 2010.
“Because we are just over the threshold for compliance, one of our main concerns is the cost and resources necessary to be sure all our suppliers are compliant,” Nembirkow said.
Joe’s Jeans has upwards of 50 direct suppliers, and unknown numbers of third- and fourth-party suppliers. The company has had a system in place to investigate its domestic supply chain for years, but has recently had to hire third-party auditors abroad to look into international links in its supply chain.
Businesses complain that this is just the latest business-unfriendly regulation to hit California, but Menard predicted this won’t drive away companies.
“I would be very surprised if a company would refuse to do business in one of the largest economies in the world simply because of a statute,” he said. “Perhaps the cumulative effect of legislation and tax laws in California turns businesses away, but not the statute alone.”
California may not be singled out for long, however. A federal law – the Business Transparency on Trafficking and Slavery Act – is being considered. The act, introduced in the House of Representatives in August, would require public companies to disclose their efforts to address forced labor in supply chains to the Securities and Exchange Commission.
