How California complicates compliance for retailers
Retailers and consumer goods companies already know that California leads the nation when it comes to burdensome regulatory requirements.Now, the situation could go from bad to worse with enforcement looming of a complex law known as the Transparency in Supply Chains Act.
In 2010, California enacted the Transparency in Supply Chains Act (the “Act”), which requires retailers and manufacturers doing business in California (those with $100 million or more in world-wide revenue) to disclose on their websites their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.” That legislation was not without a political component; in fact, Attorney General Kamala Harris announced that the fight against human trafficking meant to be buttressed by the Act is a priority for the California Department of Justice.
Although the Act went into effect on January 1, 2012, little has been done since then in the way of enforcement of the law or indications as to what or what not might constitute full compliance. However, the Department of Justice recently signaled a change in that trend by issuing a mass mailing on April 1, 2015 to dozens of companies around the world. The Attorney General’s form letter called for certified compliance with the Act within 30 days.
In mid-April, the Attorney General posted a Resource Guide for compliance with the Act (which can be viewed at Resource Guide: California Transparency in Supply Chains Act). Taken together, these events certainly indicate that prosecution may be imminent for businesses that are not complying (or are under-complying) with the Act’s requirements. The Act only applies to businesses that do business in California, have annual worldwide gross receipts in excess of $100 million and are identified as manufacturers or retail sellers on their California state tax returns.
Each business that meets these criteria must post a “conspicuous and easily understood link” on the homepage of their website that provides information on the extent of that company’s efforts, if any, to ensure that the goods that they sell or make, or any components of those goods, are not produced by workers who are enslaved, coerced or otherwise forced into service or who have been the victims of human trafficking. This presents a new compliance dynamic for those in the retail industry, not the least of which is what constitutes compliance?
For starters, businesses subject to the Act must disclose the following information on their websites:
• Verification: The extent, if any, to which the business engages in verification activities to assess and manage the risks of human trafficking and slavery in its product supply chains. Businesses must also disclose whether third-party verifiers are used to assess and manage those risks.
• Audits: The extent, if any, to which the business audits its suppliers to evaluate whether the suppliers are complying with established company standards to prevent trafficking and slavery in supply chains. Again, the business must specify if the audits are independent and unannounced.
• Certification: The extent, if any, to which the business requires its direct suppliers to certify that materials incorporated into the products that it makes or sells comply with the laws regarding slavery and human trafficking of the countries in which those suppliers are doing business.
• Internal accountability: The extent, if any, to which the business maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and human trafficking.
• Training: The extent, if any, to which the business provides training for its employees and management who have direct responsibility for supply chain management on slavery and human trafficking, particularly with respect to mitigating risks within supply chains.
The Attorney General’s Resource Guide provides several model disclosures and samples of others that would be considered to be inadequate. However, tellingly, the Resource Guide notes that “there is no formula for a model disclosure because one size does not necessarily fit all. The best disclosures are those that are specific to the company and explain the company’s efforts in clear, concise language.”
Herein lies the problem for businesses that are subject to the Act – after more than three years, it is still not clear what would or would not be a violation. The best way to proceed at this point is to have sound corporate guidelines regarding doing business with those that engage in slavery and human trafficking, assess supply chains to the greatest extent possible, create mechanisms by which such assessment can be verified and repeated on an ongoing basis and carefully craft the disclosures required under the Act.
The Attorney General has the exclusive authority to enforce the Act by filing a civil action for injunctive relief, the only remedy expressly authorized by the Act. The Resource Guide suggests that the Attorney General intends to prosecute deficient disclosures as equally as the wholesale failure to make the required disclosures. Although the Act does not create a private right of action, it does state that “[n]othing in this section shall limit remedies available for a violation of any other state or federal law.”
Thus, as they always should in California, businesses should expect the class action plaintiffs’ bar to scrutinize every representation made pursuant to the Act to identify any false or misleading representations or omissions that might form the basis of a claim under other California statutes. If the Attorney General turns up the heat on the Act, the plaintiffs’ bar will find a way to try to profit from it.
The Attorney General’s recent mass mailing suggest more active enforcement of the Act and has understandably caused many to seek legal counsel to determine whether they are subject to the Act and/or whether their disclosures comply with the Act’s requirements. Without more guidance from the Department of Justice or the courts, there will continue to be confusion and worry. The best solution at this point is to implement the most practical and good faith efforts possible to comply with the plain terms of the Act and keep a close eye on what the Department of Justice does with respect to enforcement efforts and clarifications of its expectations.
Mark C. Goodman and Brandon P. Rainey are San Francisco-based lawyers at Hogan Lovells, a global legal practice that helps corporations, financial institutions, and governmental entities across the spectrum of their critical business and legal issues globally and locally.