United States: Proceed With Caution: Navigating The California Transparency In Supply Chains Act – What Might Seem Like A Straightforward Reporting Requirement, Actually Contains Possible Traps

Sud v. Costco Wholesale Corp., et al. and Barber v. NestléUSA, Inc.

Recently, the filing of a class action lawsuit alleging the use of slave labor in Costco Wholesale Corporation's (Costco) product supply chains made headlines, sparking concerns over future claims and highlighting the unexpected pitfalls that California's retailer and manufacturer disclosure laws can present. The lawsuit, filed in the United States District Court for the Northern District of California, focuses on Costco's online disclosures made pursuant to the California Transparency in Supply Chains Act (the "Supply Chains Act" or the "Act") found at Civil Code § 1714.43.1

If you are not familiar with it, the Supply Chains Act was signed into law in October 2010 by former Governor Arnold Schwarzenegger, but did not go into effect until January 2012. The Act requires every "retail seller and manufacturer doing business in [California that has] annual worldwide gross receipts [exceeding] one hundred million dollars" to post on the homepage of its website a "conspicuous and easily understood" link disclosing, among other things, the extent to which it verifies its product supply chains to "evaluate and address risks of human trafficking and slavery," "conducts audits of supplier compliance with company standards for trafficking and slavery," and requires "direct suppliers" to certify that product materials are obtained in compliance with the slavery and trafficking laws of the countries in which they do business.

The Act does not mandate that retailers or manufacturers must implement new measures to ensure that their supply chains are free from slave labor or inhumane activity. Indeed, the Act seemingly only requires that businesses make the statutorily required disclosures, even if a business does little or nothing to safeguard its supply chain and admits as much. 

The Act presents as a disclosure requirement, as opposed to presenting required measures to be undertaken by a retailer, manufacturer or similar business to prevent the utilization of slave labor or implement operational changes. Thus, the Act may seem less concerning from a day-to-day business standpoint.

Further, the "exclusive remedy for a violation" of the Act "is an action brought by the Attorney General for injunctive relief." Thus, most retailers and manufacturers might expect that a private cause of action by consumers or others simply does not exist.

However, the lack of mandatory measures to be implemented through the Act, as well as its limitation on the ability to pursue private claims, might lull one into a false sense of security from the possibility of litigation. Indeed, the recent filings against Costco and Nestlé present a potentially ominous picture of what might be on the horizon.

Specifically, in the Sud case, Plaintiff Monica Sud, on behalf of herself and "all others similarly situated in California" alleges that Costco knowingly obtained its store sold- and farm-raised prawns through a supply chain in which companies engage in human trafficking and illegal labor practices in Thailand. Sud asserts that Costco purchases farm raised prawns from Charoen Pokphand Foods Public Company Limited (CP Limited) and C.P. Food Products, Inc. (CP Inc.), which are involved in "a supply chain that depends upon documented slavery, human trafficking and other illegal labor abuses." Costco then provides these farm raised prawns, "tainted by the use of slave labor in Thailand," on its retail shelves in California for everyday purchase. Of importance, plaintiff's complaint enumerates that the statements contained in Costco's "Supply Chain Disclosure" (as found on Costco's website) constitute false and misleading representations in contravention of law and public policy.

In its disclosures, Costco asserts, in part, that it "has a supplier Code of Conduct which prohibits human rights abuses in [its] supply chain," that it requires its subcontractors and sub-suppliers to contractually agree to follow its Code, and that it conducts "social responsibility audits" of its suppliers of private label merchandise. This disclosure by Costco facially may well fully comply with the Act, thus leading to a sense of protection.

However, as stated above, while individuals are precluded from bringing a direct cause of action against Costco for violation of the Act, this has not deterred the plaintiffs in Sud or Barber from attacking both retailers and manufacturers. In Sud, the plaintiff and her class instead have brought claims for unlawful business practices under California Business & Professions Code § 17200, et seq., as well as misleading and deceptive advertising claims under California Business and Professions Code § 17500, et seq., and additionally unfair and deceptive practices in violation of the Consumer Legal Remedies Act codified at Civil Code § 1750, et seq. At the heart of each of these claims are Costco's attempts to comply with the Supply Chains Act and its statements published therewith. Surely, Costco did not envision that its legal compliance efforts would form the basis of a controversial lawsuit against it.

Whether the claims in Sud or Barber will succeed remains to be seen and should be monitored closely. Indeed, we expect there are particular defenses to these lawsuits.

Nevertheless, the Sud and Barber cases serve as a warning that disclosure statements made under the Supply Chains Act should be drafted with precision, especially when making representations about the supply chain and inclusion of third parties in the disclosure. Further, if the Sud and Barber cases present a legal trend, not only preparing to defend such claims should be considered, but also anticipating such allegations should be made a part of the formation process when establishing and then maintaining a disclosure statement under the Supply Chains Act. 

If you have any questions relating to the Supply Chains Act, issues involving retailers, suppliers or manufacturers, or defending claims arising from the Act, please contact us at Troutman Sanders LLP. At the firm, we have decades of experience in representing international and national retailers, manufacturers and related businesses, and are able to navigate you through a variety of issues.


1 Almost a week later, a similar lawsuit was filed against Nestlé USA, Inc. (Nestlé) in the Central District of California, leading commentators to speculate that a flurry of like claims could follow. See, Barber v. Nestlé USA, Inc., et al.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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