United States: When Transparency Is Not Enough: Class Action Litigation Under California's Transparency In Supply Chains Act

Passed in 2010, the California Transparency in Supply Chains Act has a worthy aim: requiring retailers and manufacturers doing big business in California to disclose what measures, if any, they are taking to ensure their suppliers comply with human rights standards. What started as a legislative effort to educate consumers and incentivize good corporate citizenship, however, is quickly becoming a vehicle for private class actions against companies making this information available–even though the Act itself nowhere authorizes private lawsuits seeking damages. For consumer product companies, this is an important trend that could mark the next wave of class action litigation in California.

So what exactly does the Act require? And what litigation risks does this law now pose for companies doing business in California?

What the Act Requires

Under the Act, companies doing a large volume of business in California must "conspicuously" disclose on their websites their "efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale." The Act does not necessarily require that businesses adopt any specific measures; rather, the purpose is to provide consumers with more information about what steps, if any, companies are taking, and what information they are demanding from their suppliers. The necessary disclosures fall into five categories:

  1. Verification. Disclose (a) whether the company conducts verifications of entities in its supply chain for slavery and human trafficking risks, as well as (b) whether the company uses a third-party verifier.
  2. Audits. Disclose (a) whether the company audits its suppliers in evaluating compliance with its slavery and human trafficking standards, as well as (b) whether the audits are independent and unannounced.
  3. Certification. Disclose whether the company requires its direct suppliers to certify that their materials comply with human trafficking and slavery laws in their home countries.
  4. Internal Accountability. Disclose whether the company has internal procedures for determining whether employees or contractors are complying with its slavery and human trafficking standards.
  5. Training. Disclose whether the company trains its employees and management on how to mitigate risks of slavery and human trafficking within the supply chain.

Not every business in California is subject to these disclosure requirements: the Act applies only to companies that (1) identify themselves as retail sellers or manufacturers on their California tax returns and (2) have more than $100 million in annual gross receipts worldwide.

Emerging Litigation Risk: Consumer Class Actions Alleging Inadequate Disclosures

Notably, the Act itself does not give private individuals the right to sue for damages for inadequate disclosures. The California Attorney General has exclusive authority to enforce the Act by filing a civil suit to force a company to fix its disclosures–which to date it has declined to do.

But in a recent series of class actions filed in California federal courts, plaintiffs are donning the mantle of "private attorneys general" by alleging violations of the Act as predicates under other class action-friendly California statutes, such as its Unfair Competition Law and False Advertising Law. The typical complaint reads like this: the defendant has deceived and misled consumers because–contrary to the disclosure statements on its website–actors in its supply chain use slave labor or otherwise violate the company's standards for its suppliers. What's more, by affirmatively making Act-required disclosures that are allegedly false, the company has engaged in "unlawful conduct"–itself a basis for liability under the Unfair Competition Law.

The company is thus liable not only to the named plaintiffs, the complaints say, but to all consumers within the class who purchased its products without realizing that the underlying supply chain involved slave labor or other human rights violations. On behalf of the class members, the plaintiffs typically demand restitution of the purchase price to each consumer, as well as an injunction preventing the company from selling the products until it fixes its disclosures.

The first and most highly visible of these class actions, Monica Sud v. Costco Wholesale Corp., set the model. The Sud complaint alleged that Costco had violated the Act, and so deceived consumers, by stating that Costco "has a supplier Code of Conduct which prohibits human rights abuses in our supply chain" when, according to the plaintiff, the farmed prawns it sold were fed with fishmeal allegedly obtained from pirate fishing boats using slave labor. Since Sud, several other class actions have been filed against companies such as Nestle, Mars, Hershey, and Iams, each on essentially the same theory. The shocking nature of allegations centering on slave labor only increases the litigation pressure created by these class actions, which threaten reputational as well as monetary damages.

What's Next

The rise in Supply Chain Act litigation illustrates a broader trend in California: the opportunistic use of the class action device to target an array of legally required disclosures. The most prominent example is class action litigation under Proposition 65, the California voter initiative that requires companies to warn consumers that their products may expose them to substances linked to cancer and birth defects. With Supply Chain Act disclosures likewise beginning to attract increasing scrutiny, companies should take care to ensure their accuracy and document their underlying due diligence.

Even these efforts, though, may not deter an opportunistic class action suit, as the recent surge in such filings suggests. The companies targeted to date have already raised several defenses, including the argument that the Act requires companies to disclose their efforts to ensure compliance, but not to report every instance of slave labor at the farthest reaches of their supply chains. How courts handle the first wave of these class actions will be instructive for companies dealing with–or hoping to avoid–similar suits. In the interim, the playbook learned in defending litigation under the "usual suspects" of California statutes will be instrumental in defending against this newest breed of California class action.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Daniel J. Herling
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.