This week, we are pleased to have a guest post from Kevin Daly.  Attorney Daly is a member of Robinson & Cole’s Manufacturing Industry Group and also its Trade Compliance Team.

In 2010, California enacted the California Transparency in Supply Chains Act (the “Act”).  The goal of the Act is to curtail human trafficking and slavery by requiring certain manufacturers and retailers doing business in California to disclose publicly the extent of their efforts to prevent such abuses in their supply chains.

While the law does not require companies to take any affirmative steps to curtail human trafficking, it does require covered companies to disclose on their websites whether and to what extent they undertake certain efforts to investigate and reduce the risk of human trafficking.  Manufacturers or retailers currently doing business in California or planning to expand to California need to assess whether they are covered by the law and, if so, take steps to ensure that they comply with the disclosure requirements.

WHO IS COVERED BY THE ACT?

In order to be covered by the Act, a company must:

  1. Have annual worldwide gross receipts exceeding $100 million;
  2. Be identified as a retailer or manufacturer on the company’s California tax returns; and
  3. Be doing business in California.

For retailers and manufacturers who meet the $100 million threshold, even relatively minimal contacts with California can classify the company as doing business in California.  A company is considered to do business in California if it is organized under California law, domiciled in California, or if it meets certain minimum thresholds for California sales (the lesser of $500,000 or 25% of company’s total sales), California property holdings (the lesser of $50,000 or 25% of company’s total property holdings), or compensation paid in California (the lesser of $50,000 or 25% of company’s total compensation paid).  In 2015, the California Office of the Attorney General estimated that the Act covered approximately 1,700 companies at that time.

WHAT IS REQUIRED FOR MANUFACTURERS THAT ARE COVERED?

A company that is subject to the Act must post on its website disclosures regarding the following topics:

  • To what extent the company engages in verification of supply chains to evaluate and address risks of human trafficking and slavery.  (If the verification is not performed by a third party, the disclosure must specify as such).
  • To what extent the company audits suppliers to verify supplier compliance with company standards for trafficking and slavery in supply chains.  (If such audits are not unannounced or independent, the disclosure must specify as such).
  • To what extent the company requires direct suppliers to certify that materials incorporated into the product comply with the slavery and trafficking laws of the countries where they do business.
  • To what extent the company maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  • To what extent the company provides employees and management who have direct responsibility for supply chain management with training on trafficking and slavery (particularly on mitigating risk within the supply chains of products).

The Act does not require that companies undertake any efforts to combat human trafficking or slavery.

It only requires that covered companies disclose the extent of their efforts on each of the required topics.  The company must disclose the extent of its efforts on each topic; providing only a yes/no response as to whether the company undertakes efforts with respect to each topic does not meet the Act’s requirements.  The required disclosures must be posted in a conspicuous link on the company’s internet homepage.  (Companies that do not have a website instead must provide written disclosures within 30 days of the receipt of a request to any consumer who requests them).  Many companies comply with this requirement by maintaining a link on the top or bottom of their home pages.  A resource guide published by California Office of the Attorney General contains examples of what the agency views as adequate disclosures under the Act.

WHAT HAPPENS IF YOU DO NOT COMPLY?

Enforcement of the Act rests exclusively with the California Attorney General.  The sole remedy in an enforcement action by the Attorney General is injunctive relief.

However, some consumers and their attorneys have begun to bring cases under California consumer protection statutes that permit private actions (such as the Unfair Competition Law, the False Advertising Law, and the Consumer Legal Remedies Act) on the theory that a violation of the Act constitutes  a violation of one of the other laws.  So far, courts have not reached the issue of whether violations of the Act are actionable under these other statutes.

Companies subject to the Act must be aware of the Act’s requirements and place a priority on compliance.

First, covered companies not in compliance with the Act likely face a high probability of an inquiry or enforcement action from regulators.  Because the disclosures are required to be publicly posted, any deficiencies are likely to come to the attention of regulators (particularly given the relatively small number of companies subject to the Act).

Second, the risk of private consumer protection lawsuits based on alleged violations of the Act is uncertain at this time because courts have not yet determined whether such suits are permitted.  If any court decisions endorsing such legal theories come forward, the risk of noncompliance will increase significantly as non-compliant companies may find themselves liable for monetary damages and attorneys’ fees in addition to injunctive relief.