Litigation Fallout From All This Supply Chain Transparency Legislation (Or, These Things Have Teeth!) (Or, The Cycle of Misfortune)

posted on: Wednesday, August 26, 2015

In previous posts, we’ve talked about emerging legislation designed to increase visibility and transparency in supply chains to bring about desirable social ends.  We’ve discussed, for instance, the California Transparency in Supply Chains Act and the UK Modern Slavery Act, both of which require companies to disclose their efforts to eradicate slavery from their supply chains.  But now it is becoming clear that companies’ attempts to comply with these laws, if not managed properly, can precipitate major litigation.

On August 19, 2015, a consumer filed a putative class action against Costco Wholesale Corporation and several of its suppliers in the United States District Court for the Northern District of California, asserting that prawns from Southeast Asia that Costco sold to consumers were farmed using forced labor.  Paragraph 2 of the complaint states the gist of the action:

 “This case arises from the devaluing of human life.  Plaintiff and other California consumers care about the origin of the products they purchase and the conditions under which the products are farmed, harvested or manufactured.  Slavery, forced labor and human trafficking are all practices which are considered to be abhorrent, morally indefensible and acts against the interests of all humanity.”

In the 49-page complaint, the plaintiff alleges that Costco’s use of forced labor is inconsistent with its California Transparency in Supply Chains Act disclosure.  Costco’s Supply Chain Disclosure stated among other things that Costco, “has a supplier Code of Conduct which prohibits human rights abuses in our supply chain.”  The Disclosure also stated that Costco conducts supply chain audits and imposes consequences to prevent and correct violations.  The plaintiff’s complaint alleges consumer fraud and other violations, claiming damages “in excess of $5,000,000.”

While this may be the first lawsuit of its kind, it certainly won’t be the last.  Other transparency-oriented legislation and legal guidance besides the California and UK human trafficking laws provide ample opportunity for costly and high-profile consumer and shareholder class actions.  The US Conflict Minerals Rule, the textile industry “Cotton Pledge,” and the UN Guiding Principles on Business and Human Rights all require or encourage disclosure by companies about their responsible sourcing practices.  Just as with the Costco lawsuit, these disclosures can provide fertile ground for litigation.

And this, in fact, is exactly what the NGO and activist groups that promoted these types of legislation and policy guidance intended.  For example, a Zimbabwean activist group promoting the adoption of the UN Guiding Principles to address poor labor practices in mining in Africa makes clear that the end-goal of the Guiding Principles is not just corporate disclosure, but changed corporate practices.

What business organizations should take away from this development is the value of a robust compliance program that develops policies, engages suppliers, monitors supply chain practices, and takes remedial action to respond to identified risks is also very important, however.  Well-structured corporate supply chain compliance programs are relatively new concepts in some industries, and many companies may be in the dark as to how best to develop them.  But these compliance programs can be tailored to each company’s industry and particular supply chain needs.  Implementing a robust compliance program that addresses various sourcing and supply chain risks will reduce reputational risk and will also reduce the likelihood of high-profile and costly litigation.