California’s Transparency in Supply Chains Act: What it provides, Why it matters, and What effects it will have on business
Human trafficking. Child slave labor. It is distressing to imagine the powerlessness, suffering, and abuse endured by victims, who are often subject to beatings, unsanitary living conditions, malnourishment, sexually transmitted diseases, and exposure to toxic chemicals or other harmful materials.1 And maybe that is why there is dissonance. It is too far away, too attenuated. We wear our clothing, talk on our cell phones, drink our coffee – detached and unaware of the possibility that a scared, starving child, against her will, may have stitched that shirt, welded that microchip, or picked those coffee beans.
As companies continue to outsource their manufacturing to cheaper, distant countries where trafficking laws are non-existent or feebly enforced, and those companies in turn sub-contract with little or no oversight to operationally opaque entities, the possibility of forced labor tainting a company’s supply chains increases starkly. And, to be sure, forced labor is not only a “foreign” issue – it is a challenge within our own borders.
THE SEVERITY OF THE PROBLEM
The numbers are staggering. According to the International Labour Organization, over 215 million children engaged in child labor in 2008 worldwide, and 115 million of them engaged in hazardous work.2 To put these numbers in perspective, the number of children engaged in child labor worldwide is greater than the entire population of Brazil, and the number of children engaged in hazardous work, greater than the entire population of Mexico. Moreover, an estimated 2.4 million people are in forced labor (including sexual exploitation) at any given time as a result of trafficking,3 and an estimated 12.3 million people – equal to nearly one-third of California’s total population – are working in some form of forced labor worldwide.4 Nor is trafficking limited to remote countries – federally-funded task forces investigated 2,515 suspected incidents of human trafficking in the United States between January 2008 and June 2010.5
Outside of the occasional media story when illegal work practices are exposed in the supply chains of American companies, the public at large remains relatively unaware whether the companies from which they buy their products use suppliers engaged in trafficking or benefiting from the minimal costs of forced labor.
PURSUING CHANGE THROUGH PURCHASING DECISIONS
California has taken a first step to bring these issues to the fore of public consciousness. The Transparency in Supply Chains Act of 2010 (“TISCA”) took effect in California on January 1, 2012,6 as a first-in-the-nation effort to expose and combat human trafficking through consumer awareness. The legislative history of the bill states that the purpose of the statute is as follows:
to help consumers better distinguish companies based on the merits of efforts to manufacture and supply products that are free from the taint of slavery and trafficking. With better information, consumers will be more equipped to help eradicate trafficking and slavery from product supply chains through their purchasing decisions.
TISCA requires retailers and manufacturers with annual worldwide gross receipts exceeding $100 million who do business in the State of California to disclose their efforts “to eradicate slavery and human trafficking from [their] direct supply chain[s] for tangible goods offered for sale.” This information must be posted on the companies’ web sites with a “conspicuous and easily understood link to the required information placed on the business’ homepage.” Although more than 125 countries have adopted anti-trafficking laws since 2000, those laws have focused on the prosecution of traffickers or protection for victims.7 TISCA is unique in that it compels the private sector to be transparent in their efforts (or lack thereof) to prevent human trafficking or forced labor from entering their supply chains to begin with. Those companies, in turn, presumably wanting to eliminate the taint of trafficking from its suppliers, will reduce demand for forced labor, preventing trafficking from the source.8
Indeed, private enterprise is uniquely situated to combat human trafficking.9 Private companies are better suited to monitor and ensure their supply chains are free from trafficking victims and forced labor because they usually already have some form of supply chain monitoring in place (e.g., for quality control or efficiency), they generally have greater resources than regulatory agencies to invest in such monitoring, and the private sector, when focused on this challenge, is more likely to drive innovative solutions.10
TISCA’S MINIMUM REQUIREMENTS
Qualifying manufacturers and retailers must disclose, at a minimum, to what extent, if any, the retailer or manufacturer does for each of the following:
- Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure shall specify if the verification was not conducted by a third party.
- Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure shall specify if the verification was not an independent, unannounced audit.
- Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.
- Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
- Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.
The law appears modest in its goal; its penalties, limited. But do not underestimate the importance of this law, and the necessity of a company getting out in front of it. Here is why:
TISCA HAS NOT BEEN ENFORCED . . . YET
The exclusive remedy for a company’s violation of TISCA is an action by the California’s Attorney General for injunctive relief to compel the company’s compliance. It remains to be seen how effective the injunction remedy will be and whether the Attorney General will pursue other potentially related claims that could arise (e.g., false statements about compliance or unfair business practices).
Nearly seven months after the law has taken effect, there appears to have been little by way of enforcement of TISCA by the Attorney General thus far. But companies should not be lulled to complacency. Present non-enforcement of TISCA is likely only a product of the Attorney General’s current lack of knowledge of which companies it can prosecute. By November 30th of this year, California’s Franchise Tax Board is required to provide the Attorney General a list of qualifying businesses based upon their 2011 tax filings. Once the list of businesses who fall within the purview of TISCA is provided, the Attorney General need only visit each qualifying company’s website, identify noncompliance, and file an injunctive suit. The company, if unsuccessful in the litigation, could face the embarrassment of a public lawsuit – possibly resulting in court orders compelling the company to comply with the slave labor statute. Moreover, the law specifies that “nothing in this section shall limit remedies available for a violation of any other state or federal law,”11 leaving open the opportunity for a government regulator, private citizen, or competitor to possibly pursue an action such as an unfair business practices claim, possibly based on a company’s non-compliance with TISCA. So even if the Attorney General does not pursue injunctive relief, others may attempt to pursue remedies based upon violations of California’s new law.
AS CALIFORNIA GOES, SO GOES THE NATION
It is a low threshold for a company to qualify as “doing business” in California. But even for companies with no presence in California, this bill remains significant. California is a historical legislative leader, from environmental to consumer protection laws. To that point, a bipartisan bill similar to TISCA was introduced in the United States House of Representatives in August of 2011. Although that bill remains in Committee, it may only be a matter of time before the federal government or other States adopt California’s law – or some version of it.
UNSUPERVISED AGENTS AND INTERMEDIARIES COULD DO MORE HARM THAN GOOD
Regardless of your views regarding TISCA, the fact remains that a supply chain scandal could wreak havoc on a company’s reputation and perception. At first blush, companies may attempt to comply with TISCA solely by use of unmonitored third party agents and intermediaries, but reliance on such third parties alone could be risky.
For example, in 2007, GAP Inc., the multi-billion dollar clothing retailer, faced a media firestorm over accusations of trafficking and slave labor at a subcontractor in its supply chain in India. GAP had apparently not known or authorized work from one of its subcontractors, which provided materials derived for child labor. GAP acted immediately to investigate the charges, to prohibit future production by the violating subcontractor, to ensure that no products derived from that offending subcontractor were sold, and to strengthen its policies and practices to ensure that child trafficking in its supply chain would not happen again. Even so, GAP’s image as an ethical, socially-conscious retailer was damaged by the mere specter that its supply chain was tainted by child slave labor.
Similarly, in 2011, Apple, faced with a scandal over charges of poor working conditions in its factories, acknowledged that child labor was a growing problem in its supply chain, where 91 children under the age of 16 were discovered to be working in ten Chinese factories. If the mere allegations are not in themselves embarrassing enough, envision how much worse this firestorm would have been if materials from the forced labor remained in the supply chain and no remedial efforts had been taken. No reputable business wants to be recognized as the company with no regard for child slave labor in its supply chain.12
WHAT COMPANIES CAN DO
Experienced counsel is crucial to a company’s proactive effort to comply with TISCA. Companies will want to retain counsel with solid judgment, who will be sensitive not to interrupt the company’s day-to-day operations unnecessarily, and who is comfortable interacting with regulators about the company’s compliance. Counsel should be able to review and assess the appropriate due diligence of companies in the supply chain, including regular audits and surprise workplace visits, and be able to conduct an internal investigation as may be necessary. Counsel should be able to craft appropriate vendor agreements containing representations and warranties that suppliers, and any sub-suppliers, adhere to company policies (i.e., do not utilize child and/or forced labor) and are compliant with State, federal, and foreign laws. Counsel should additionally have the ability to craft and assist in the implementation of appropriate policies and procedures to assure that a company is compliant with TISCA, and to prepare training materials for companies and those in their supply chain to familiarize them with TISCA, related human trafficking and labor laws, and potential risks and public relations issues that could arise.13
WHAT IF THE COMPANY DOES NOT MEET THE FINANCIAL THRESHOLD OF TISCA?
Eventually, this is unlikely to matter. While it is estimated that only 3.2% of businesses operating within California are currently within TISCA’s purview, those major retailers and manufacturers account for over 87% of the total receipts for total income and cost of goods sold in California.14 In other words, a lot of people purchase products from a small number of large retailers and manufacturers. As these companies add these links to their websites, customers may take notice and become accustomed to seeing a link about TISCA compliance on company home pages. When a particular company does not have this link, consumers may question why. Will consumers draw a distinction that a particular company does not have gross sales of $100 million and does not thus have to comply with TISCA? Probably not. Additionally, TISCA has no cost adjustment in it. As the years go on and inflation pushes more companies over the $100 million gross sales threshold, a greater percentage of companies will be required to comply.
DOING WHAT IS RIGHT IS ALSO WHAT MAY BE BEST FOR BUSINESS
Companies should comply with TISCA and be able to answer affirmatively the questions posed by the statute. Ultimately, this is simply the right thing to do, and may also – on a practical level – be good for business. Many companies already invest resources to minimize the possibility that forced laborers, many of whom are children, with no protections or pay, are producing the goods from which they profit. TISCA exposes those companies that do not make these investments – leaving it to the purchasing public to even the competitive playing field by not purchasing non-compliant products.
As more companies disclose their policies on this issue, a growing number of consumers will learn to express their policy preferences through their spending decisions. When it comes to choosing between one company, which expressly provides customers information as to the laudable efforts it has taken to eradicate human slavery and trafficking, and a competitor, which does not, the company compliant with TISCA could be more attractive to customers.
Companies should not fear TISCA; they should embrace it. And, with guidance from skilled counsel, companies can develop a comprehensive approach to complying with TISCA, and proudly speak to those efforts on their websites. Companies, on the other hand, that do not comply with TISCA may find themselves targets of a governmental investigation or litigation and may need to incur the costs of being on the defense, including managing negative publicity and possibly having to litigate whether they should be enjoined to comply with TISCA.
Anthony Pacheco, a partner at Jeffer Mangels Butler & Mitchell LLP’s Los Angeles office, is the Chair of the firm’s Corporate Defense and Investigations practice group. He has extensive experience with corporate defense, internal investigations, regulatory and compliance matters, and managing public relations crises. He can be reached at Pacheco@jmbm.com. His phone number is (310) 785-5309.
Special thanks to Jennifer Musto, PhD, Rice University, for sharing her keen insight and recognized expertise about human trafficking and forced labor.
2Yacouba Diallo, Frank Hagemann, Alex Etienne, Yonca Gurbuzer & Farha Mehran, Global Child Labour Developments: Measuring Trends from 2004 to 2008, ILO Publications (International Labour Organization, Geneva, CH), 2010, at 6, 10.
4Official California Legislative Information Bill Analysis of SB 657, http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0651-0700/sb_657_cfa_20100628_112914_asm_comm.html (last visited August 6, 2012).
5Office of Justice Programs Bureau of Justice Statistics, http://bjs.ojp.usdoj.gov/index.cfm?ty=tp&tid=40 (last visited August 6, 2012).
12Jonathan Todres notes that some companies have chosen to “technically comply” with TISCA by merely disclosing that they are not undertaking measures in the statute to combat human trafficking and the use of slave labor in its supply chain. Todres, supra, at 205. The “technical compliance” approach does not give appropriate credence to the risks of having forced labor in a company’s supply chain, of potential litigation by regulators and possibly other third parties, of potential negative public relations, and of a loss of customers and good will.
13Source-disclosure requirements addressing social responsibility are becoming more commonplace. For example, on August 22, 2012, the United States Securities and Exchange Commission voted 3-2 in favor of new rules enforcing Section 1502 of the Dodd-Frank Act. The rules require supply chain due diligence and disclosure in SEC filings by companies who purchase “conflict minerals” from countries where proceeds from such purchases are known to be used to finance conflict. The new disclosure rules passed over the objection of two dissenters on the Commission who argued that humanitarian and social issues should not be within the SEC’s domain. Security and Exchange Commission Final Rule: Conflict Minerals (Aug. 22, 2012), available at http://www.sec.gov/rules/final/2012/34-67717.pdf; Lisa Reisman, SEC Votes in Favor of Strict Conflict Minerals Audit Rule, MetalMiner, August 22, 2012, http://agmetalminer.com/2012/08/22/breaking-sec-votes-favor-strict-conflict-minerals-audit-rule/.