Employment Law

December 21, 2011

California Transparency in Supply Chains Act—Your Checklist as the January 1st Deadline Approaches

Authors: Renee E. Becker | Stanley W. Levy

The Act: Disclosing Efforts to Eradicate Slavery and Human Trafficking

The California Transparency in Supply Chains Act of 2010 was signed into law on September 30, 2010, and takes effect on January 1, 2012. The Act requires every retail seller and manufacturer doing business in California and having annual worldwide gross receipts over $100 million to disclose its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale.

The disclosure must be posted on the retail seller’s or manufacturer’s website with a conspicuous and easily understood link to the required information on the company’s homepage. If a retail seller or manufacturer does not have a website, a consumer must be provided the written disclosure within 30 days of receiving a written request for it. The exclusive remedy for a violation of the Act is an action by the California Attorney General for injunctive relief, but nothing in the Act limits remedies available for a violation of any other state or federal law.

If your company is a large retailer or manufacturer doing business in California, whether or not located within California, you should be aware of the Act’s requirements and comply with the disclosure requirements if you determine that the Act covers your company. This newsletter provides a checklist of actions you should take now and the issues you should consider before the January 1, 2012 deadline when disclosures required by the Act are to be posted on your company’s website.

Companies Subject to the Act
The Act adds a new Section 1714.43 to California’s Civil Code and defines "retail seller" as a business entity with retail trade as its principal business activity code, as reported on the entity’s tax return, and "manufacturer" as a business entity with manufacturing as its principal business activity code, as reported on the entity’s tax return. An entity is deemed to be “doing business in this state” under the Act if it (a) is organized or commercially domiciled in California, (b) has sales in California for the applicable sales tax year that exceed the lesser of $500,000 or 25% of the company’s total sales, (c) has real property and tangible personal property in California exceeding the lesser of $50,000 or 25% of the company’s total real property and tangible property, or (d) has paid an amount of compensation in California that exceeds the lesser of $50,000 or 25% of the total compensation paid by the company, as set forth in Section 23101 of the California Revenue & Taxation Code. Under the Act "gross receipts" has the same meaning as in Section 25120 of California’s Revenue & Taxation Code, which refers to gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code, subject to certain exceptions listed in the definition.

Contents of Disclosure
The Act requires that the large retail seller’s or manufacturer’s website must, at a minimum, disclose to what extent, if any, the company does each of the following as set forth in the Act:

1. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure must specify if the verification was not conducted by a third party.

2. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure must specify if the verification was not an independent, unannounced audit.

3. 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.

4. Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.

5. 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.

Company disclosures in response to the Act will vary widely depending upon the extent to which a company practices each of the above elements required in the disclosure statement.

Your Checklist
Your company should be acting now to determine whether or not it is covered by the Act. If you conclude that your company is covered, you must prepare disclosure that is appropriate for and specific to your company’s facts and circumstances.

If your company determines that it is subject to the Act, some of the steps your company may consider taking are listed below. This list is not exhaustive. You should seek the advice of legal counsel if you have questions regarding the Act and your company's response.

1. Determine your company’s response to the Act. Remember that a company must only disclose the efforts it makes, if any, to eradicate slavery and human trafficking from its direct supply chain. A company may determine, as a practical matter, that its efforts are and will be limited due to concerns about the cost of monitoring its suppliers and implementing internal controls, among other things. Your company should, however, consider the public relations consequences of not making efforts to determine whether slavery or human trafficking exists within its supply chain. As recited in the Act, one of its purposes is to provide consumers with information that will allow them to "distinguish companies on the merits of their efforts to supply products free from the taint of slavery and trafficking" and to make purchasing decisions based on this information. Consider the potential reputational risk of disclosing that your company’s efforts to eradicate human trafficking are limited. Consider the response of your shareholders if your company’s shares are publicly held, as well as that of other company stakeholders.

2. Be certain that your website disclosure responds to each of the 5 elements listed in the Act. Failure to comply with the Act or any misstatement in the disclosure could expose your company to claims brought by consumers, competitors, and/or activists for damages (actual and punitive), injunctive relief, restitution, ancillary relief and attorneys’ fees under the California Unfair Competition Law and the Consumers Legal Remedies Act, in addition to any action brought by the California Attorney General.

3. Conduct a risk assessment of your company’s supply chain to determine where and whether your company may be vulnerable to human trafficking in its supply chain. Evaluate high-risk sectors and regions. Identify commodities frequently associated with human trafficking and regions where human trafficking is pervasive. Helpful resources include the U.S. State Department’s Trafficking in Persons Report, which ranks countries on anti-trafficking measures, and the Department of Labor’s List of Goods Produced by Child Labor or Forced Labor, which lists 130 goods from 71 countries that the Department of Labor’s Bureau of International Labor Affairs has reason to believe are produced by child labor or forced labor in violation of international standards.

4. Consult up and down the line with members of your company’s internal compliance department and procurement teams to ensure that everyone responsible for supplier contracts is aware of the Act and its requirements.

5. Review your supplier contracts to determine what language, if any, is required to be amended to ensure that the company’s efforts to prevent slavery and human trafficking are documented and to give suppliers clear guidance as to your company’s expectations. Consider including in such contracts your company’s right to audit the supplier for compliance with your company’s legal and ethical standards. Contract provisions should include a statement that failure to comply with all relevant laws is a breach of contract.

6. Develop, maintain and communicate accountability standards and procedures for employees and contractors who fail to meet the company’s standards, if such standards are established, regarding slavery and human trafficking.

7. If your company conducts or determines to conduct audits of its suppliers, it should consider whether, under the particular circumstances, it is better to use company employees, allow self-reporting by suppliers or use independent auditors. Recall that your company must disclose whether or not the verification was conducted by a third party. Many consulting companies that monitor supply chains for compliance with various laws have geared up to assist large retailers and manufacturers in their efforts to comply with the Act. Consider requiring your suppliers to fund the cost of monitoring by such independent companies.

8. Consider developing a company policy on slavery and human trafficking. If your company determines to adopt a policy on human trafficking and slavery, such policy should be communicated in writing to all your company’s stakeholders. These include your company’s executive officers, employees, customers, investors and suppliers.

9. If your company undertakes to train employees and management who have direct responsibility for supply chain management, consider including your company’s suppliers, contractors and auditors in such training.

10. Be mindful that even if your company determines to undertake limited efforts to eradicate slavery and human trafficking in its supply chain, your company’s customers who are large retailers or manufacturers doing business in California may require your company to do more and certify as to those heightened efforts.

11. Conduct regular risk assessments of potential company involvement in human rights violations, because risks evolve. There are a number of human rights organizations, such as the Danish Centre for Human Rights’ "Human Rights Compliance Assessment," whose information can be used as a cross-check of risk analysis.

12. Monitor developments that relate to the Act, such as guidance from the California Attorney General and the response of consumer and shareholder activists. You may sign up on Manatt’s website for legislative updates at www.manatt.com under the tab "Insights." Changes in your disclosure may be triggered by changes in your business, products and/or suppliers. Monitor best practices in your industry and the practices of your competitors. Follow developments published in industry and trade publications.

Summary
If covered by the Act, your company must say what it does and then must do what it says it does. The Act’s impact is expected to be significant for businesses. If you have questions regarding the Act, please contact Renee E. Becker, Esq. at (310) 312-4119, or Stan Levy, Esq. at (310) 312- 4379.

January 1, 2012 is just around the corner. Are you ready?