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July 15, 2019

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

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.

© Copyright 2019 Squire Patton Boggs (US) LLP


About this Author

Sarah K. Rathke, Squire Patton Boggs, Manufacturing Litigation

Sarah Rathke is a trial lawyer specializing in manufacturing litigation, particularly complex supply chain disputes. She has argued and tried cases on behalf of manufacturers in forums throughout the US. Her clients include foreign, domestic, and multinational manufacturing entities. Her skills include a deep understanding of the process of bringing highly engineered products to market and conveying that understanding to judges and juries.

Sarah has litigated supply chain disputes involving automotive, aerospace, medical, construction and office...

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Dynda A. Thomas, SquirePattonBoggs, Mergers and Acquisitions Lawyer

Dynda Thomas has extensive experience in the areas of mergers and acquisitions and project finance. She has had principal responsibility for numerous mergers, acquisitions and dispositions for public and private companies in a wide range of sell-side and buy-side auctions and negotiated transactions.

As leader of the Squire Patton Boggs’ conflict minerals team, Dynda focuses on relevant industries’ best practices in working with clients’ legal, procurement and compliance groups. She advises on developing and reviewing procurement policies, training executives and relevant client teams, planning communications with customers and suppliers, and proposing data gathering and retention policies. Dynda and her team work with companies in a wide variety of industries, including aerospace, automotive, consumer products, electronics and mining.

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Simon Garbett Litigation Attorney Squire Patton Boggs Law FIrm

Simon Garbett is a partner working out of Squire Patton Boggs' Birmingham and London offices and is head of the Litigation team in Birmingham. Simon’s practice is global in scope and includes both public and private sector clients. Areas of key focus are cross-border disputes, manufacturing, supply chain and product liability issues (particularly in the aerospace, automotive and industrial products sectors), as well as a broad range of financial services litigation, including for banks, brokers, insurers and pensions clients. Simon is a qualified Solicitor Advocate....

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Mitchell R. Berger, Squire Patton Boggs, commercial litigation attorney

Mitch Berger has been litigating high-value commercial and enforcement disputes for more than 35 years throughout the US, for plaintiffs and defendants, against private parties and government entities. He has tried numerous cases to judgment before judges and juries and has argued in most federal and several state appellate courts. He regularly counsels US and overseas financial institutions, multinational corporations and foreign governments, agencies and officials. He also represents targets and witnesses before committees of the US Congress, federal enforcement...

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