While you were worrying about tin, tungsten, tantalum, and gold in your supply chain—all minerals blamed for human rights abuses—recent lawsuits targeting cat food and shrimp cocktail are creating a whole new type of compliance headache.
Last month a class-action lawsuit was filed against Nestlé for allegedly supporting a system of slave labor and human trafficking when sourcing seafood for its Fancy Feast brand of cat food. A similar lawsuit alleges that Costco knowingly sold frozen prawns that were the product of slave labor in Thailand; it demands those products be labeled to indicate that they are the product of slave labor.
Expect more cases like these as government regulations continue to address social issues. Notably, the California Transparency in Supply Chains Act and U.K. Modern Slavery Act require companies to disclose their efforts to eradicate forced labor and human trafficking from their supply chains. The California law was invoked in the Nestlé and Costco lawsuits.
“It is the tip of the iceberg and signal of a trend we are going to see more of,” Dynda Thomas, a partner with the law firm Squire Patton Boggs , says of this new breed of litigation.
The Costco compliant argues that its use of forced labor is inconsistent with its California Transparency in Supply Chains Act disclosure. That state law requires businesses to disclose the efforts they are making (if any) to eradicate human trafficking and slavery from their supply chains. It applies to retailers and manufacturers with annual worldwide gross receipts that exceed $100 million and that do business in California.
Costco’s disclosure under that law says that it “has a supplier Code of Conduct which prohibits human rights abuses in our supply chain” and that it conducts supply chain audits and imposes consequences to prevent and correct violations. The lawsuit, drawing from media reports uncovering forced labor in Thailand’s shrimping industry, claims that the disclosure was both inaccurate and misleading.
The lawsuit against Nestlé similarly alleges that the company “knowingly supports a system of slave labor and human trafficking to produce its Fancy Feast cat food, while hiding its involvement with human rights violations from the public.”
“These cases show the risks of making what people probably believed were solid, good faith statements about their efforts to eradicate slavery because they are now being used against them.”
Dynda Thomas, Partner, Squire Patton Boggs
The lawsuit alleges that Nestlé works with a Thai partner, Thai Union Frozen Products, to import more than 28 million pounds of seafood-based pet food for brands sold in America, some ingredients of which were sourced using slave labor. The complaint also states that despite protection of human rights listed as one of Nestlé’s Corporate Business Principles, the food giant “has failed to live up to its own ideals” as government sources have confirmed that fish and shrimp from Thailand are likely the product of forced labor.
Activists, litigants, and shareholders are all pressuring organizations to have a better understanding of their supply chains, says Mike Varney, partner in Crowe Horwath's global risk consulting practice. Lawsuits like these will increasingly make organizations “aware they have to consider both financial and non-financial elements in their decision making.” They also, once again, drive home the point that companies must be fully engaged in supply chain risk management and have an “intimacy with their vendors.”
“Think back 15 years ago. Nine times out of 10 you probably knew the person you were buying from, or knew a person from the organization,” Varney says. “Now, with these wide, dispersed supply chain structures in all parts of the world, and with a lot of negotiations and discussions done over the phone or via e-mail with organizations in countries with different cultural norms—if you are not close to your vendors, have an engaged relationship, and a process where you vet them, audit them and hold them accountable, you can end up in situations like this.”
An unnerving reality of the lawsuits is the potential that companies have no good options when disclosing their efforts to be socially responsible. You can try ignoring issues like human trafficking until litigation, regulatory wrath, and bad publicity catch up with you; or you can put programs in place and discuss them openly—and immediately put yourself in the crosshairs of the plaintiffs bar.
CALIFORNIA’S DISCLOSURE REGIME
The following, selections from a resource guide to the California Transparency in Supply Chains Act: A Resource Guide, was published California Attorney General Kamala Harris.
The California Transparency in Supply Chains Act applies to any company doing business in California that has annual worldwide gross receipts of more than $100 million and that identifies itself as a retail seller or manufacturer on its California tax return. Companies subject to the Act must post disclosures on their Internet websites related to five specific areas: verification, audits, certification, internal accountability, and training.
[The following are requirements and recommendations from the report]
Confirm whether the company engages in verification activities to identify, assess, and manage the risks of human trafficking in its product supply chain.
If the company conducts verifications, additionally disclose whether the company uses a third-party verifier.
Describe the general methodology the company uses to verify entities in the product supply chain in assessing those risks, including general information about the frequency of verifications.
Describe whether the company assesses and manages potential risks related to the presence of labor brokers or third-party recruiters in its supply chain.
State whether the audits are independent and unannounced.
Generally describe the audit methodology and how the company selects suppliers to audit.
Provide statistics on the general timeline, frequency, and number of announced and unannounced audits.
Disclose to what extent, if any, that the retail seller or manufacturer 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.
Provide a general description of the certification requirement and the consequences for violating it.
Provide a link to the company’s code of conduct related to supplier workplace standards and provide general information on the types of preventative and corrective actions it takes.
Disclose any mechanisms in place to help workers understand the company’s fair labor requirements, including protections for workers who lodge grievances or report violations. Identify levels of employees being trained by category or type.
Provide a general description of the nature of relevant training, including topics and general statistics regarding the duration and frequency of the training sessions conducted.
Source: Office of the Attorney General.
Thomas worries that disclosures under the California Transparency Act will be used as fodder for litigation if those assurances prove to be unfounded or inadequate. “These cases show the risks of making what people probably believed were solid, good faith statements about their efforts to eradicate slavery because they are now being used against them,” she says. “In Costco’s case, they said they don’t tolerate slavery in their supply chain. Then the evidence comes out that it exists. If they hadn’t made that statement, they probably wouldn’t be sued for this.”
Getting Ahead of It
One of the only ways to insulate company claims from successful litigation is to ensure that the claims they make are accurate and their programs are suitably effective, whether the issue at hand involves slavery, child labor, conflict minerals, cotton, cocoa, or palm oil. Companies need to achieve regulatory compliance, but also keep costs in check when waging the uphill battle to ensure that what could be thousands of suppliers are compliant.
A prerequisite is education, says James Calder, director of compliance programs for Assent Compliance. If possible, companies should develop a learning management system for suppliers and ensure that there is a clear, unambiguous communication of corporate policies. Also, track what suppliers have done for training as part of their on-boarding process. Educational outreach should encompass both a vendor’s management team and employees, with the latter group provided a hotline or similar mechanism to report concerns and violations of the agreed-upon Code of Conduct.
A supplier management system can sort through the data you collect on vendors and help make sense of surveys, inspection reports, supplier training, and due diligence auditing. Using this data, a company can establish risk profiles based on product and geography, prioritizing outreach and due diligence investigations. “Those will trigger activities within the program to quantify whether a supplier is high risk or not,” Calder says. “Then, if you have a high-risk supplier, there is an assessment by subject matter experts and a much deeper survey and discussion. You may not necessarily need an audit at that point, but you want to get as much information from those suppliers as possible to develop the risk assessment.”
Unannounced on-site visits and audits can be deployed for uncooperative or suspicious suppliers. “That’s a pretty high level of due diligence because if you pop up on site without telling them you are coming, that’s when you might catch issues,” Calder says. “You need to have good auditors, people who understand the issue so they interview the right people and ask the right questions. Even if a supplier tries to hide stuff, if you ask the right questions you can find out if there is something wrong.”
As for avoiding litigation, Calder’s advice is simple: Have a plan and stick to it. “Make a commitment, and have senior management buy into it,” he says.