Does the California Transparency in Supply Chains Act Spell More Consumer Litigation for California Businesses?

So you implemented a sexual harassment policy in the 1990’s when that seemed like the thing to do.  You then followed up with a corporate compliance and ethics policy several years later when Enron and other companies underscored the need for more robust corporate governance initiatives.  What’s the next frontier in corporate compliance? 

It appears that Corporate Social Responsibility (“CSR”) is the next wave in corporate governance which require that companies adhere to certain standards.  CSR encompasses everything from making sure that the company follows best practices with respect to environmental concerns, contributing to the community, ethical labor practices, to observing human rights in foreign countries. 

The clearest example of the law advancing CSR is the California Transparency in Supply Chains Act.  The Act generally requires certain retail sellers and manufacturers to disclose their ongoing efforts to eradicate slavery and human trafficking from direct supply chain for tangible goods offered for sale.  I have separately posted on what the law including a summary of which entities are subject to compliance as well as provided the Michael Scott Explanation for the Act.  The focus of this post is to begin thinking through the litigation liabilities that may stem from the California Transparency in Supply Chains Act. 

It appears that the drafters of the statute were uncharacteristically sensitive to opening the door to litigation arising from the Act:

The exclusive remedy for a violation of this section shall be an action brought by the Attorney General for injunctive relief. Nothing in this section shall limit remedies available for a violation of any other state or federal law.  (Cal. Civ. CodeSec.1714.43(d).)

This is a classic example in which the Legislature has sent conflicting messages.  The first sentence suggests that a private right of action is not permitted because an action by the Attorney General is the exclusive remedy.  But the second sentence undermines that notion, particularly when understood in the context of the Unfair Competition Law (“UCL”) (Cal. Bus. & Prof. Code Sec. 17200) which allows a private plaintiff to bring a civil action against any business engaging in unfair, fraudulent or unlawful conduct.

Suppose a company provides an inaccurate statement concerning its efforts to eradicate slavery and human trafficking from its supplier in a foreign country.  It seems clear that a consumer plaintiff’s counsel would not pause in framing a claim for violation of Section 17200.  After all, claims that a product was made in the USA or unsubstantiated claims regarding a lower environmental impact (“greenwashing”) have certainly been recognized as a basis for a consumer class action. 

This is how this works.  A company seeking to comply with the Act posts on its website statements that are less than accurate concerning its audit efforts of a manufacturing operation in China.  A consumer class action attorney believes that he or she can prove that the statements were false and misleading and are “unlawful” for purposes of the UCL as they violate California Transparency in Supply Chains Act.  Even without actual damages or losses, the plaintiff will be able seek injunctive relief (compliance with the statute by correcting the representations) and obtain significant attorney fees for the public benefit obtained through the lawsuit.

This same basic legal theory was unsuccessfully asserted against WalMart before the enactment of the California Transparency in Supply Chains Act.  The principal problem with the theory is that WalMart had allegedly made those alleged representations, not to the public, but rather in its supply contracts.  The relegated plaintiffs to a third-party beneficiary claim and other creative theories.  The Ninth Circuit Court of Appeals affirmed the dismissal of these claims on a motion to dismiss.  See Doe I v. Walmart Stores, Inc., 572 F.2d 677 (9th Cir. 2009). 

By now requiring that representations be made to the public (as opposed to allowing companies to simply include such statements in their private contracts), the Legislature has made it much easier for a plaintiff to bring a consumer class action lawsuit.  Based on all of these factors, I anticipate that we will see a significant increase in these types of lawsuits in the future.

These new frontiers of corporate compliance and social responsibility raise numerous questions and public policy considerations.  For further reading on this and related topics, I highly commend to you Haley Ravek, Corporate Codes of Conduct: Binding Contract or Ideal Publicty, 63 Hastings L. J. 1646 (2012).