Anyone doing business in California (who isn’t?) with significant global sales will be dealing with a new California statute in 2012 – the California Transparency Supply Chains Act. Once again, California has gotten into the business of legislating business ethics, this time trying to prevent the use of human trafficking in business supply chains. A laudable goal to be sure, but is this going to be effective and is the method overly burdensome?

The legislation was enacted in September 2010, but only went into effect on January 1, 2012. It applies to every large retailer or manufacturer doing business in California with global receipts over $100 million. The law is designed to force companies to monitor and disclose human rights abuses in their supply chains, and to take specified actions to eliminate slavery and human trafficking activities by providing information to consumers on steps taken to manage their supply chains in a socially responsible manner to prevent abuses. It does not actually impose a substantive regulation on business, but it does require more disclosure.

Information on actions taken by companies is to be posted on the company website with an easy-to-find link to information on the home page. The disclosures require that the company report on the extent to which it does each of the following:

1. Engage in verification of its supply chain to evaluate and address risks of human trafficking/slavery, and whether third parties are used for this process;
2. Conduct audits of suppliers to evaluate their compliance with company standards regarding trafficking and slavery, and the evaluations are independent/unannounced;
3. Require direct suppliers to certify that materials incorporated into company products comply with local laws regarding slavery and human trafficking (basically, that you don’t allow your direct suppliers to engage in slavery or human trafficking);
4. Maintain internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking;
5. Provide training to employees and management responsible for the supply chain on human trafficking and slavery, and with respect to mitigating risks of same from suppliers.

The state attorney general is responsible for enforcing the law, and there is no private right to sue under it. Because of this, the only real enforcement mechanism (beyond public pressure) is a suit by the attorney general for injunctive relief. Again, it is purely a disclosure rule that essentially pressures companies to have some sort of policy and perform due diligence on suppliers from a public relations standpoint.

As far as what it means for the immediate future, it is a bit of a black box right now. The law was intended to target big retailers operating in California, but it is written in a way that covers a much larger group. Indeed, one analysis of the legislation indicated that it would cover 87 percent of all sales of goods in California. There have been similar efforts targeted at the clothing industry in the past, but this law is much broader.

For individual companies that meet receipts threshold, it means having a policy on slavery and human trafficking (i.e. “we don’t allow it”), an initial risk assessment with follow-up processes to audit and verify compliance by suppliers, some training of company personnel, communication of the policy to the suppliers and the public, and the imposition of consequences if a supplier fails to abide by the policy.

We expect a period of time to pass as significant businesses operating in California learn about the new law and add to their existing procedures/website disclosures. The speed with which this happens will depend in part on how active the attorney general in California and consumer groups are in tagging laggards. At a minimum it adds one more layer onto the regulatory compliance environment. By itself it does not seem like that much of a burden, but with every new layer of regulation comes a cost to business – visions of death by a thousand cuts comes to mind. And of course, federal legislation has been introduced to require similar disclosures by any company that files reports with the Securities and Exchange Commission.

Should you have any questions regarding this Alert, please contact members of Arent Fox’s International Trade Group, or the Arent Fox attorney who handles your matters.