All retailers and manufacturers that operate in California should be aware of the California Transparency in Supply Chains Act of 2010 (the “Act”). Under the Act, effective January 1, 2012, any retailer or manufacturer that operates in the state of California and has “annual worldwide gross receipts” exceeding one hundred million dollars ($100,000,000) must disclose its “efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale.” To comply, a conspicuous and clearly labeled link to the disclosure must be posted on the home page of the company’s website. The disclosure must provide information regarding to what extent the retailer or manufacturer does the following:

• Verifies its product supply chains to evaluate and address risks of human trafficking and slavery, specifically including whether or not this verification is conducted by a third party;
• Audits its suppliers to evaluate their compliance with company standards for human trafficking and slavery, specifically noting if the audit was unannounced and conducted by a third party;
• Requires Certifications from direct suppliers confirming that materials incorporated into the product comply with laws regarding human trafficking and slavery in the countries in which the suppliers operate;
• Maintains Internal Accountability through internal standards and procedures for employees and contractors that fail to meet company standards regarding human trafficking and slavery; and
• Trains company employees and management who have direct responsibility for supply chain management on human trafficking and slavery, particularly with respect to mitigating risks within the supply chain.

The Act itself does not require retailers and manufacturers to cease operations with suppliers that are involved with human trafficking and slavery, but it does require retailers and manufacturers to disclose efforts taken to eradicate this behavior. The sole penalty for failure to comply with the Act is injunctive relief, which may be sought by the Attorney General of California, however, the retailer or manufacturer may still be liable under other state or federal laws, such as those that criminalize benefiting financially from involuntary servitude. The primary purpose of the Act is to permit consumers to make informed decisions regarding the companies with whom they do business.

Practical Implications

While the Act says that the disclosures should be accessible through a clearly labeled link on the business’ homepage, it appears that the industry accommodates this requirement by incorporating a “Social Responsibility” link within the “About Us” section or directly on the homepage of the corporate website (where applicable). Other retailers appear to incorporate the link in the footer of the brand website under a heading such as “Company Information.”

It is also apparent that companies, as to be expected, have varying levels of supply chain oversight and disclosures. While some have very detailed information and vendor agreements on their websites, others include very simple statements that indicate that suppliers must sign agreements confirming that they use “legally qualified workers, pay those fair and legal wages, and have them work in a safe and comfortable environment,” but do not hyperlink directly to those vendor standards.

Each company’s disclosure must be tailored to fit the company’s activities in this area, including whether the company has direct oversight of its suppliers, audits supplier facilities, and trains its employees. Below, we provide recommendations for steps that retailers can include in their efforts to curtail human trafficking and slavery in its supply chains, as well as steps to comply with the Act.

Recommendations

Based on our examination of the Act, the only step that retailers must take to comply is to incorporate a link on their website home page that provides information about its efforts to eradicate human trafficking and slavery. Should a retailer want to incorporate additional provisions into its business model that help to bolster this disclosure, we recommend the following:

• Include provisions in all vendor agreements that:
  • Require suppliers to verify that they will comply with human trafficking and slavery laws in the countries in which they operate and that their operations comply with all applicable U.S. laws governing imports.
  • Permit unannounced audits by either company employees or third-party auditors.

• Include a link on the company website titled, “Social Responsibility” or something creative that still indicates that it is linking to the company’s efforts as they relate to eliminating human trafficking and slavery in the supply chain.
• Include language on the “Social Responsibility” page such as the following (if accurate):

“[Company Name] is opposed to human trafficking and slavery and takes steps to ensure that these illegal behaviors are not incorporated into the [Company Name] supply chain. These steps include agreements with vendors that they will not engage in this type of behavior and will comply with local laws. We also have the right to conduct facility audits during visits, as well as include provisions in our vendor agreements that permit [Company Name] to conduct unannounced audits using independent auditing agencies. To ensure that we hold ourselves to the level to which we hold our vendors, [Company Name] has internal standards and procedures for training and disciplining employees and suppliers that fail to uphold our goals of a free workplace. Together, we can all help to stop human trafficking and slavery in the retail industry.”

Arent Fox is continuing to monitor laws and regulations related to the retail industry. Please contact Anthony V. Lupo, Sarah L. Bruno, or Eva J. Pulliam with questions.