The California Transparency in Supply Chains Act of 2010 (the “Act”) was enacted into law on September 30, 2010. According to Section 2 of the Act, the Act’s purpose is to “ensure large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains,” thereby allowing consumers to make educated purchasing decisions and distinguish companies based on their efforts to remove the stain of trafficking and slavery from their products. To accomplish this purpose, the Act adds Section 1714.43 to the California Civil Code and Section 19547.5 to the California Revenue and Taxation Code.

The Act became effective on January 1, 2012, requiring all subject companies to comply with certain disclosure obligations. The Act does not require subject companies to take any substantive action to eradicate human trafficking or slavery from their supply chains.

Who is Subject to the Act?

Every retail seller and manufacturer doing business in California that has worldwide annual gross receipts over One Hundred Million Dollars ($100,000,000) is subject to the Act. For purposes of the Act:

• “Retail Seller” means a business entity with retail trade as its principal business activity code, as reported on the entity’s tax return.

• “Manufacturer” means a business entity with manufacturing as its principal business activity code, as reported on the entity’s tax return.

• “Doing business” means actively engaging in any transaction for the purpose of pecuniary gain or profit, and includes any business that meets any of the following criteria:

1. Taxpayer is organized or domiciled in California;
2. Sales of the taxpayer in California exceed the lesser of $500,000 or 25% of the taxpayer’s total sales;
3. The real property and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25% of the taxpayer’s total real property and tangible personal property; and
4. The amount paid in California by the taxpayer for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid by the taxpayer.

• In other words, a company can have a small commercial presence in California and still be subject to the Act as long as it has sufficient overall size.

What is Required by the Act?

If a company is subject to the Act, then it must disclose its efforts to eradicate slavery and human trafficking from its supply chain for tangible products offered for sale. This disclosure must be made readily available on the company’s website with a “conspicuous and easily understood link to the required information placed on the [company’s] homepage.” If the company does not have a website, then the company must provide a consumer with the written disclosures within thirty (30) days of the company’s receipt of a written request from a consumer for the same.

How Can Companies Comply with the Act?

If a company is subject to the disclosure requirements of the Act, the disclosure must, at a minimum, show to what extent the company does each of the following:

1. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure must specify if the verification was not conducted by a third party.
2. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure must specify if the verification was not an independent, unannounced audit.
3. 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.
4. Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
5. Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.

A subject company should avoid having to disclose that it has no policy covering labor conditions in its supply chain or that it does not monitor compliance with its policy. Such a disclosure would harm the company’s reputation in the eyes of some consumers. Indeed, a subset of consumers will likely reward companies who actively pursue and publish their efforts to eradicate human trafficking and slavery from their supply chains.

What Happens if a Company Does not Comply?

The exclusive remedy under the Act is for the Attorney General of California to bring an action for injunctive relief against a noncompliant company. The Act requires the California Franchise Tax Board to make a list of all retail sellers and manufacturers subject to the above-referenced disclosure requirements available to the Attorney General. The Act does not create a private cause of action.

Companies should also consider and evaluate their influence over the operations of their suppliers, as they may be deemed a “joint employer” responsible for the suppliers’ treatment of their workers. To minimize this risk, some companies are requiring suppliers to provide certification (either separately or as part of a supply agreement) of compliance with applicable international standards prohibiting slavery and human trafficking. However, such certification is not required by the Act, and is not necessary for subject companies to obtain. Subject companies should likely only consider this certification if their suppliers provide products from “high-risk” countries or territories.

*********

Since the Act only became effective on January 1, 2012, its full impact remains to be seen. Ideally, the Act will educate consumers, whose purchasing decisions will then support socially responsible companies and simultaneously pressure other companies into eliminating abuses from their supply chains. In the meantime, companies must consider their response to the requirements of the Act. Although no one solution is available to all companies, the factors outlined in this article should assist companies in tailoring policies and procedures that properly comply with the Act while addressing potential abuses associated with slavery and human trafficking in their supply chains.

Kathryn M. Agostinelli is an Associate at
Foley & Lardner LLP
kagostinelli@foley.com; 213-972-4727