Retail sellers and manufacturers across the country that conduct a threshold amount of business in California must comply with the California Transparency in Supply Chains Act (“Supply Chains Act” or “Act”). CAL. CIV. CODE § 1714.43. The Act, which became effective in January 2012, requires those retailers and manufacturers to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains. Id. § 1743.43 (a)(1). Specifically, those companies must disclose on their website to what extent they: (1) engage in verification of product supply chains to evaluate and address risks of human trafficking and slavery; (2) conduct audits of suppliers; (3) require direct supplies to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the countries in which they are doing business; (4) maintain accountability standards and procedures for employees or contractors that fail to meet company standards regarding slavery and human trafficking; and (5) provide employees and management training on slavery and human trafficking. Id. § 1743.43 (c).

By its terms, the Act does not require manufacturers and retailers to take affirmative action to detect or prevent slavery or human trafficking in their supply chains. It requires only that the company make the mandated disclosures. Nevertheless, manufacturers and retailers should be aware of the potential for attorney general enforcement actions, as well as enterprising litigation by consumers, based on violations of the statute.

Requirements of the Supply Chains Act

The Act applies to any company that does business in California, has worldwide annual revenues in excess of $100 million, and is either a “manufacturer” or “retail seller” as reported on the entity’s California tax return. CAL. CIV. CODE §§ 1714.43(a)(1)–(a)(2). A retail seller or manufacturer located outside of California may be considered to be “doing business in California” if it satisfies one of the following conditions: the retail seller or manufacturer in a tax year (1) has business sales in California that exceed $500,000 or 25% of the businesses’ total sales, whichever is lesser; (2) has retail property and tangible personal property in California that exceeds $50,000 in value or 25% of the business’ total real property and tangible personal property value, whichever is lesser; or (3) pays compensation in California that exceeds $50,000 or 25% of the total compensation paid by the business, whichever is lesser. Id. § 1714.43(a)(2)(D); CAL. REV. & TAX. CODE § 23101(b). Retailers and manufacturers subject to the Act are identified each year using data provided to the California Attorney General by the state Franchise Tax Board. See CAL. REV. & TAX. CODE § 19547.5.

Retailers and manufacturers subject to the Act must disclose their efforts in the following five areas: verification, audits, certification, internal standards, and employee training. In 2015, the California Attorney General issued non-binding guidance to assist companies in complying with the statute. See California Department of Justice, “The California Transparency in Supply Chains Act: A Resource Guide,” at 3 (2015) (“Resource Guide”). According to the Attorney General’s guidance, disclosures should include the following:

• Verification. Manufacturers and retailers subject to the act must disclose whether they verify “product supply chains to evaluate and address risks of human trafficking and slavery.” CAL. CIV. CODE § 1714.43(c)(1). This disclosure should include whether a third party conducts the verifications, a description of the verification process, and whether the company assesses potential risks related to labor-brokers and third-party recruiters in its supply chain. See Resource Guide at 11–12.

• Audits. Manufacturers and retailers subject to the act must disclose whether they audit their suppliers’ practices. CAL. CIV. CODE § 1714.43(c)(2). This disclosure must specify whether audits are independent and unannounced. Id. It also should include statistics regarding the timeline, frequency, and number of audits. See Resource Guide at 14–15.

• Certification. Manufacturers and retailers subject to the act must disclose whether they require direct supplies to certify that materials “comply with the laws regarding slavery and human trafficking of the . . . countries in which they are doing business.” CAL. CIV. CODE § 1714.43(c)(3). This disclosure should describe the company’s certification requirements, the consequences to the supplier of any violation, and any additional action the company takes to encourage direct suppliers to comply with relevant laws. See Resource Guide at 16–17.

• Internal standards. Manufacturers and retailers subject to the act must disclose whether they maintain “accountability standards and procedures for employees or contractors [that] fail[] to meet company standards regarding slavery and human trafficking.” CAL. CIV. CODE § 1714.43(c)(4). This disclosure should describe the company’s standards and procedures, identify the persons tasked with monitoring these standards and procedures, and identify the company’s code of conduct related to supplier standards. See Resource Guide at 18–19.

• Employee training. Manufacturers and retailers subject to the act must disclose whether they provide “employees and management . . . training on slavery and human trafficking, particularly with respect to mitigating risks within the supply chains of products.” CAL. CIV. CODE § 1714.43(c)(5). This disclosure should identify what positions receive training and provide a description the training, including the topics presented, duration, and frequency. See Resource Guide at 20–21.

Companies subject to the Supply Chains Act must make the above disclosures on their website’s homepage “with a conspicuous and easily understood link to the required information.” CAL. CIV. CODE § 1714.43(b). The California Attorney General has suggested that to be “conspicuous and easily understood,” a link should be placed at the top or bottom of the company’s homepage and include a relevant title, such as “California Supply Chains Act,” that plainly alerts consumers to its content. See Resource Guide at ii, 5. If a company subject to the Act does not maintain a website, such company must provide a written disclosure to any consumer request within 30 days. CAL. CIV. CODE § 1714.43(b).

A. Exclusive Remedy for Violations of the Act and Uses of the Act In Litigation

The exclusive remedy for a violation of the Supply Chains Act is an action brought by the California Attorney General for an injunction. Although the Attorney General has filed few cases under the statute, it has called upon consumers to report suspected violations. In 2015, the Attorney General requested companies that may be subject to the Act’s requirements to submit information voluntarily about their current disclosures. See Press Release, California Office of the Attorney General, Attorney General Kamala D. Harris Issues Consumer Alert on California Transparency in Supply Chains Act (April 13, 2015); Informational Letter.

B. The Supply Chains Act as a Predicate of California Unfair Competition Law, False Advertising Law, or Consumer Legal Remedies Act Claims

Although the sole remedy provided for under the Supply Chains Act is an Attorney General action for injunctive relief, the Act provides that it does not “limit [other] remedies available for a violation of any other state or federal law.” CAL. CIV. CODE § 1714.43(d). Some plaintiffs have therefore attempted to rely on violations of the Supply Chain Act as predicates for liability under California’s consumer protection statutes, the Unfair Competition Law (UCL), CAL. BUS. & PROF. CODE § 17200 et seq., the False Advertising Law (FAL), CAL. BUS. & PROF. CODE § 17500 et seq., and the Consumer Legal Remedies Act (CLRA), CAL. CIV. CODE § 1750 et seq.

For example, in Sud v. Costco Wholesale Corp., the plaintiffs attempted to bring UCL, FAL, and CLRA claims based on Costco’s alleged failure to disclose on its packaging that its prawns were “derived from a supply chain tainted by slavery, human trafficking and other human rights violations.” No. 15-CV-03783-JSW, 2017 WL 345994, at *1 (N.D. Cal. Jan. 24, 2017). The plaintiffs argued that this was an “unlawful” practice under the UCL, in part because it violated the Supply Chains Act. The Northern District of California dismissed the plaintiff’s claims, holding that “[t]he Supply Chains Act does not clearly speak to product labels.” Id. at *8. The court additionally held that “to the extent Plaintiffs are attempting to suggest” that Costco’s Supply Chains Act disclosure on its website did “not comply with the requirements of the Supply Chains Act . . . Plaintiffs lack[ed] statutory standing” because they had not alleged that they “read or relied on” the disclosure. Id. at *5, *8. Because the court focused on plaintiffs’ failure to allege an actual violation of the Supply Chains Act and their failure to allege that they relied on the disclosures required by the Act—as opposed to ruling that there was no private cause of action under the Supply Chains Act—Sud leaves open the possibility that inadequate Supply Chains Act disclosures could be a basis for successful UCL, FAL, or CLRA claims.

C. The Supply Chains Act as a Defense to California Unfair Competition Law, False Advertising Law, or Consumer Legal Remedies Act Claims

Defendants have also attempted to use their compliance with the Act to defeat claims under the UCL, FAL, and CLRA. California law recognizes a “safe harbor” defense to UCL, FAL, and CLRA claims where the California legislature has either clearly permitted certain conduct or “considered a situation and concluded no action should lie.” See Loeffler v. Target Corp., 324 P.3d 50, 76 (2014). Companies defending against UCL, FAL, or CLRA actions have, therefore, successfully pointed to their compliance with the Supply Chains Act as precluding plaintiffs from pursuing UCL, FAL, or CLRA claims based on alleged human trafficking or slavery in a company’s supply chain. In several cases, the District Court for the Central District of California has determined that the Act creates a safe harbor under the UCL because the California legislature specifically considered “how much companies should disclose to consumers about the possibility of forced labor in their supply chains.” Wirth v. Mars, Inc., Case No. 1:15-cv-1470, 2016 U.S. Dist. LEXIS 14552, at *3 (C.D. Cal. Feb. 5, 2016) (concerning cat food products that may have included ingredients from forced labor); See also Barber v. Nestle USA, Inc., 154 F. Supp. 3d 954, 961 (C.D. Cal. 2015) (same).

The Northern District of California, however, has expressed skepticism toward this argument. Without reaching the merits, in McCoy v. Nestle United States, Inc., the court questioned whether the Supply Chains Act creates a “safe harbor” because the Act is merely a disclosure statute that neither bars nor clearly permits conduct. 173 F. Supp. 3d 954, 971 (N.D. Cal. 2016). Similarly, in Hodsdon v. Mars, Inc., the court, in dicta, questioned whether adequate Supply Chains Act disclosures, which cover only “human trafficking” and “slavery,” preclude liability under the UCL, FAL, or CLRA based on child labor. The Hodsdon court commented that it would be “anomalous” if businesses earning more than $100 million worldwide (the Supply Chains Act threshold) would have access to such a “safe harbor” defense while smaller businesses would not. See Hodsdon, 162 F. Supp. 3d at 1029.