Issue Overview

Plaintiffs' class-action bar in the United States is an ingenious lot. Give them an inch, and they'll take a mile. Like Doc Holliday's hypocrisy in the 1993 film Tombstone, this group's artfulness "knows no bounds."

Among their recent plays is an effort to hold companies liable under state consumer-protection laws for failing to disclose the possible presence of forced labor in their supply chains. The hook for these claims is the California Transparency in Supply Chains Act of 2010 (Supply Chains Act). See CAL. CIVIL CODE § 1714.43. This law requires every large retailer and manufacturer doing business in California, with global gross receipts exceeding $100 million annually, to post disclosures on its website regarding the company's efforts to eradicate slavery and human trafficking "from its direct supply chain for tangible goods offered for sale."

These lawsuits are part of a broader U.S. litigation trend that one court has derided as a misguided effort to "require any company selling any product or services to affirmatively disclose every conceivable piece of information about [a] product or service (or even about [a] company generally) because inevitably some customer would find such information relevant to his or her purchase." Hall v. Sea World Entertainment, Inc., 2015 WL 9659911, at *7 (S.D. Cal. Dec. 23, 2015) (involving failure to disclose condition and treatment of whales in captivity); see also Gallagher v. Chipotle Mexican Grill, Inc., No. 15-cv-03952-HSG (N.D. Cal. Feb. 5, 2016) (challenging company's "non-GMO" claims for failing to explain certain ingredients derived from animals that consumed genetically engineered feed).

In the world according to plaintiffs, the failure to disclose anything that might cause a consumer "to regret patronizing" a business is fair game. Hall, slip op., at *7. For the moment, U.S. courts are not buying plaintiffs' theory of supply-chain liability. But time will tell.

The first cases of this sort were filed in a California federal court just a month after the New York Times published a six-part series on forced labor in the Southeast Asian fishing industry. See, e.g., Sea Slaves: The Human Misery That Feeds Pets and Livestock, N.Y. TIMES, July 27, 2015. Targeting the pet-food industry, these cases have thus far failed based on similar legal and policy considerations. See Wirth v. Mars, Inc., No. SA CV 15-1470-DOC (C.D. Cal. Feb. 5, 2016); Barber v. Nestlé USA, Inc., No. SA CV 15-01364-CJC (C.D. Cal. Dec. 9, 2015).

Anatomy of Plaintiffs' Liability Theory

Defendants in both cases sourced seafood used to manufacture various brands of cat food from Thai suppliers that purchased fish from fleets working the waters between Thailand and Indonesia. According to news reports and the complaints, these suppliers receive "large shipments of fish from 'motherships,' which are large boats that refrigerate and transport fish they receive, in turn, from numerous smaller fishing boats." Barber, slip op., at 2. These smaller boats are the pivot point. They "stay at sea for significant amounts of time, with little oversight [of] their operations" (id.), where individuals forced into service on these vessels are reportedly subject to "dangerous and inhumane working conditions." Wirth, slip op., at 2. Once the fish is loaded aboard the "motherships," however, "fish that is the product of forced labor is mixed with fish that is legitimately caught, making any kind of tracing impossible." Id.

Enter consumers complaining about defendants' failure to mention -- on either their packaging or websites -- the "likelihood that forced labor was used to catch the seafood going into the product." Id.; see also Barber, slip op. at 3. Asserting that defendants' "superior knowledge" of their supply-chains creates "a duty to disclose" information of this sort, plaintiffs claim to have been injured by defendants' failure to inform them that their products "may have been sourced from forced labor" -- because "they would not have purchased [the] products, or would not have paid as much for the products" had they known otherwise. Wirth, slip op., at 2-3. According to plaintiffs, defendants' failure to disclose "the likelihood of forced labor" in their supply chains violates California's consumer protection laws.

Mars and Nestlé moved to dismiss the cases for failure to state any claim for relief as a matter of law, arguing (as pertinent here) that: (a) they had no duty to disclose the desired supply-chain information; and (b) the claims were barred by operation of the safe-harbor doctrine pursuant to the terms of the Supply Chains Act.

Legal Analysis

No Duty to Disclose

The court in Wirth found no legal duty under California law to disclose information regarding "the likelihood of forced labor on … product packaging." Slip op. at 5. Noting that "failure to disclose a fact one has no affirmative duty to disclose is [not] 'likely to deceive' anyone within the meaning" of California's consumer protection statute, the court held: "California courts have generally rejected a broad obligation to disclose," instead holding that "a manufacturer's duty to consumers is limited to its warranty obligations absent either an affirmative misrepresentation or a safety issue." Id. at 6 (internal quotations omitted). Since the requested information did not relate to "any safety issues" or "a product defect," defendants "were not bound to disclose the omitted information." Id.

Had defendants "lied to consumers," on the other hand, by (say) claiming "no possibility" of forced labor in their supply chains," a plaintiff "would have actionable claims based on" misrepresentation.Id. But absent allegations of that sort, a defendant has no "independent and broad duty to disclose information concerning the possibility of forced labor to consumers." Id. Explaining California's rejection of such a "broad obligation to disclose," the Wirth court referenced Hall v. Sea World, explaining:

To hold otherwise, simply because Plaintiffs allege that information about the whales' conditions and health, had it been disclosed, would have been material to them, would effectively require any company selling any product or service to affirmatively disclose every conceivable piece of information about that product or service (or even about the company generally) because inevitably some customer would find such information relevant to his or her purchase. Under the standard argued by Plaintiffs, any consumer would have standing to sue any company that fails to disclose product ingredients or components, or business practices that could cause that consumer to regret patronizing that business.

Id. at 7.

Beyond black letter legal principles, the court was "troubled" that plaintiffs' theory of liability carried "no meaningful limiting principle" as a policy matter.  Id. at 9. It would mean "that a business has an affirmative duty to disclose anything and everything that might cause some consumers not to purchase its products, or risk liability for fraudulent conduct." Id. (emphasis in original; internal quotations omitted). Put another way, a plaintiff "does not have standing to maintain a claim that he assumed characteristics or qualities of a product that were not on the label (with the exception of characteristics or qualities related to safety)." Id. "If that were the case," the court continued, "Defendants could be held liable for not including their products' environmental impact or their company's political contributions on the labels of pet food products" -- give an inch! Id.

The Shelter of the Safe-Harbor Doctrine

Defendants further argued that the Supply Chains Act created "a safe harbor" from plaintiffs' consumer-protection claims. This doctrine comes into play under California law when "the Legislature has permitted certain conduct or considered a situation and concluded that no action should lie." Barber, slip op., at 5 (internal quotations omitted). When that happens, plaintiffs cannot "assault that harbor" by claiming that "permitted conduct (or omission) is unlawful." Id.

Turning to the Supply Chains Act, the court commented that it only required a "covered" party to:

[D]isclose whether it (1) engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery; (2) conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains; (3) requires direct suppliers to certify that materials incorporated into its products comply with laws regarding slavery and human trafficking; (4) maintains internal accountability standards and procedures for employees or contractors who fail to meet company standards regarding slavery and trafficking; and (5) provides company employees and management with training on human trafficking and slavery.

Id. at 5-6. It then noted: "Importantly, the Supply Chains Act does not actually require covered retailers to do any of the five things listed above:  they must simply say on their websites whether or not they do them." Id. at 6 (emphasis in original). And plaintiffs were not alleging that defendants had failed to comply with the Act, but instead that they were "obligated to make additional disclosures at the point of sale regarding the likelihood that a given [product] contains seafood sourced by forced labor." Id.

Defendants maintained that the safe-harbor doctrine foreclosed plaintiffs' claims, "because the California Legislature already considered the disclosures that large companies with potential forced labor in their supply chains need to make to consumers, and elected not to require the disclosures" sought by plaintiffs. Id. (emphasis added). Plaintiffs countered that the doctrine was inapplicable, on the ground that "the Supply Chains Act does not specifically authorize nondisclosure of the presence of forced labor in a supply chain." Id. at 7.

Rejecting plaintiffs' "novel application" of law, the court held that "California has spoken directly to the issue of what disclosures companies must make to customers about potential forced labor in their supply chains," adding:

At bottom, Plaintiffs argue that because the Legislature has not specifically permitted nondisclosure of the facts they would like, nondisclosure cannot possibly find a safe harbor. But the trouble with this argument is that it ignores [precedent to the effect that] safe harbors exist both if the Legislature has permitted certain conduct and if it has considered a situation and concluded that no action should lie. … Here, the Court is persuaded that the California Legislature considered the situation of regulating disclosure by companies with possible forced labor in their supply chains and determined that only the limited disclosure mandated by [the Supply Chains Act] is required.

Id. at 9-11 (emphasis in original; internal quotations omitted). Notwithstanding what the court characterized as the "understandabl[e]" merit of greater disclosure, it ruled that the safe-harbor doctrine stands guard against "precisely the sort of legislative second-guessing" proposed by plaintiffs. Id. at 11; see also Wirth, slip op., at 10-15.

Miscellany

Their ingenuity knowing no bounds, plaintiffs tried an end run of the safe harbor doctrine. But their attempted use of statements from one defendant's website regarding its "supplier code of conduct" and "corporate business principles" to establish liability based on alleged misrepresentations fared no better. See, e.g., Barber, slip op., at 12 ("[Nestlé] expects the Supplier to adhere to all applicable laws and regulations … and strive to comply with international and industry standards and best practices."); ("[Nestlé] reserves the right to verify compliance with the [Supplier] Code."); ("Suppliers will ensure [that] there is no known sourcing from Illegal, Unreported and Unregulated … fisheries and vessels.").

The "thrust" of plaintiffs' misrepresentation claims was that statements like these could "persuade a reasonable consumer that forced labor is not present in Nestlé's supply chains." Id. at 11. More specifically, they asserted that Nestlé's inability to "actually verify that its supply chain is free of forced labor" made its "online representations … misleading, at a minimum, or false." Id. Nestlé countered by characterizing its supply-chain statements and policies as "aspirational" and consistent with the stated aim of its "responsible sourcing guidelines": namely, setting "expectations" for its suppliers and guiding them "to improve their practices where necessary." Id. at 13.

Turning back this part of plaintiffs' attack, the court concluded that "no reasonable consumer" reading Nestlé's statements "in context could conclude that Nestlé's suppliers comply with [its] requirements in all circumstances." Id. To the contrary, it held:

Nestle seems to anticipate a certain level of non-compliance. It is not shy about identifying for consumers the rules and expectations for its suppliers, but it does not mislead them into thinking that its suppliers abide by those rules and meet those expectations in every instance.

Id. Unable to plead any cognizable misrepresentation, plaintiff could not run wide of the safe-harbor doctrine.

Business Implications and Best Practices

The legal and reputational issues that Global South-related outsourcing bakes into the supply chain will continue to vex multinational corporations for the foreseeable future -- in the court of public opinion as well as the judicial system. Corporate policies, public statements, annual reports, supplier codes and contracts, and things like voluntary accords with foreign unions and other stakeholders will be mined by prospective claimants in an effort to argue that global retailers and manufacturers have assumed a duty or made a promise of some kind regarding supply-chain practices. Careful drafting is crucial, as is the harmonization of public messaging across markets on a global basis.

Given the importance of corporate social responsibility to a company's reputation and bottom line, firms need to be proactive and vigilant about litigation risks based on the business practices of their partners throughout the global supply-chain. Robust due diligence and well-documented compliance programs (covering the entire lifecycle of a product or process) are critical. Audit teams ideally should be multidisciplinary and when potentially serious problems arise, investigations should be conducted by outside counsel, so that findings are protected by attorney-client privilege.