Ho Chi Minh City (HCMC) is not Las Vegas, and what happens in HCMC does not necessarily stay there. This is particularly true for U.S. companies in the apparel/footwear industries. Many of my clients in the fashion industry manufacture their products in Asia (mostly Vietnam, China and Cambodia). I personally know these countries very well and used to – when I had a fashion sneaker company – manufacture my products there as well. I am always amazed and surprised by the lack of care and borderline negligence certain fashion companies show when managing their Asian operations. U.S. companies can get in trouble for conduct/dealings or events that take place in Asia where their goods are manufactured. Often those events have regrettable legal consequences for the brands and for the companies themselves. The goal of this post is to identify some issues companies in the fashion industry face as a result of the manufacturing of their products in Asia. In my opinion, a post on a blog may not be the proper forum to explore in depth the various legal concepts and theories these issues raise. But a post certainly can flag issues before they become problems. Here, then, are some of the main issues that should not be neglected or overlooked by fashion (or any other) companies manufacturing goods in Asia:
1. Employment Law and Other Compliance-Related Issues
Of course, U.S. fashion companies operating overseas must and should comply with any local laws and regulations (pay minimum wages, etc.). My purpose is not to address compliance with local employment laws but rather the nature or the structure of the relationship a U.S. fashion company should have with the people working for it in Asia. Any major U.S. fashion company that manufactures in Asia has to have people on the ground in Asia.
Does your company have people on the ground in Asia? Those people often work with your suppliers; they source materials for you and follow the development of your products with the sample rooms, etc. Do you know what type of arrangements or relationships these people have with your company? Are they employees or “consultants”? Do you operate through a subsidiary, a branch office, or some other arrangement? You need to know and plan properly for how you want to work with your people/team on the ground in Asia. After all, you need to have a team there if you want to have your samples ready on time for the shows and at a level of quality that meets your expectations and standards. Having the proper arrangements in place with the people you work with in Asia and doing the required monitoring of those relationships should help prevent claims of misclassifications and help your HR team manage the overseas workforce.
Also, your foreign practices may have an impact in lawsuits against your U.S. operations (in addition to the troubles they can create in the foreign jurisdictions themselves). Plaintiffs may obtain discovery concerning employment practices at a foreign-basedemployer’s non-U.S. operations (Piscane v. Enichem Am., Inc., 1996 US Dist. Lexis 9755). More specifically, a plaintiff may discover activities outside the U.S. to determine the degree to which those activities are related to operations in the U.S. A trend that we have seen develop is to try to hold U.S. – based global employers liable for violations of local employment standards laws committed by their suppliers based on the global employer’s code of conduct. The Ninth Circuit Court of Appeals held (fortunately) in Doe v. Walmart Stores, Inc., that a U.S. company’s good-faith requirement, contained in its code of conduct, that foreign suppliers follow ethical labor standards did not allow a supplier’s employees to sue the U.S. company when their employer failed to follow the standards.
2. Foreign Corrupt Practices Act-Related Issues
The Foreign Corrupt Practices Act (FCPA) is a federal law enacted in 1977 that prohibits companies from paying bribes to foreign government officials and political figures for the purpose of obtaining business. There are two main provisions to the FCPA. First, the antibribery provisions that are enforced by the Department of Justice (DOJ) and, second, the accounting provisions that are enforced by the Securities and Exchange Commission (SEC).
The goal of the statute is to frustrate the efforts of companies looking to secure favorable legislative action or seeking the discharge of certain ministerial duties by inducing a political quid pro quo. The FCPA applies to any person who has a certain degree of connection to the United States and engages in foreign corrupt practices. The FCPA also applies to any act by U.S. businesses, foreign corporations trading securities in the United States, American nationals, citizens, and residents acting in furtherance of a foreign corrupt practice, whether or not they are physically present in the United States
Failure to comply with the FCPA may bring about civil and criminal fines and/or imprisonment and the disgorgement of any resulting profits. It is thus essential for U.S. companies doing business abroad (most fashion companies do business abroad) to implement rigid and monitored compliance programs that will alert executives to any improper payments made by employees to third-party agents.
We have seen over the past few years heightened FCPA enforcement by the SEC and the DOJ. Therefore, it is crucial that individuals and corporations subject to the FCPA take certain internal measures to protect against liability under the FCPA. It is a very good practice, for example, for U.S. companies to develop compliance programs that will help insulate the companies from prospective liabilities.
It is also worth writing a few words about the California Transparency in Supply Chains Act (Act) adopted by the California legislature in 2010. The goal of the Act is to ensure that large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains. Since last year, every retailer and manufacturer (as self-identified on the entity’s tax return filed with the California Franchise Tax Board (FTB)) doing business in California that has annual worldwide gross receipts exceeding $100 million must conspicuously disclose on its website the extent to which it does the following:
- engages in third-party verification of its supply chains to evaluate and address the risk of trafficking and forced labor;
- conducts independent, unannounced audits of its suppliers to evaluate their compliance with company standards for trafficking and forced labor in its supply chains;
- requires suppliers to certify that materials incorporated into the product comply with local laws on trafficking and forced labor;
- maintains internal accountability standards and procedures for employees and contractors failing to meet company standards regarding trafficking and forced labor; and
- provides training on trafficking and forced-labor issues to employees with direct responsibility for supply-chain management.
Note that the Act only requires disclosure. It does not require the companies to take action on any of the five enumerated subjects, only to disclose the extent to which it does these things.
3. Manufacturing Arrangements
You cannot and should not manufacture goods without having the proper manufacturing agreements in place with your manufacturing partners. A good manufacturing agreement should cover, among other things, payment terms and conditions, MOQs, samples and whether you will be charged for their developments, deliveries, confidentiality, protection of intellectual property and trade secrets, designs, unauthorized productions and overruns, resolution of disputes, etc. I am always surprised that many clients manufacturing goods in Asia do not have a manufacturing agreement per se with their suppliers.
4. IP Issues
Is your brand protected where your goods are being manufactured? Many smaller U.S. fashion companies register their mark in the U.S., but do not register their mark in the countries in which the goods are being manufactured. Sometimes they neglect, sometimes they forget, and sometimes they simply do not know that they should. Big mistake! If you manufacture goods in China, for example, but do not secure the registration of the mark in China, you are hurting your business and the brand you are attempting to build and develop in the U.S. A trademark in the country in which the goods are being manufactured should always be obtained.