California Transparency in Supply Chains Act of 2010 When the California Transparency in Supply Chains Act of 2010 goes into effect on January 1, 2012, it will bring increased disclosure requirements to large companies doing business in California. The Act will not require these companies to engage in any affirmative conduct other than these disclosures, as the goal of the Act is to provide better visibility into the efforts of companies to ensure that their supply chains are free from slavery and human trafficking.

  1. What Companies Are Directly Subject to the Act?

Companies doing business in the state of California1 with more than $100 million in worldwide gross receipts2 who have either “manufacturing” or “retail trade” listed as their principal business activity code3 on their California tax return must comply with the requirements of the Act.

  1. What Is Required of Companies Directly Subject to the Act?

Companies falling under the requirements of the Act must disclose their efforts to eliminate slavery and human trafficking from their supply chain. If the company has a website, it must post this information in a location accessible from a clear and conspicuous link on its homepage. If it does not have a website, the company must make this information available within 30 days of any written request by a consumer.

A subject company must disclose to what extent it 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 shall 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 shall 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.4

It is important to note that a subject company is not required to actually undertake any of the above activities. The Act merely requires a disclosure of the extent, if any, that the company does undertake them.

  1. What Companies Are Indirectly Subject to the Act?

Any supplier forming a link in the “direct supply chain” of a company subject to the Act likely will be required by that company to assist it in complying with the Act. “Direct supply chain” is not defined in the Act, nor is it defined elsewhere in the California code so that an intended definition may be determined from an alternate source. Given the broad scope of the Act, it is likely that the phrase would be broadly construed such that, if the company is not directly subject to the Act, its packaging would be included in the “direct supply chain” of its customers.

Suppliers not subject to the act but in the direct supply chain will be indirectly subject to the Act’s disclosure requirements. These suppliers likely will be asked to certify that their components comply with laws regarding human trafficking and slavery. They also may be asked to submit to unannounced audits by independent inspection bodies to verify their compliance with these laws.

  1. What Is the Penalty for Noncompliance with the Act?

The exclusive penalty for a directly subject company that is not compliant with the Act is an action brought by the state attorney general for injunctive relief.5 The Franchise Tax Board shall make available to the attorney general a list of retail sellers and manufacturers required to disclose efforts to eradicate slavery and human trafficking by November 30, 2012, and each November 30 thereafter.