California's new disclosure law to combat human trafficking takes effect January 1, 2012.
What is the law? The California Transparency in Supply Chains Act of 2010 (the "Act") is designed to spotlight human trafficking and forced labor issues and to make information available to purchasers of products and services so that they might make their purchasing decisions with greater knowledge of which companies(1) are actively involved in efforts to eliminate forced labor and human trafficking from their supply chains. The law will have a direct effect on only a small minority of companies, but its secondary effect will be larger and will grow considerably.
Who is covered by the law? Each manufacturer(2) and retail seller(3) doing business in California and having annual worldwide gross receipts greater than $100 million is directly affected.
A company is "doing business" in California if it:
- is formed or domiciled in California;
- achieves sales in California in excess of the lesser of $500,000 or 25% of its overall sales;
- owns real property and tangible personal property in California the value of which exceeds the lesser of $50,000 or 25% of its total real property and tangible personal property; OR
- pays as employment or similar compensation and benefits more than the lesser of $50,000 or 25% of its overall compensation.
What is required of companies subject to the Act? As noted above, the intent of the Act is to make information available. California's chosen vehicle for this availability is the Internet: each covered company must place on its home page(4) a "conspicuous and easily understood link" taking the user to the required information. The required information itself is a statement disclosing at least "to what extent, if any," the retail seller or manufacturer carries out each of the following listed activities (quoted from the Act):
- 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.
- 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. [Obviously, this implies the existence of such standards.]
- 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.
- Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
- 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.
NOTICE: There is no actual requirement to develop, implement, or monitor anti-trafficking and anti-slavery policies.
How does California plan to discover which companies are subject to the Act? The California tax authorities are to select and collect information based on tax returns they have received on or before December 31, 2011 (and each year thereafter), and provide to the California Attorney General at the end of the following November, beginning November 30, 2012, a list of the covered manufacturers and retail sellers.
What is the liability related to violations? Because the intent of the Act is to compel disclosure, the sole remedy is an action by the California Attorney General seeking an injunction to compel compliance. There is no private right of action; no party is authorized by the Act to sue a company based on the company's noncompliance. The Act is not as ineffective as it might first seem, however; noncompliant companies may risk a damaging consumer response, precisely as expected by the California legislature. Companies choosing to comply by reporting that they have no such policies may risk the same sort of response.
What is the effect on companies not covered by the Act? Not being covered directly by the Act may not mean escaping its effects. As many companies directly subject to the Act begin to comply, and particularly as they begin to implement policies and the methods of tracking and reporting their enforcement of those policies, a natural effect will likely be that they will impose requirements for similar policies on their suppliers, on a business-to-business basis. Beginning in 2012 at the latest, many of them will require their suppliers to impose auditable requirements on their own suppliers, and so on to the ultimate sources of products and materials. Thus many smaller companies across the United States and beyond its borders, and many that do not themselves do business in California, will begin to see such requirements in their contracts. As a result, California's seemingly weak and state-centered law will almost certainly have far-reaching indirect effects throughout the directly affected companies' supply chains, both in the United States and abroad. Without imposing a single requirement beyond disclosure, and without attempting to assert any authority over companies not doing business in California, the Act may very well cause self-policing.
(1)For convenience, this notice refers to "companies," but other forms of business entities are also covered by the Act.
(2)A business entity that lists manufacturing as its principal business activity code on its California tax return.
(3)A business entity that lists retail trade as its principal business activity code on its California tax return.
(4)If, against all probability, a company with $100 million in gross receipts has no website, it must provide the information in writing to consumers within 30 days after receipt of a written request for such information.