New California Transparency in Supply Chain Act Has Implications for Wholesaler-Distributors
- January 2012
Under the new California Transparency in Supply Chains Act, effective, January 1, 2012, any retail seller or manufacturer doing business in California and who has annual global gross receipts in excess of $100 million, must: (1) disclose the company’s “efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale,” and (2) post this disclosure on the company’s website with a conspicuous link to the required information on the home page of the company’s website. The Act does not require companies to take remedial action to combat slavery or human trafficking in their supply chain or cease doing business with anyone. Through disclosure, the law seeks to encourage corporate responsibility and have companies voluntarily monitor their supply chain.
A “retail seller” is any business entity with retail trade as its principal business activity code, as reported on the entity’s California tax return. A “manufacturer” is any business entity with manufacturing as its principal business activity code, as reported on the entity’s California tax return. A company is “doing business” in California if: it is organized or domiciled in the state; its annual sales in the state exceed the lesser of $500,000 or 25 percent of total sales; its property (real and tangible personal) in the state exceeds the lesser of $50,000 or 25 percent of total property; or its paid personnel compensation in the state exceeds the lesser of $50,000 or 25 percent of total personnel compensation.
The disclosure must provide information regarding to what extent (if any) the company does the following:
• Engages in verification of product supply chains to evaluate and address risk of human
trafficking and slavery (specifying whether the verification was conducted by a third party);
• Conducts audits of suppliers to evaluate supplier compliance with company standards
for trafficking and slavery in supply chains (specifying whether the verification was an
independent and unannounced audit);
• 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 human trafficking; and
• Provides company employees and management who have direct responsibility for supply
chain management with training on human trafficking and slavery, particularly with respect
to mitigating risk within the supply chains of products.
The exclusive remedy for a violation of the Act is an action for injunctive relief (no fines or penalties) brought by the California Attorney General, although the Act does not limit or eliminate remedies available for a violation of any other state or federal law. The Act may be viewed at:
Implications for Wholesaler-Distributors and others in the Supply Chain
The fact that a wholesaler-distributor is not a “retail seller” or a “manufacturer”—and thus is not covered by the Act—does not mean the Act will have no effect on the wholesaler-distributor. A wholesaler-distributor’s customer may well be a covered retail seller or a covered manufacturer, or the customer may have voluntarily adopted its own “supplier code of conduct” or standards in a vendor agreement that require its suppliers to have policies banning the use of slavery or human trafficking in its supply chain.
As a condition of doing business, those customers may require the wholesaler-distributor (and others in the supply chain) to adopt policies that prohibit the use of slavery or human trafficking in the wholesaler-distributor’s direct supply chain. Further, the customer may require a wholesaler-distributor to certify that it prohibits the use of slavery or human trafficking in its direct supply chain and adequately enforces this prohibition.
In short, the California law will undoubtedly increase the attention that companies in the supply chain give to up-stream suppliers and the policies those suppliers have to prohibit the use of slavery and human trafficking in the supply chain. Each company’s effort to curtail human trafficking and slavery in its supply chain needs to be tailored to fit its products, markets and customer base, with guidance from your professional advisors.