California Apparel News

Beginning Jan. 1, California manufacturers and retailers are required to let their consumers and suppliers know what they’re doing about human trafficking.

Senate Bill 657, the California Transparency in Supply Chains Act of 2010, goes into effect at the beginning of 2012. Signed in 2010 by Gov. Arnold Schwarzenegger, the law requires the state’s retailers and manufacturers “to develop, maintain and implement policies related to their compliance with federal and state law regarding the eradication of slavery and human trafficking from their supply chain.”

Retailers and manufacturers are required to post this information about their policies on their website’s home page beginning on the first of the year or face an injunction from the California attorney general. The Franchise Tax Board will provide the attorney general with a list of retailers and manufacturers that are required to comply.

The law is not limited to apparel retailers and manufacturers, but it is applicable for all retailers and manufacturers with annual worldwide sales of $100 million or more and “a presence in California.” A company’s “presence” in California does not have to be large. The law applies to companies that meet the following requirements:

• Be organized or commercially domiciled in California.

• Have sales in California for the applicable tax year that exceed the lesser of $500,000 or 25 percent of a company’s total sales.

• Own real and tangible personal property in California that exceeds the lesser of $50,000 or 25 percent of the company’s total real and tangible personal property.

• Pay compensation to California employees the lesser of$50,000 or 25 percent of the company’s total compensation.

Under the conditions of the law, large manufacturers and retailers with sales of $100 million and more are required to comply if they have stores in California, offices in the state or, potentially, distribution centers in California.

“That’s determined, in large part, by how they identify themselves—as retailer, manufacturer or otherwise—on their California tax return. Any such business is then subject to this law,” said attorney Richard G. Reinis, a partner with Steptoe & Johnson LLP. “It certainly [includes] sales reps and retail stores [in California]. The question of distribution centers is whether it is in business to make a profit. I think the answer to that, generally, is yes. They would file a tax return in California that they are a retailer, so they would be covered.”

What’s required?

The law requires companies to post specific information on their website’s home page. The statement must include five points—dubbed by Reinis as VACIT, an acronym for verification, auditing, certification, (establishing) internal standards and training.

Companies must post information on their website—or provide a prominent and conspicuous link to a page that states the company:

• Has reviewed its supply chain for risk of human trafficking and slavery.

• Has conducted supplier audits. In addition, the company must disclose whether the audits are independent and unannounced.

• Requires certification from its suppliers that they are in compliance with the law.

• Maintains accountability standards for suppliers that do not comply.

• Provides training to employees and management who have “direct responsibility” for supply-chain management.

(A company can post this information on an interior page of its website, but there must be a link to the page prominently featured on the home page.)

Reinis said he is advising manufacturers and retailers to put information at the foot of the company’s home page that says, “Statement on Transparency and Supply Chain Act” or, for out-of-state companies, “Statement on California’s Transparency and Supply Chain Act.”

For companies with multiple brands and websites, Reinis is advising placing the link on all home pages.

But attorney Douglas M. Lipstone, a partner in the Los Angeles office of Manning & Kass, Ellrod, Ramirez, Trester LLP, points out that not all manufacturers have a website. “I know a number of manufacturers that don’t,” he said, adding that the law says in those cases, companies are required to provide the VACIT information in writing within 30 days of receiving a written request for it from a consumer.

Also, it’s not enough to simply post the information. Companies need to update and maintain the information—and ensure that someone can respond to requests for proof of compliance.

“You have to maintain these pages,” Reinis said. “If there’s a question, you have to have someone who owns it in your shop. Someone’s got to be able to respond to inquiries.”

Potential risks

The California Fashion Association has been spreading the word about the law and its requirements to its members.

“Pounding the table is more like it,” said CFA President Ilse Metchek.

One key concern of many industry watchers is the potential for penalties. As the law is written, the “exclusive remedy” for noncompliance is injunctive relief from the attorney general.

“That means if you are in violation of the law, the penalty you pay is that you have to immediately comply,” Reinis said.

However, Metchek said, retailers and manufacturers could face action from private attorneys general—private citizens who can file lawsuits and pursue penalties under California’s Private Attorney General Act of 2004 (PAGA).

Reinis said despite theexclusive provision in SB657, there is a risk of PAGA lawsuits for companies found to be intentionally misleading the public about their compliance with SB657.

“Lawyers have used PAGA legislation to sue and get relief, potentially of millions of dollars, for misleading the public—although I don’t think this would likely happen,” he said. “It seems to me that you’re really exposed at that point to potential damages despite the limitations of the act.”

But, Reinis said, even a company that audits its supply chain but fails to disclose its efforts on its website could face a PAGA action, although the potential damages would likely be less.

“The damages obviously wouldn’t be the same. How are you going to prove damages for failure to disclose?” he said. “I think you’ll spend a lot of money in legal fees trying to defend yourself. You could at least be exposed to potential award of attorney’s fees [and] that could be in the hundreds of thousands. If you haven’t disclosed [your efforts to comply with the law] under the act, it’s been violated.”

Mitchell Silberberg & Knupp LLP—a law firm with offices in Los Angeles, New York and Washington, D.C.—recently prepared and presented a webinar for the CFA covering the requirements of SB657.

MSK attorney Susan Kohn Ross, who led the webinar, also warned that companies not in compliance could face class-action lawsuits, shareholder derivative suits and other shareholder actions.

Manufacturers and retailers that already employ third-party auditors, such as Bureau Vertitas, for monitoring their factories for labor-law compliance can now ask their auditors to certify compliance with SB657.

“Most of the major California companies with worldwide revenue in that [$100 million] range or greater have some sort of labor-compliance auditing in place now,” Reinis said.

The Walmart effect

But even a California company that falls below the $100 million threshold could find itself forced to comply with the law. If a smaller company supplies to a large retailer or manufacturer with operations in California, the company is required to conduct audits and provide certification that it has monitored its operations and supply chain for evidence of slavery and human trafficking.

And, Reinis warns, major retailers with great influence could force all of its suppliers to comply with SB657.

“Walmart is driving the bus for many of my clients, and they aren’t going to be bothered that this does not apply to people with lower than $100 million revenue,” he said. “They won’t care if you have $100 million, $90 million or $9 million. They’re going to say to you, ‘We want you to do this anyhow because we’re required to do it.’ If Walmart requires every supplier to certify to audit to verify to establish internal standards, etc., then it seems to me that everyone is going to have to do this. Every retailer and all their suppliers are going to be forced to do it regardless of size.”

As of press time, Walmart had not added a compliance statement to its corporate website, but the company does have a link on its home page indicating its compliance with California privacy laws, as well as the company’s ethics statement, which includes a broad range of topics from wage and hour compliance to the company’s position on discrimination and harassment.

Levi Strauss & Co. also had not added information regarding compliance with SB657 by press time, but a search on the company’s website turned up a page in the Levi’s online library with the company’s statement in compliance with the five VACIT requirements.

Unanswered questions

Time is running out for retailers and manufacturers to gather the necessary information from their suppliers. Although the California attorney general will not receive a list of applicable companies until late in 2012, any company that does not have the necessary information posted on its website by Jan. 1 could be found in violation of the law.

And questions remain about the law and its reach.

“This is a brand-new law, and it doesn’t go into effect until Jan. 1, so there is a lot of conflicting information,” Reinis said.

One concern is what will happen if a company cannot gather the required materials.

“If you can’t get certification from somebody, do you need to drop them? [The law] doesn’t say that,” Lipstone said.

Another concern is what happens if an audit turns up evidence of human trafficking.

“What do you do then?” Reinis said. “Is there a requirement that you disclose anything that’s been discovered? I don’t see it in the act.”

But if the act is limited to disclosure only, what happens if a company discovers evidence of human traffic, does not report it and sells the goods?

“There are other federal enactments that make that illegal,” Reinis said. “[This legislation could] expose you to other legislative penalties for shipping goods that were made under those circumstances. It’s a literal Pandora’s box. Because it’s brand new, we don’t know how large or small that box is.”

Federal version introduced

For now, SB657’s requirements are limited to companies “with a presence in California.”But a federal version is being considered by Congress. On Aug. 1, U.S. Reps. Carolyn Maloney, Jackie Spier and James McGovern introduced R2759, the Business Transparency on Trafficking and Slavery Act, in the House of Representatives. The federal law, if passed, would require companies to disclose their efforts to identify and address “conditions of forced labor, slavery, human trafficking and the worst forms of child labor within the company’s supply chains” in their annual reports to the Securities and Exchange Commission.

“That sounds like the kind of legislation that has a real chance of passing,” Lipstone said. “That’s the sort of thing you don’t want to vote against. It’s going to be very bipartisan. I can't see that getting tied up for a very long time.”

Defining the problem 

On Jan. 1, Senate Bill 657, the California Transparency in Supply Chains Act of 2010, goes into effect.

Under the new California law, manufacturers will be required to monitor their supply chain for instances of slavery and human trafficking in the same way many are already monitoring for labor-law violations.

On Dec. 21, Star magazine ran a story alleging several apparel and footwear collections sold under the Kardashian family’s labels (K-Dash by Kardashian, Kris Jenner Kollection and ShoeDazzle) were made under sweatshop conditions in the Guangdong region of China. The story did not indicate forced labor or slavery was involved. Instead, the article alleged wage and hour violations and employment of underage workers.

The Kardashian news followed closely on the heels of another report—this one involving forced labor in West African nation of Burkina Faso. A Dec. 14 story in Bloomberg News profiled a 13-year-old Burkina Faso girl who was forced to pick cotton, which ultimately ended up in Victoria’s Secret underwear. According to the Bloomberg story, the Victoria’s Secret underwear was labeled “Made with 20 percent organic fibers from Burkina Faso.”

The Alliance to Stop Slavery and End Trafficking (ASSET), an advocacy non-government organization formed to eradicate slavery, defines slavery as “when one person completely controls another person, uses violence or violent threat to maintain control, exploits them economically and pays them effectively nothing.” The organization defines trafficking as “a process of enslaving someone.”

“If you consider the fact that there are 12 million slaves, by estimate, in the world ... the estimates are that as many as a million are in the U.S.,” said Richard G. Reinis, a partner with Steptoe & Johnson LLP, citing figures provided by the Coalition to Abolish Slavery and Trafficking (CAST), a Los Angeles–based anti–human trafficking organization.

Reinis worked as co-counsel with CAST to represent a person who was trafficked to the United States from Mexico and forced to work for 12 years. Reinis’ client did not work in the apparel industry, and the attorney acknowledged that the problem of trafficking is not limited to the apparel industry.

“This isn’t something that’s indigenous to the apparel industry at all,” he said, adding that his firm is currently helping several electronics companies ensure they are complying with SB657.

For many companies, the supply chain is vast, spread over many companies, countries and continents.

“You’re so far removed from this that you say, ‘How could I possibly have known?”” Reinis said. “This legislation is aimed at forcing you to do a better job.”—A.A.N.