Corporate Social Responsibility Disclosures: Fodder for Class Action Lawsuits? 

Sweat Shop

Claims and investigations based on corporate social responsibility (“CSR”) disclosures are becoming increasingly common in the U.S. and internationally. Numerous theories are advanced in claims asserted for allegedly untrue, misleading or incomplete reports and disclosures about a company’s social responsibility initiatives and accomplishments.  This article highlights a class action lawsuit in California now on appeal in the U.S. Ninth Circuit Court of Appeals related to disclosures under the California Transparency in Supply Chains Act 2010 (“CTSCA”). The case is an example of increased litigation potential arising from CSR reports and disclosures.  Companies making such reports and disclosures are encouraged to consult with counsel about potential litigation exposure.

CSR and the CTSCA

The CTSCA requires retail sellers and manufacturers to “disclose to what extent, if any,” they take steps to “eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.” Cal. Civ. Code, § 1714.43(a)(1). The law applies to retail sellers and manufactures doing business in California that have annual worldwide gross receipts of more than $100 million. Cal. Civ. Code § 1714.43(a)(1).

Class Actions

The CTSCA does not expressly include a private right of action. See Cal. Civ. Code § 1714.43. Even so, numerous lawsuits have been filed in California alleging that covered companies’ disclosures under the CTSCA were incomplete, misleading, and/or deceptive in violation of other California consumer protection statutes.

For example, in Melanie Barber, et. al. v. Nestle USA, Inc., et al, 154 F. Supp.3d 954, 959 (C.D.Cal. 2015), Nestle USA, Inc. (“Nestle”) did not disclosure on its Fancy Feast products that some of the seafood used to make Fancy Feast was likely produced by forced labor in Southeast Asia. Barber v. Nestlé USA, Inc., 154 F. Supp. 3d 954, 957 (C.D. Cal. 2015). The plaintiffs did not allege that Nestle failed to comply with the CTSCA. Id. Instead, plaintiffs argued that Nestle was obligated to make additional disclosures at the point of sale regarding the likelihood that a given can of Fancy Feast product contained seafood sourced by forced labor. Id.

Consumers alleged that they would not have purchased the product if they realized that some of the seafood contained in Fancy Feast may have been sourced from forced labor. Id. The consumers argued that Nestles’ failure to make that disclosure was unlawful under the California Unfair Competition Law, California Legal Remedies Act, and the California False Advertising Act. Id. Nestle argued that it had a “safe harbor” from the plaintiffs’ state law claims created by the CTSCA. Id. at 962. Judge Cormac C. Carney agreed that the plaintiffs’ claims were barred by the safe harbor doctrine and therefore dismissed the case. Id. at 964.

Judge Carney’s decision is currently on appeal to the United States Court of Appeals for the Ninth Circuit. Melanie Barber, et al v. Nestle USA, Inc., et al, Docket No. 16-55041, Argued and Submitted, December 7, 2017 ECF No. 61 (9th Cir.). The case was consolidated with other cases making similar allegations against other companies. Oral arguments for all of those cases were heard in December 2017.

Compliance with the CTSCA

Companies subject to the Act must post disclosures related to five specific areas: verification, audits, certification, internal accountability, and training. Cal. Civ. Code § 1714.43(c). The disclosure must be accessible by a “conspicuous and easily understood” link on the organization’s website. Cal. Civ. Code § 1714.43(b).

The CTSCA “does not mandate that business implement new measures to ensure that their product supply chains are free from human trafficking and slavery.” State of California, Department of Justice, “The California Transparency in Supply Chains Act, A Resource Guide (2015).”  Instead, “the law only requires that covered businesses make the required disclosures – even if they do little or nothing at all to safeguard their supply chains.” Id.; see also American Bar Association Section of Labor & Employment Law, International Labor & Employment Law Committee Midyear Meeting 2018, Business and Human Rights: Threading the Needle of Multiple Jurisdictions in Supply Chain Integrity, Including Human Trafficking Compliance (May 10, 2018).

For more information, contact Steve O’Day.