Canada-U.S. Blog Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

California State Legislature Enacts Supply Chain Security Law

Posted in Aerospace & Defence, Agriculture, Cross-border deals, Immigration law, State Governments, Transportation, Uncategorized

Are you covered by S657 – the new California law requiring retailers and manufacturers to inform the public about their efforts to combat slavery and human trafficking? Whether or not you think the California Legislature has improperly stuck its nose into international affairs, the fact remains the law takes effect on January 1, 2012. Human trafficking and slavery are crimes and this law seeks to let consumers have information which may influence their buying decisions.

If you have operations within California, there is no wiggle room. You must comply. What about if you do not have physical operations in California? What happens if you only sell your products into California? First, you cannot rely on the usual analysis of whether or not you do business in the state. Wrigley (505 U.S. 214 (1992)) and its sales force analysis do not frame the discussion. The oft-used rule of thumb of not being required to file a tax return in California also will not get you off the hook. The law is written to define doing business in California by reference to Section 25120 of the Revenue and Taxation Code (R+TC).  If you are organized or domiciled in California, you have no option but to comply. However, if you think you do not have a presence in California, guess again. This R+TC provision may still encompass you.  Do you have sales (including by agents and independent contractors) within California which total $500,000 or 25% of your total sales? Do you have real property and tangible personal property worth $50,000 or 25% of your total real property and tangible personal property? Still saying no? Here is the catch-all – do you pay compensation (“wages, salaries, commissions and any other form of remuneration paid to employees for personal services.” See R+TC 25120.) of $50,000 or 25% of your total compensation to those residing in California? If you answered yes to any of these questions, you must comply with this law.

So, now that you know you are included, what is next? The requirements are two-fold – put information on the home page of your website and have a robust compliance program that meets specific mandates. The information on the home page addresses how your company is combating human trafficking. You are permitted to put a link on your homepage which takes the reader to a different section of your website where those details are located, but the initial link must be on your homepage. Companies which do not have websites must respond to requests for such information within thirty (30) days of receipt. 

The required details indentify what your company is doing with its supply chain to “evaluate and address risks of human trafficking and slavery.” To the extent the evaluation was not conducted by a third party, that fact must be stated. Suppliers must be “audited” to evaluate their compliance with company standards to combat human trafficking and slavery. If the audit was not independent and unannounced, that fact must also be disclosed. Direct suppliers must “certify” that “materials incorporated into the product” comply with their local laws. The company must also maintain “internal accountability standards and procedures” for contractor employees who fail to meet company standards and provide training to company employees and management with direct responsibility for supply chain management, especially with respect to “mitigating risks” in the supply chain.

If a company is found to violate these requirements, only the California Attorney General may seek enforcement and then only in the form of an injunction, although other remedies which exist under the law remain available. In other words, you may still get sued by third parties, but on other legal theories. The Franchise Tax Board will yearly provide the Attorney General with a list of retailers and manufacturers who must comply.

For those companies not already members of the Customs-Trade Partnership Against Terrorism (C-TPAT) or whose direct suppliers are not currently part of their C-TPAT validated or certified supply chain, now is the time to change that. While C-TPAT and Authorized Economic Operator (AEO) corresponding international program members design their programs to address supply chain security focused on security of goods and data, those provisions in your security plan which deal with qualifying your suppliers and the steps they have in place to vet their employees, including making sure there are no under age employees and that proper working conditions and pay exist and are being followed, will be the basis for certifying compliance with the California Transparency in Supply Chain Act of 2010.

Whether you are directly impacted or supply those who are, now is the time to get started implementing the necessary steps. January 1, 2012 will be here shortly.