Cocoa Beans

The continuing use of child and forced labor in parts of the world is, without question, a humanitarian tragedy. Less clear, though, is whether consumer class actions in the United States are a suitable tool for addressing this problem.

Should retailers and manufacturers be subject to suit under consumer protection statutes if they fail to disclose the difficult-to-quantify risk that their suppliers—or their suppliers’ suppliers—may use forced labor? Do these companies have a legal duty to disclose such risks directly on their products’ labels and packages? And if so, what is the limiting principle here—what types of information must a company disclose on the limited “real estate” of its products’ packaging, and which can it safely omit?

A recent series of decisions by California federal courts has supplied much-needed clarity. The latest two, decided just last week in the Northern District, reaffirm the emerging consensus: California’s consumer protection statutes generally do not require that companies disclose all human rights violations at the farthest reaches of their supply chains on their products’ labels and packages.

The analysis is far different, though, where companies have made affirmative representations about their efforts to combat human rights abuses—as required, for example, by California’s Transparency in Supply Chains Act. The logic of these decisions is worthwhile homework, then, for any retailer or manufacturer doing business in California.

Defining the Duty to Disclose: The Court’s Decision in McCoy and Dana

On March 29, 2016, the Northern District granted dismissal in a joint decision in McCoy v. Nestlé USA and Dana v. The Hershey Company. The two cases were parallel class actions charging that the defendants, both chocolate manufacturers, had failed to disclose labor abuses in their supply chains—specifically, the widespread use of child and slave labor by cocoa producers in Côte d’Ivoire.

In dismissing both complaints, the McCoy/Dana court arrived at the same result the Central District has reached in similar cases—including another class action against Nestlé, Barber v. Nestlé USA—but followed different reasoning to get there. Instead, citing the Northern District’s recent decision in Hodsdon v. Mars, Inc.—another class action brought by the same attorneys and making the same allegations against another chocolate manufacturer—Judge Joseph Spero held that neither company had an “affirmative duty to disclose severe labor abuses in its supply chain on its product labels.”

The court did not deny the importance of this information, nor that some consumers might “place less value on a product produced from a supply chain involving severe labor abuses.” But “there are countless issues that may be legitimately important to many customers,” Judge Spero reasoned, “and the courts are not suited to determine which should occupy the limited surface area of a chocolate wrapper.”

As the court explained, “some bright-line limitation on a manufacturer’s duty to disclose is sound policy, given the difficulty of anticipating exactly what information some consumers might find material to their purchasing decisions and wish to see on product labels.” Information related to product safety, for example, falls within that mandatory duty to disclose; labor abuses and human rights violations, while no doubt important, do not have the same degree of urgency or primacy under California law.

Key Caveat:  How Companies Can Assume a Duty to Disclose

In a qualification that could prove very important for companies doing business in California, though, the decision also suggested that companies could self-impose a duty of disclosure by making public statements about their human rights record or efforts to ensure compliance by their suppliers. This is an important caveat, as many companies make such statements regularly—either voluntarily or to satisfy statutory requirements.

Indeed, California’s Transparency in Supply Chains Act mandates that Barber v. Nestle Hodsdon v. Mars Dana v. Hershey McCoy v. Nestle certain companies doing business in California must disclose on their websites what measures, if any, they are taking to ensure their suppliers comply with human rights standards. These requirements apply to any company that (1) identifies itself as a retailer or manufacturer on its California tax return and (2) records more than $100 million in annual gross receipts worldwide.

The Act itself only authorizes California’s attorney general—and not private plaintiffs—to sue to compel companies to fix inadequate or inaccurate disclosures under the law. But California’s Unfair Competition Law is expansive enough to allow consumers to bring class actions seeking compensation based on such violations. The McCoy/Dana decision, then, only confirms that companies doing business in California should take care to ensure the accuracy of their disclosures and document their underlying due diligence.

Photo courtesy of Flickr/Indi Samarajiva