Corporate Defendants Find a Safe Harbor in California Transparency Litigation

thumbnailA District Court judge in California has dismissed a complaint against Nestlé USA Inc. and Nestlé Purina Petcare Co. (together “Nestlé”) which argued that the company was obligated to inform consumers that seafood in its catfood products may have been sourced from forced labor. Plaintiffs alleged violations of the California Unfair Competition Law, the Legal Remedies Act, and the California False Advertising Law.

Specifically, plaintiffs stated that they would not have purchased the company’s products if they had been informed that the seafood in those products was linked to forced labor, citing specific evidence that certain seafood sourced from Thailand relies upon the use of forced labor. This suit is one of several suits filed against companies in 2015 alleging that the companies’ disclosures regarding human rights concerns in their supply chains are misleading and harmful to corporate consumers, as discussed previously.

In dismissing the case against Nestlé, the District Court found that the California Transparency in Supply Chains Act creates a “safe harbor” for liability under the California Unfair Competition Law. The Court observed that “California has spoken directly to the issue of what disclosures companies must make to customers about potential forced labor in their supply chains” through the Transparency in Supply Chains Act.

Despite that fact that plaintiffs alleged liability on the basis of nondisclosure by the company and plaintiffs’ argument that “such nondisclosure cannot possibly find a safe harbor,” the Court found that “businesses’ responsibilities to inform consumers about the presence of forced labor in supply chains begin and end with the required disclosures” in the Transparency in Supply Chains Act.  The California legislation does not require companies to disclose the existence of actual or potential forced labor in their supply chains.

The Court also considered whether plaintiffs could allege that Nestlé’s statements regarding forced labor are misleading. Reviewing specific statements in the company’s Code of Business Principles, its code of conduct for suppliers, its responsible sourcing guidelines, and its corporate social responsibility report, the Court concluded that “no reasonable consumer who reads the four documents could conclude that Nestlé’s suppliers comply with Nestlé’s requirements in all circumstances.” The Court observed that “[o]n the contrary, Nestlé seems to anticipate a certain level of non-compliance.”  Ultimately, the Court concluded that plaintiffs could not successfully plead a misrepresentation claim.

This dismissal will provide some level of comfort to companies evaluating the legal risks associated with new disclosure requirements.  That said, it is important for companies to evaluate new and previous disclosures in order to ensure that statements are true, capable of being verified, and not likely to deceive the public.

As companies seek to address complex human rights challenges, it can be easy to make statements in public disclosures that are factually accurate but potentially misleading. Noting the analysis in the Nestlé dismissal, information about corporate efforts to address complex challenges, including the enactment of specific expectations for suppliers, can be disclosed in a manner that demonstrates commitment to address hard issues without misrepresenting to consumers the company’s capacity to eliminate all potential harm.

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