Responsible Sourcing Obligations and Tools for Cleaner Supply Chains

I. INTRODUCTION

Governments are beginning to impose stringent regulations to prevent products tainted by human rights abuses from entering their markets. Companies are now becoming aware that aspirational goals to clean their supply chains are becoming mandatory. They are working with professionals to assess their risk and build frameworks to establish a responsible supply chain. Legal professionals can make use of the Model Contract Clauses when developing a contractual framework for responsible sourcing.

II. REGULATORY LANDSCAPE

The modern enforcement regime to curb human rights abuses in global supply chains traces back to the enactment of the California Transparency in Supply Chains Act of 2010 (Transparency Statute). It required all retailers and manufacturers doing business in California with an annual worldwide gross revenue of at least $100 million to publicly disclose their efforts toward eradicating modern slavery from their supply chains. These disclosures included submitting audits on human trafficking, certifications from direct suppliers, and trainings for employees on responsible supply chain management.

While this didn’t impose any concrete obligations on companies to implement responsible supply chain policies, the thinking behind the Act was that disclosure and transparency would lead to better practices. While the Act has not led to a wave of companies changing their practices, it was a harbinger for bolder steps from governments.

The U.S. government had a long policy prohibiting the importing of products produced using forced labor through the enactment of Section 307 of the Tariff Act in 1930. However, the “consumptive demand” clause—which allowed for an exemption where no comparable product was produced in the US—acted as a gaping hole to enforcing Section 307 such that few regulatory steps were ever taken.

Importers viewed the potential presence of human rights abuses in their supply chains as constituting an acceptable business risk that was far outside their sphere of influence. There still existed tens of millions of people in supply chains who worked in conditions amounting to modern slavery.

In 2015, the US Congress removed the “consumptive demand” clause through the Trade Facilitation and Trade Enforcement Act, and the U.S. Customs & Border Protection Department (USCBP) began enforcing Section 307 through the issuance of Withhold Release Orders (WROs). This meant that U.S. importers now faced a heightened risk that their goods might be seized at port and prevented entry into the U.S.

USCBP has substantially increased the number of WROs issued since Congress removed the “consumptive demand” clause in 2015, which represents a reasonable risk to importers. Still, USCBP has been surgical in its approach to issuing WROs, focusing on companies or product categories that had substantial evidence for the presence of forced labor. However, the entry into force of the Uyghur Forced Labor Prevention Act (UFLPA) has significantly broadened the risk exposure that importers face.

The UFLPA creates a rebuttable presumption that any goods that have a nexus to Xinjiang, Uyghur labor, or a list of prohibited companies will have been produced using forced labor and thus prevented from entry into the U.S. pursuant to Section 307.

There is no de minimis exception to the UFLPA, which means that if a single button in your jacket is sourced from a factory that uses Uyghur labor, then you will be subject to the Act.

The territorial scope is also considerably broad because there have been movements of Uyghur peoples throughout China as part of a government-sponsored poverty alleviation program. This means that even if your supplier is based on the Chinese coast, hundreds of miles from Xinjiang, your goods might still have been produced using Uyghur labor and would thus be subject to the UFLPA.

Given the expansive scope of the UFLPA, virtually any company that imports its products from Asia, or anywhere in the world, must carefully consider its supply chain and the potential risk of seizure or disruptions.

The two key questions for companies to consider with respect to UFLPA compliance are: (1) are my goods subject to the UFLPA; and (2) if so, do I have clear and convincing evidence that my goods were not produced using forced labor?

To address the first question, a preliminary due diligence exercise must be undertaken to map your supply chain and investigate your suppliers. You must assess whether each tier of your supply chain has ties to Xinjiang, prohibited suppliers, or Uyghur labor.

Assuming your company can map its supply chain and there is no nexus to Uyghur labor, you must also establish a reliable methodology for supply chain tracing to prove that a specific shipment conforms with the relevant supply chain map.

If your goods are subject to the Act (or you cannot demonstrate that your goods are not subject to the Act), then you must consider whether you can compile sufficient credible evidence to defeat the rebuttable presumption that your goods were produced using forced labor. While USCBP has not yet initiated many enforcement actions, it has made clear that the evidentiary burden is very high—and it has repeatedly noted the increasing difficulty in obtaining reliable information as to the presence of forced labor for products that are subject to the Act.

This means that determining whether your products are subject to the Act will be a key consideration for most importers and requires that they establish a reliable framework to understand their supply chain and the potential risks for human rights abuses within the same. My firm is one of a growing number of law firms that helps companies establish responsible sourcing frameworks and supply chain maps.

We should note that the U.S. is not the only jurisdiction taking steps to prevent tainted products from entering its market. There are several countries in the EU, including Germany, France, and the Netherlands, that have enacted laws requiring companies of a certain size or presence in their markets to actively perform human rights due diligence in line with the guidance set out by the Organization for Economic Cooperation & Development and the United Nations Guiding Principles on Business & Human Rights.

There is even an EU-wide draft Directive on Human Rights Due Diligence that was released by the European Council earlier this year. The mandatory requirement to conduct human rights due diligence under the proposed Directive would apply to EU companies of a certain size and even non-EU companies with a significant presence in the region.

The U.S. approach has focused on preventing tainted goods from entering the market but has been less proscriptive with how a company operates and investigates its supply chains, whereas the EU has focused more on setting out requirements for investigating & remediating supply chain issues. There are benefits to either approach, but both regulatory environments effectively require companies with international supply chains to develop a framework for investigating their supply chains and obtaining credible information about how their products are made.

III. THE MODEL CONTRACT CLAUSES

The Model Contract Clauses (MCCs) were produced by a working group of the American Bar Association’s Business Law Section (Working Group). They were designed to operationalize the principles found in the United Nations Guiding Principles on Business and Human Rights, particularly human rights due diligence, remediation, and integrating best practices throughout your organization.

The drafters of the MCCs wished to address the problem of a perfectly stitched soccer ball that was produced using child labor by establishing a contractual framework so that “process defects” would be addressed in similar ways as “product defects.”

The MCCs are a set of 33 template contract clauses that are pan-industry and fully modular. They can be inserted into supply agreements to ensure that the parties establish effective human rights due diligence and have a framework for remediating problems and engaging stakeholders, monitoring compliance, and resolving disputes when they arise.

They provide for a company to establish a supplier code of conduct reflective of the relevant concerns of the organization which is referred to as Schedule P. The MCCs also set out a series of buyer responsibilities called the Buyer Code of Conduct (or Schedule Q).

The previous approach centered around suppliers signing a series of unilateral representations and warranties, which often devolved into a tickbox exercise where the supplier believed that signing the document was more important than actually ensuring its obligations were honored.

The system of supplier codes of conduct was sufficient during a time when businesses saw little risk of exposure for human rights issues. But given the new regulatory approach, companies must take effective steps to prevent human rights abuses in their supply chains. They would do well to ensure their supply contracts reflect this new approach and operationalize practices such as human rights due diligence.

You can learn more about the MCCs at the ABA webpage. The Working Group is also producing a series of educational modules to be hosted by the Association for Corporate Counsel. Earlier this year, the International Law and Immigration Section organized a webinar regarding the MCCs and the Buyer Code of Conduct.

IV. CONCLUSION

There are a number of tools at a company’s disposal once it chooses to build a responsible supply chain framework. One effective tool to operationalize human rights due diligence are the MCCs.

Hopefully, California can continue leading the way toward eliminating human rights abuses from supply chains. Perhaps the California legal community might find it useful to organize a group of lawyers committed to business and human rights to provide guidance on how to bring California’s Transparency Statute in line with the more robust European approach or to consider other effective means to ensure companies do their part to rid the world of modern slavery.

Patrick Miller is the founding attorney of Impact Advocates APC, a law firm focusing on international commercial disputes and responsible supply chains. He is a strong advocate for social impact companies and is passionate about resolving their commercial disputes through mediation, arbitration, or litigation. He also assists companies in creating a framework for responsible supply chain practices. He is involved in the business and human rights legal community and recently began working with an ABA Business Law Section working group that has developed a comprehensive set of contractual provisions to address potential human rights violations in international supply chains.