Last week, we posted about the newly-filed consumer class action against Costco in federal court in San Francisco, based on Costco’s disclosure under the California Transparency in Supply Chains Act.  As we noted, this is the first case of its kind, in which plaintiffs’ lawyers are seeking injunctions, restitution and other damages for a putative class of consumers based on claims of unfair business practices stemming from a company’s alleged failure to ensure that its business practices match up with its public disclosure.  But the Costco case certainly won’t be the last one.  Indeed, just this week, a similar consumer class action was filed against Nestle, alleging that its pet food products also included seafood farmed using slave labor.

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In our post last week, we discussed how the new laws that require companies to make disclosures about their supply chain operations mean that it is important not only to make a proper disclosure, but also to enact a robust compliance program.

This week, we’d like to summarize some of the real world considerations bearing on what will likely drive further litigation against companies for alleged failure to operate consistent with their public statements.  Hopefully, that may help prevent such class actions or prepare for defeating them.

Defending consumer and shareholder class actions is difficult and fraught with risk.  Often, these suits are “one-party litigation,” because if the plaintiffs’ law firms have chosen a sufficiently uncontroversial person to serve as the nominal plaintiff, the defendants are entirely the focus of the proceedings.  The nominal plaintiffs’ conduct is often irrelevant; usually, all someone has to do to be a plaintiff is buy some of the product (for consumer class actions) or buy some stock (for shareholder class actions).  This is often done in coordination with the real backers of the lawsuit.

Moreover, in consumer and shareholder class actions stemming from corporate social responsibility issues, negative publicity is often drummed up to drive and compound the litigation challenges that a company faces.  The new Costco case illustrates the point.

ShrimThe complaint in the new Costco case spends about 40 of its 50 pages alleging that slave labor exists in certain fishing areas of Southeast Asia.  About half of those pages are replete with photographs and quotations from multinational media and NGO documentaries and commentaries – about slavery, not about Costco, to elicit outrage.  The complaint includes photographs of packaged shrimp on Costco shelves in California, taken on the last day before the complaint was filed – to connect the company with the foreign societal problem and to create a sense of urgency locally.

And then, in what will be both a theme and an organizing principle in this new sort of litigation, the complaint boldly alleges a short sentence 42 pages into the depiction of a centuries’ old problem that multiple governments and NGOs are combating – that “Costco could remedy this situation by enforcing its supplier standards, which prohibit slave labor and human trafficking.”

The legal bases for this type of litigation are old ones – longstanding state unfair business practices laws and consumer protection laws.  In California, for decades, plaintiffs’ counsel have been known for treating those laws as particularly flexible anytime a new opportunity for them can be thought up.

What is new here is the combined use of those old laws and the new California Transparency in Supply Chains Act.  California’s longstanding unfair business practices act allows a claim to be brought against anyone who engages in “unlawful” business practices.  By seeking to stand on the shoulders of the new California Transparency in Supply Chains Act and the reports of media and NGOs, the complaint in the new Costco case alleges that the company’s practices “are unlawful in that their conduct in sourcing and selling farmed prawns actively contributes to the use of slave labor in violation of bans,” ranging from the state’s Penal Code to U.S. federal law to the UN Declaration of Human Rights.  And only a little more specifically, the complaint alleges that “Costco’s conduct in representing that it enforces policies against the use of slave labor in the farming of the prawns it sells is a violation of” the new California Transparency in Supply Chains Act — and therefore in turn is alleged to give rise to a claim under the state unfair business practices law.

Class action litigation is sometimes brought as “impact litigation.”  This is litigation meant to not only obtain a large dollar award for consumers and a large attorneys’ fee award for the law firms that brought the case, which are certainly huge motivating factors (indeed business models for some plaintiffs’ law firms), but are also touted as a way to address a broader societal problem.

Each of those motivating factors – the lure of money for consumers, the lure of money for plaintiffs’ attorneys’ fees, and the lure of impacting a broader societal problem – drives cases like this.  More such cases seem likely, as others seek to stand on the shoulders of media and NGO reports with new lawsuits designed to pressure U.S. businesses in ways to address societal problems that distant governments have not fully addressed; some problems for centuries.

To prevent being targeted in such cases, and/or in preparation for defeating one if brought, it is important for companies to be able to demonstrate reasonable and good faith control and monitoring of their supply chains.  Perfect supply chain compliance with corporate social responsibility policies and goals may not be able to be proven (and may not be achievable).  But being able to show that a company implemented robust procedures, engaged in diligent efforts to follow and enforce those procedures, and monitored regularly, will be important to prevent being targeted with this new class action litigation – or if targeted, then in mounting a successful defense.  Hiring the right supply chain/ industry experts, to show what the best practices in industry are, will likely also be pivotal.Gavel

More class actions like the new Costco and Nestle cases seem likely, in California and elsewhere.  Avoiding them if possible, and defending them when brought, will be a priority.