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Is Supply Chain Due Diligence General Corporate Activity and Why Does that Matter? Supreme Court Decision Leaves Open Questions on the Alien Tort Statute

Is Supply Chain Due Diligence General Corporate Activity and Why Does that Matter? Supreme Court Decision Leaves Open Questions on the Alien Tort Statute Background Image

On June 17, 2021, in Nestle USA Inc. v. Doe, the United States Supreme Court reversed a Ninth Circuit decision that would have allowed foreign cocoa workers to pursue claims against Nestlé USA, Inc. (Nestle), Cargill, Inc. (Cargill) and others for alleged human rights abuses committed by foreign suppliers under the Alien Tort Statute (ATS). Companies reading this opinion might expect it to provide some protection from lawsuits alleging supply chain human rights violations, but it is worth noting that the scope of Supreme Court’s decision remains unclear, particularly with regard to companies’ domestic supplier diligence programs.

For additional context on the Supreme Court’s decision, the ATS is a jurisdictional statute that allows U.S. courts to hear claims brought by aliens for torts. The Nestle plaintiffs brought claims under the ATS against the defendants based on allegations that cocoa farms in the Ivory Coast made them work as forced child labor to produce cocoa approximately 15 years ago, and that the defendants knowingly aided the cocoa farms’ actions by providing them with technical and financial resources in exchange for exclusive rights to purchase cocoa. The plaintiffs attempted to justify a domestic application of the ATS by observing that the defendants made all of their major operational decisions regarding cocoa purchases in the U.S. The Supreme Court concluded that that was not enough: Plaintiffs must allege more facts than mere “general corporate activity” if they want to pursue a domestic application of the ATS.

While some more common situations (e.g., a decision is made in the U.S. to engage with a foreign supplier who eventually becomes subject to allegations of human trafficking or forced labor) now appear unlikely to support an ATS action, the Supreme Court’s failure to define or provide examples of what kinds of actions would constitute more than “general corporate activity” means that decision-making more directly related to the human rights abuses might be enough. Consider grossly (or even willfully) negligent due diligence programs. For example, what if a plaintiff alleges that a company discovered actual evidence of slavery in its supply chain during a domestically conducted diligence exercise, but then it decided to do nothing about the violation?  That specific decision to turn a blind eye to forced labor may very well extend beyond the “general corporate activity” described in the Supreme Court’s decision. Similarly, a decision to act on diligence findings in an ineffective way may constitute more than general corporate activity.

After Nestle, the question still left open is whether specific decisions or actions either blessing or willfully ignoring known human rights abuses could support a domestic ATS claim. Accordingly, companies would do well to continue to take their diligence efforts seriously, even after the Nestle decision.

Even assuming such decisions are not enough to support an ATS claim, companies should also keep in mind that there are other risks associated with weak due diligence programs. Other statutes besides the ATS, such as the Trafficking Victims Protection Reauthorization Act of 2003 (TVPRA), may still subject corporations to domestic liability for indirect involvement with slavery to the extent they have provisions with extraterritorial application. A case under the TVPRA is currently pending before the Federal District Court in Washington, D.C., and a hearing on a pending motion to dismiss that lawsuit is set for July 8, 2021.

Finally, and maybe most importantly, the Nestle decision also does not mitigate the social costs associated with human rights violations abroad, either for businesses and their investors or for the communities in which those violations occur. Lax supplier auditing and compliance procedures may result in the loss of a company’s social license to operate should a particularly damning story come to light about human rights violations in its supply chain.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.