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What Does It Mean When the Whole World Just Learned About How Important Supply Chains Are?

What Does It Mean When the Whole World Just Learned About How Important Supply Chains Are? Background Decorative Image

Until recently, most consumers have given little thought to the supply chains that bring groceries to grocery store shelves. However, in the face of ongoing COVID-19 disruptions, anyone who has made a grocery run for things like chicken or toilet paper has seen the risks facing our supply chains. The increased attention to supply chains from the public will likely spur more attention from investors and the government. With this additional scrutiny, companies would be wise to audit their own supply chains and pay particular attention to circumstances that could interfere with them, such as poor labor practices or human rights violations.

In a recent online poll by Vinson & Elkins, only 37% of the energy businesses polled had audited their supply chains. Given that the energy industry works in many parts of the globe where human rights violations (including child labor and forced labor) remain common in the supply chains for necessary items — sometimes for items as basic as the groceries used by the workforces stationed in those challenging places — more companies need to start auditing their supply chains. Investors, the public, and the courts are beginning to ask whether companies have taken the appropriate steps to ensure that their supply chains are not participating in human rights abuses.

For our part, we are seeing more claims against companies where supply-chain diligence has allegedly failed. Where companies have taken no steps to regulate their labor and materials suppliers, the effects of such a lawsuit being brought against a company can be devastating.

Two recent cases illustrate the types of claims that might be asserted against companies for failing to monitor their foreign supply chain: Here, in the U.S., Doe 1 et al. v. Apple Inc., and to the north in Canada, Nevsun Resources v. Araya.

In Doe 1 et al., more than a dozen unnamed plaintiffs sued several major U.S. corporations that use cobalt in the production of their products’ lithium-ion batteries, claiming that each defendant had knowingly benefitted from the use of forced child laborers in cobalt mines in the Democratic Republic of Congo. While the case remains in the earliest stages of litigation, the U.S. statute that the claims are brought under has a clear extra-territorial jurisdiction provision, which will predictably make it more difficult to remove the cause of action from U.S. courts on jurisdictional grounds.

The Nevsun case has proceeded much further in Canadian courts (with litigation having been initiated in 2014), and in February of this year, the Canadian Supreme Court rejected Nevsun’s motion to dismiss the case. There, three Eritrean plaintiffs claimed that Nevsun, through an Eritrean government-owned affiliate, had conscripted them and over a thousand other persons into a forced labor mining operation. Several of the plaintiffs’ causes of action were based on violations of customary international law, and the Supreme Court, in a surprise holding, allowed those claims to continue even though international law obligations are traditionally only asserted against states rather than private actors.

While some companies may think that the risk these types of lawsuits pose is marginal, the ongoing COVID-19 pandemic demonstrates the value in preparing for “black swan” scenarios. As we have seen in the COVID-19 context, a general failure to imagine or account for the risks posed by a global pandemic can lead to massive disruptions for workers, families, and employers alike. Similarly, a failure to address the risks lurking in companies’ supply chains can lead to other major disruptions down the road, and forward-thinking companies would do well to plan for them now.

The Vinson & Elkins Environmental, Social, Governance Taskforce addressed these risks and others in a recent webinar, The New ESG: How COVID-19 Has Permanently Altered the ESG Conversation. A link to a video recording of the webinar and other materials can be found here.

Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.

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.