Overview

For nearly 200 years following its passage in 1789, the Alien Tort Statute[1] ("ATS") was largely ignored.  That changed in recent times, when parties troubled by the impact of US multinational corporation activities abroad began to invoke the statute to seek relief for alleged overseas misconduct.  These ATS claims arose particularly around alleged human rights, labor and environmental improprieties by corporations overseas.  Over the past decade, several US Supreme Court decisions seemingly closed the door on such claims, limiting their viability to narrowly confined circumstances.  However, in a July 5, 2019 decision in Doe v. Nestle, S.A.,[2] the US Court of Appeals for the Ninth Circuit reversed and remanded a lower court decision, permitting plaintiffs to replead their ATS claim.  This significant decision may fuel multinational concerns that common engagement practices with suppliers - including auditing and financing arrangements - could give rise to ATS jurisdiction and liability stemming from supplier misconduct.  As a result, companies should consider looking anew at their supply chain compliance program and management structures, and question whether enhanced risk calls for systemic modifications.

ATS Background

Beginning in 2004, with Sosa v. Alvarez-Machain,[3] the Supreme Court clarified and restricted the scope of ATS, concluding that ATS provides jurisdiction only as to violations of customary international law which are universal, well-defined and obligatory.  More recently, in Jesner v. Arab Bank PLC,[4] the Court ruled that ATS applies only to US entities and is unavailable for claims against foreign corporations.

Between those decisions, the Court more expansively addressed the jurisdictional scope of ATS in Kiobel v. Royal Dutch Petroleum.[5]  In Kiobel, Nigerian nationals sued several Dutch, British and Nigerian corporations alleging that the entities had aided and abetted the Nigerian Government in committing widespread human rights abuses involving extrajudicial killings, torture, and unlawful detainment.  While the case was dispatched on different grounds, the Supreme Court also observed that the ATS does not typically apply to extraterritorial conduct, limiting its reach to specific violations of binding international law that touch and concern the US, and that are committed by domestic corporations.  Further, the Court indicated that the touch and concern must be of moment, cautioning that "even where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application."[6]  While the Court declined to elaborate on the meaning of "sufficient force," most commentators viewed the decision as effectively closing the door on ATS claims except for clearly egregious US multinational conduct directly affecting significant US interests.

Ninth Circuit Doe Decision

However, the Ninth Circuit Nestle decision has seemingly reopened the door to multinational liability risk concerns in relation to supplier misconduct.  In Nestle, former child slaves filed an ATS action against Nestle and several other major agriculture multinationals for allegedly aiding and abetting child slave labor in the Cote d'Ivoire.  Specifically, the plaintiffs alleged that defendants provided financial support and technical farming aid to farmers, even though they knew their acts would assist farmers who were using forced child labor, and knew their assistance would facilitate child slavery.[7]  In Doe v. Nestle, S.A.,[8] defendants sought rehearing en banc by the Ninth Circuit.  On July 5, 2019, the Ninth Circuit released its split opinion, amending and affirming the previous decision and denying rehearing.  The Ninth Circuit ultimately reversed the District Court's dismissal of the action and remanded it to allow plaintiffs to replead their claim in alignment with the Ninth Circuit's decision.

Central to the Ninth Circuit's decision appears to be a reliance on plaintiffs' assertions that the defendants were aware of supplier slavery, provided personal spending money to maintain the supplier relationship, facilitated inspections by employees from US headquarters of the supplier operations, and made the operative financing decisions from US offices."Contrary to the district court's reasoning, providing personal spending money to maintain relationship above the contract price for cocoa is not ordinary business conduct, and is more akin to 'kickbacks.'  Mastafa, 770 F.3d at 175.  Defendants also had employees from their United States headquarters regularly inspect operations in the Ivory Coast and report back to the United States offices, where their financing decisions, or 'financing arrangements,' originated.  Licci by Licci, 834 F.3d at 217 (citingMastafa, 770 F.3d at 191).  In sum, the allegations paint a picture of overseas slave labor that defendants perpetuated from headquarters in the United States."[9]

Such assertions, the Ninth Circuit found, are sufficient to provide jurisdiction for an ATS case to go forward and litigate the veracity of those claims.

Significantly, despite the court's claim that the conduct at issue was "not ordinary business conduct," many aspects of the Nestle fact pattern are common in multinational supply chains, thereby making it reasonably easy for plaintiffs to fashion claims sufficient to achieve ATS jurisdiction.  After Nestle, many companies may look anew at their supply chain structure—including audits and US direct involvement—and ask whether risk mitigation considerations suggest a need for changes in the nature of supply chain engagement.

Supply Chain Program Implications

In particular, some within companies may advocate for decentralization of supply chain oversight to remove US direct engagement from the process, including in relation to any financing, as well as reducing US involvement in supply chain audits and inspections and/or outsourcing these activities to third parties.  However, such a position is both unlikely to limit liability risk under the ATS while potentially increasing reputational risk and liability risk under other laws regulating corporate supply chain activities.  It is not hard to imagine plaintiffs alleging the absence of engagement or auditing as failing to act with reasonable due care and reflective of willful blindness, resulting in elevated liability risk under regimes including the ATS, the Trafficking Victims Protection Act, and a variety of consumer protection laws.  Moreover, insofar as reduced engagement and auditing leads to greater reliance on problematic suppliers or an increase in human rights, labor rights, or environmental impacts directly resulting from supplier performance, the reputational and marketplace risks rise considerably.

Rather than knowing or doing less, a risk mitigation strategy suggests doing more in the context of an organized program of corporate supplier engagement designed to effectively balance the risks of over vs. under-engagement.  In particular, a strategy of engagement is called for that provides sufficient knowledge of supplier activities while also ensuring information relating to failures or "bad acts" by suppliers is elevated within the company and appropriately addressed - whether by remediation or termination.

Conclusion

In short, the Ninth Circuit decision may well invite more ATS claims to be filed in the US against US companies relating to alleged supplier misconduct overseas.  The best defense in those cases (as well as in the marketplace) will be evidence of well-developed, engaged and effectively-structured supply chain compliance programs - not the absence of them. 


[1] 28 U.S.C. §1350.

[2] Doe v. Nestle, S.A., 2019 U.S. App. LEXIS 20050 (9th Cir. Jul. 5, 2019).

[3] Sosa v. Alvarez-Machain, 542 U.S. 692 (2004).

[4] Jesner, et al. v. Arab Bank, PLC, 138 S. Ct. 1386 (2018).

[5] Kiobel v. Royal Dutch Petro. Co., 569 U.S. 108 (U.S. April 17, 2013).

[6] Id. at 124-125.

[7] Doe v. Nestle, S.A., 906 F.3d 1120, 1122-23 (9th Cir. Cal. October 23, 2018).

[8] Id.

[9] Id. at 1123.

 

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