No duty to disclose child labor production in California, court rules

Hodsdon v. Mars, Inc., 162 F.Supp.3d 1016  (N.D. Cal. 2016)

Mars sells chocolate, some of which comes from cocoa beans from Côte d’Ivoire, where trafficked children and forced laborers “wield dangerous tools, transport heavy loads, and face exposure to toxic substances….The working conditions on the farms are deplorable. Laborers often do not receive pay, sleep in locked quarters, and fear corporal punishment.”  Despite an agreement with other chocolate manufacturers in 2001, Mars and other signatories haven’t been able to implement certification procedures to eradicate the worst forms of child labor on cocoa farms. “According to the most recent reports, the number of children working on cocoa farms has increased since 2005. As of 2014, ‘[o]nly 36% of [Mars’s] cocoa was certified.’”

Most of Mars’ chocolate products don’t say anything about the supply chain, though the label for Dove chocolates says, “We buy cocoa from Rainforest Alliance Certified farms, traceable from the farms into our factory.” Hodsdon alleged that he “would not have purchased” or “paid as much for” Mars chocolate products had the labels included information about the labor practices of Mars’s cocoa suppliers.

The court found that these allegations properly alleged standing by alleging actual reliance and economic injury.  Hodsdon didn’t need to allege that he bought chocolate containing cocoa beans harvested by children or forced laborers; his alleged economic injury was sufficient.  Nor did he need to trace any of Mars’s chocolate to particular farms that use the objectionable labor practices.  His allegations clearly permitted the inference that he relied on the nondisclosure when buying.  “Hodsdon ties his harm to the lack of certainty about the source of the cocoa beans, not to consumption of cocoa products actually harvested by child and forced laborers. In so doing, he has established injury in fact.”

But do California’s consumer protection laws cover omissions?  The FAL bans “mak[ing] or disseminat[ing]...any statement...which is untrue or misleading, and which is known, or by the exercise of reasonable care should be known, to be untrue or misleading...” “with intent directly or indirectly to dispose of real or personal property.” Courts are divided on whether omissions can violate the FAL, but the court here held that the decisions could be harmonized by looking at whether the defendant made any statement at all about a subject; if it does, then it is responsible for material omissions made about that subject that render the affirmative statements misleading.  If it stays mum, however, there is no FAL liability.  That was the case here.

How about the CLRA and the UCL?  The CLRA bans “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer,” and prohibits conduct “likely to mislead a reasonable consumer,” The UCL prohibits “unfair competition” defined as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising.” In order to prevail, Hodsdon needed to show that Mars had a duty to disclose the information.  Mars argued that there was no duty to dislose information unrelated to a safety issue or product defect. Hodsdon argued that such a duty arises when “the defendant had exclusive knowledge of material facts not known to the plaintiff.”

“California courts have generally rejected a broad obligation to disclose,” except for omissions that are “‘contrary to a representation actually made by the defendant, or...omission[s] of a fact the defendant was obligated to disclose.’” The California Court of Appeal has held that a defendant did not have a duty to disclose product defects that did not pose any risk of physical injury or safety concerns.  Another case said the duty to disclose exists when “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material fact.”  However, the overwhelming authority limited the duty to disclose in situation (2) to product design/safety issues.  As the court pointed out, “[t]he definition of a material omission has stunning breadth, and could leave manufacturers (chocolate or otherwise) little guidance about what information, if any, it must disclose to avoid CLRA or UCL liability.”  This took care of the UCL “unlawful” and “fraudulent” claims.

As for “unfair,” the definition of this under the UCL is in flux.  Many courts have found a business practice “unfair” when it “offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” This approach requires courts to “examine the practice’s ‘impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.’ ” But this may well be too amorphous; the public policy test requires that the UCL claim be tethered to some specific constitutional, statutory, or regulatory provisions.”

The court found that Hodsdon couldn’t show that the failure to disclose was immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Information about Mars’ labor policies and supply chain is “readily available to consumers on Mars’s website,” so the absence of information on the packaging is not immoral even though the underlying labor practices are.  A broader formulation, which defendants are likely to quote: “Mars’s failure to disclose information it had no duty to disclose in the first place is not substantially injurious, immoral, or unethical.”  Likewise, Hodsdon’s alleged harm wasn’t tethered to any “specific constitutional, statutory, or regulatory provisions.”

Mars also argued that it was entitled to a safe harbor under the Supply Chains Act, Cal. Civ. Code § 1714.43. “To forestall an action under the unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.”  The court was dubious.  That law requires retailers and manufacturers that earn more than $1,000,000 in gross receipts to disclose their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”  They must post on their website’s homepage “a conspicuous and easily understood link to the required information,” or provide “written disclosure within 30 days of receiving a written request for the disclosure from a consumer.”

First, the SCA was about and human trafficking, not child labor. “While the distinction between child labor and forced labor may be thin, the safe harbor doctrine cautions against creating safe harbors in the absence of ‘specific legislation.’” Plus, the court wasn’t convinced that the legislature “considered a situation and concluded no action should lie.” Here, legislative history was silent about whether the legislature considered disclosures on labels. Plus, if the court accepted the safe harbor reasoning, then big businesses would be exempt from a disclosure requirement that smaller businesses not subject to the SCA would have, which would be “anomalous.”

Ebony Elizabeth Thomas & Amy Stornaiuolo, Restorying the Self: Bending Toward Textual Justice, 86 Harv. Educ. Rev. 313 (2016)