Corporate Social Responsibility and the Law : Foley Hoag LLP

It is likely that the coming year will see a number of legal developments relating to the immunity and liability of corporations, states, and individuals as recognized by U.S. courts.  With an increasing number of suits filed against companies for human rights abuses, the question of whether immunity attaches is of great significance.

Courts inside and outside the United States are weighing questions regarding jurisdiction and immunity, and their decisions and arguments will likely be picked up by other courts dealing with issues of corporate responsibility for alleged human rights violations.  

What follows is a brief round-up of some of the most anticipated legal developments in the field of corporate responsibility to keep an eye on during 2012.  In this overview, we look at three key questions under consideration by U.S. and international courts :

1. Can corporations, or their executives, be sued for human rights violations?
2. Does immunity under the Foreign Sovereign Immunities Act reach to corporations, states, and individuals?
   
3. What does international law say about state immunity?

(1) Can corporations, or their executives, be sued for human rights violations?

The answer to the question of whether corporations may be sued for human rights violations under the Alien Tort Statute (ATS) or Torture Victim Protection Act (TVPA) in the U.S. will have serious consequences in terms of corporate liability.  With the Supreme Court preparing to hear arguments in Kiobel v. Royal Dutch Petroleum and Mohamad v. Rajoub on February 28, discussions are ramping up regarding liability and immunity in human rights litigation in U.S. federal courts.  Between the two (consolidated) cases the Supreme Court will be looking at three questions:

1. Whether the issue of corporate civil tort liability under the Alien Tort Statute ("ATS"), 28 U.S.C. § 1350, is a merits question, as it has been treated by all courts prior to the decision below, or an issue of subject matter jurisdiction, as the court of appeals held for the first time. (Kiobel v. Royal Dutch Petroleum)
2. Whether corporations are immune from tort liability for violations of the law of nations such as torture, extrajudicial executions or genocide, as the court of appeals decisions provides, or if corporations may be sued in the same manner as any other private party defendant under the ATS for such violations, as the Eleventh Circuit has explicitly held. (Kiobel v. Royal Dutch Petroleum)
3. Whether the Torture Victim Protection Act, 28 U.S.C. § 1350 note § 2(a), permits actions against defendants which are not natural persons (Mohamad v. Rajoub)

All three questions will be of significant consequence in the field of corporate responsibility.  Until now there was a circuit split as to whether corporations may be sued under the ATS.  Notwithstanding the disagreement of whether a corporation may be sued under the ATS, it is clear that an individual corporate executive may be sued pursuant to the statute.  Thus, depending on the decision of the Supreme Court there may be an increase in suits filed against individuals rather than corporations.  This may lead to the emergence of an additional line of questions regarding individual liability for the actions of a corporation.

Lurking in many of these cases is the question of what exactly comprises the law of nations, which is referenced in the ATS.  Some courts have concluded it is synonymous with customary international law, while others have rejected such an understanding.  A clear definition of what amounts to the law of nations is critical to determining if a claim properly falls within the ATS.  Though not one of the questions presented to the Supreme Court, it will be interesting to see whether the Court addresses it in its decision.

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The announcement by Twitter last month that it is deploying the ability to block tweets on a country-by-country basis in response to government demand for content restrictions has generated an enormous amount of controversy.

Some commentators have accused the company, whose CEO once memorably described it as belonging to the “free-speech wing of the free-speech party,” of giving in to the demands of governments who take a narrow view of the freedom of expression in order to grow their business in lucrative new markets.

Other commentators view the decision as inevitable given that the company has grown to the point that it requires a physical presence outside the United States. This makes both Twitter and its employees vulnerable to jurisdictional assertions by foreign governments, including by democratic governments whose constitutions afford somewhat less expansive free speech protections than does the uniquely American First Amendment.

Still others have welcomed Twitter's development of a mechanism to block certain tweets from appearing in a particular country pursuant to a government request as sparing both Twitter and its users the far worse fate of the site being blocked entirely, as happened in China.

While reasonable people can certainly disagree on whether Twitter's new country-specific tweet blocking abilities are a positive development in principle, what has largely been missing from the public debate is a recognition that the manner in which such policies are implemented has almost as much of an impact on what effect the policy has in the real world.

Developing the ability to block tweets on a country-by-country basis does not necessarily mean that Twitter will honor every request it receives from every government. Twitter may well decide that such requests are only legally binding in countries where it hosts data or where it has employees who can be dragged into court on charges of contempt. Alternatively, Twitter may only accede to requests from governments that have the technical ability to block Twitter without switching off the entire Internet, as Egypt attempted to do at the height to the demonstrations in Tahrir Square.

Factors that are important to consider when reviewing a company's response to government demands for content restrictions include:

• Who exactly within the company is making the decision on whether to honor a government request to restrict content? Are lawyers knowledgeable in the laws of the requesting jurisdiction making the call, or is the decision left to technical staff who may not have the expertise to judge whether a particular request is legitimate?
• What is the internal process for reviewing decisions by frontline staff?
• When if ever might the company challenge the request of the government in court?

All of these factors ultimately have just as much of an impact, in the case of Twitter's recent policy announcement, on the type and number of tweets that will be blocked in a particular country as the bare bones of the policy itself.

Finally, from a technical perspective, it appears that the precise means Twitter has chosen for blocking certain content on a country by country basis allows users to easily evade these restrictions. Twitter reports that it uses a visitor's IP address in order to determine their physical location. Recognizing, however, that IP-based geolocation is not perfect, Twitter allows users to manually specify their location in their account settings. This information appears to be saved in a browser cookie which appears to override IP-based geolocation for all purposes–including country-specific content restrictions. No one has been able to test the efficacy of this feature against Twitter's new country-specific blocking abilities for the simple reason that Twitter has yet to publicly acknowledge blocking a tweet in a particular country. The real test will surely come, however, the next time that the Internet is pressed into service as a platform for organizing antigovernment protests of the kind that rocked the Arab world last year.

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The new IFC Environmental and Social Performance Standards -- in particular, Performance Standard 7 on indigenous peoples -- present a range of management and operational challenges for certain companies. For the first time, the Performance Standard includes a requirement of free, prior, and informed consent (“FPIC”) from indigenous peoples.

The new Performance Standards went into effect in January 2012 and are applicable to a greater number of the IFC’s investments than the 2006 Performance Standards, which only applied to project finance. Notably, the new Standards only apply to the IFC’s new investments, while the the 2006 Performance Standards apply to existing investments. Notably, the Equator Banks will apply the 2012 Performance Standards to new investments, which will result in their application to much of the world’s project financing.

The 2006 Performance Standard on indigenous peoples required “free, prior, informed consultation.” The requirement of consent in the new Performance Standard 7 comes on top of arguably more rigorous and complex requirements in Performance Standard 1 that address engagement with all communities.

Performance Standard 7 requires IFC clients to identify adverse impacts on indigenous communities and develop action plans to address them with the informed consultation and participation of affected indigenous communities. In addition, companies are expected to seek the FPIC of communities when:

• The project will impact the lands and natural resources subject to traditional ownership or under customary use;
• The project will require relocation of communities; or
• The project will significantly impact critical cultural heritage of indigenous peoples.

What is FPIC?  Definitions vary, but the IFC’s definition will be influential. The IFC requires FPIC to be established though a good faith negotiation with the community. In addition, the client should document that there is a mutually accepted process for obtaining consent, and should ensure that there is evidence that the parties agree on the outcome of the negotiations. As we suggested in a previously published report, Implementing a Corporate Free, Prior, and Informed Consent Policy: Benefits and Challenges, this means that companies should:

• Develop a formal agreement on the process with communities;
• Document the process to demonstrate it was followed; and
• Document the agreement, if one is obtained.

In addition, the Performance Standard requires companies to involve indigenous peoples’ representative bodies and members of the affected communities, and provide sufficient time for decision-making. Finally, the process should include vulnerable groups, such as women and youth.

Our conversations with companies indicate that they are grappling with how to best implement the new standards. Many companies are accustomed to engaging in complex negotiations with indigenous peoples, but may need to adjust their practices.  Specifically, they may be required to demonstrate, to the IFC or other stakeholders, that:

• The engagement process used to obtain consent was not imposed unilaterally by the company. The process should be tailored to a particular situation in consultation with the community;
• The process should seek the input of vulnerable groups and involve traditional decision-making bodies – again, precisely how this should be done may be culture and context-specific;
• The community agreed upon the process used to obtain consent; and
• The company has documented the community’s agreement to the project, including the scope of that agreement.

In short, for some companies, the new Performance Standard 7 will require significant changes to company engagement processes. In other instances, it may simply require companies to more effectively document their existing good practices.

Given the controversy surrounding large scale infrastructure on indigenous lands around the world, companies should consider reviewing their practices and filling gaps to ensure they maintain their social licenses to operate, as well as their financing. When conducting such a review, companies should bear in mind that most national laws require consultation, not FPIC, so mere compliance with national law may not be sufficient to meet the requirements of the new Performance Standard.

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A coalition of 80 institutional investors sent a letter to Congress last week in support of the Business Transparency on Trafficking and Slavery Act (HR 2759).  As discussed previously, the proposed legislation would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery, and the worst forms of child labor in their supply chains.

Modeled after the California Transparency in Supply Chains Act, which went into effect on January 1, 2012, the proposed federal legislation, unlike the California statute, is not limited to retailers and manufacturers. If enacted, the legislation would be applicable to any publicly-traded or private company currently required to submit annual reports to the Securities and Exchange Commission ("SEC"), as long as the company meets an established annual gross receipts threshold. Companies would be required to include the required disclosures in their annual reports to the SEC.

In a letter sent to Speaker of the House John Boehner and House Majority Leader Eric Cantor, members of the Interfaith Center on Corporate Responsibility and U.S. SIF: The Forum for Sustainable and Responsible Investment called for HR 2759 to be placed at the top of the legislative agenda in order to move "this important legislation forward in an expeditious manner.”  In urging Congressional leaders to prioritize the bill, the investors stated that the proposed legislation

reflects the realities of the marketplace, which increasingly requires that companies be sensitive to social and ethical issues, including human rights, in their operations and global supply chains, and create human rights policies, as well as due diligence processes to evaluate, monitor, and strengthen these policies.

Notably, the investors’ statement also argued that the U.N Human Rights Council’s unanimous endorsement of the Guiding Principles on Business and Human Rights in June 2011 established “a global norm for the ‘corporate responsibility to respect’ human rights and underscores the importance of public reporting by companies.”

When it was introduced in August 2011, HR 2759 was referred to the House Committee on Financial Services and currently sits with the Subcommittee on Capital Markets and Government Sponsored Enterprises. Given the contentious climate on Capitol Hill, and the upcoming presidential election, it is unlikely that the bill will move in 2012, but its introduction is reflective of shifting expectations regarding the responsibilities of companies to identify and account for the adverse human rights impacts of their operations.

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The Obama Administration has filed an amicus brief with the U.S. Supreme Court in Kiobel v. Royal Dutch Petroleum in support of the plaintiffs' position that corporations are proper defendants in cases involving claims under the Alien Tort Statute ("ATS").  Filed on December 21, the brief was signed by the Department of Justice, the Department of State, and the Department of Commerce. 

The Supreme Court will review the Second Circuit's controversial decision that corporations cannot be properly sued under the ATS for violations of customary international law.  Notably, the Ninth Circuit, the D.C. Circuit, the Seventh Circuit, and the Eleventh Circuit have all upheld corporate liability under the ATS.

In its brief, the Administration states that neither international law nor "[t]he text and history of the ATS itself" provide a basis for distinguishing between natural and juridical persons. The brief then observes "[b]oth natural persons and corporations can violate international-law norms that require state action. And both natural persons and corporations can violate international-law norms that do not require state action."  

Stating that international law is the proper source of law for the relevant standards of conduct in ATS cases, the Administration states that "[w]hether corporations should be held accountable for those violations in private tort suits is a question of federal common law."  Federal courts must cautiously exercise their discretion to enforce specific international law norms and "[i]nternational law informs, but does not control, the exercise of that discretion."

Kiobel is scheduled for oral argument before the Supreme Court on February 28, 2012.

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Former UN Special Representative on Business and Human Rights John Ruggie, now a senior advisor to our CSR practice, recently authored an article in Corporate Secretary magazine in which he observed that there has been a "convergence of expectations" with regard to business responsibilities in the area of human rights.  

These expectations are set forth in the UN Guiding Principles on Business and Human Rights, authored by Professor Ruggie and his team.  As discussed previously, these Principles were endorsed by the UN Human Rights Council in June of this year. Central to the Principles is the expectation that companies have a responsibility to respect human rights and that this requires companies to conduct human rights due diligence on their operations.  As noted by Professor Ruggie,

[h]uman rights due diligence requires companies to develop effective policies and procedures to assess the actual and potential human rights impacts associated with their activities and business relationships, and to act upon the findings.

Professor Ruggie observes that the Guiding Principles are "not just another set of voluntary standards vying for attention in an increasingly crowded space" but rather represent "authoritative UN standards around which the articulated expectations of many public and private institutions have already converged." (emphasis added)

Specifically, as noted in the article, the United States Council for International Business, the International Organization of Employers, and the International Chamber of Commerce have all voiced support for the Principles. The guidance set forth in the Principles has also been incorporated into:

• The revised Organization for Economic Cooperation and Development ("OECD") Guidelines for Multinational Enterprises;
• The revised International Finance Corporation ("IFC") Sustainability Policy and the corresponding Performance Standards; and
• The ISO 26000 social responsibility standard adopted by the International Organization for Standardization ("ISO"). 

The formal endorsement, and rapid incorporation, of the Guiding Principles marks 2011 as a transformative year in the field of business and human rights. Looking ahead to 2012 and beyond, companies should expect that stakeholder expectations with regard to corporate impacts on human rights will increasingly be informed by this new framework. 

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I recently authored an article for IR Magazine on "CSR and the Role of the Board." In looking at board oversight in the area of CSR, one source that I relied upon was the 2010 report, Board Oversight of Environmental and Social Issues, published by Calvert Asset Management Company and The Corporate Library. 

The report analyzed board committee charters at S&P 100 firms and found that only 65 companies in the S&P 100 have board committees with some level of responsibility for oversight of corporate responsibility concerns. One of the most notable statistics from the study was the finding that less than 50% of those 65 boards monitor and provide recommendations on CSR trends and developments.

Ultimately, this lack of focus on trends is troubling.  Looking at developments in the CSR field over the previous decades, it is not hard to see that stakeholder expectations in the areas of environmental and social standards have often lead to the developments of new regulations, legislation, and lending guidelines.  As I noted in the article,

Understanding key trends is an integral component of effective long-term strategy development and can help ensure that companies have the capacity to respond to concerns when they arise. Companies regularly seek to identify trends in consumer preferences and in regulatory environments. Companies should exercise the same diligence in identifying future stakeholder expectations with regard to social and environmental performance. Stakeholder expectations in the area of CSR frequently ask companies to go “beyond compliance” with existing legal and regulatory standards. At the same time, these expectations are often predictive of the future content of legal and regulatory requirements.

A full copy of the article is available here (.pdf).

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A developer for Google's Android mobile phone operating system has exposed what has the potential to be the most significant user privacy security vulnerability ever discovered in any computing device.

In a video posted to YouTube, Connecticut-based developer Trevor Eckhard has demonstrated how a program called Carrier IQ logs an astonishing amount of information about every aspect of mobile device use — from the full-text of SMS messages to the URL of every website visited using the device, not to mention every single keystroke that a user enters into their phone or tablet.

The Carrier IQ software is made by an eponymous company based in Silicon Valley (www.carrieriq.com) and is now known to come preinstalled on Android phones sold by many major carriers, including Sprint in the United States. The software launches automatically whenever a device on which it is installed is powered up, and there appears to be no way to disable or delete the software without “rooting” the device. It has not yet been confirmed whether the software is preinstalled on devices running operating systems other than Android, although this seems very likely given that a media alert issued by Carrier IQ earlier this month explains that its software is used for “counting and measuring operational information in mobile devices” including “feature phones, smart phones and tablets.”

In the same media alert, Carrier IQ denied that its software was being used to “record[] keystrokes or provid[e] tracking tools.” This denial appears to be contradicted by Mr. Eckhart's YouTube video, although in fairness to Carrier IQ, the video does not actually demonstrate the information collected by the software being transmitted to a mobile phone operator.

It is, of course, entirely possible that the potential the Carrier IQ software seems to provide for tracking nearly everything an individual does on their mobile device cannot actually be realized due to other aspects of the software architecture. If this is the case, Carrier IQ needs to explain that the user tracking potential of its software is the result of a programming oversight and move quickly to patch its software. If, on the other hand, the Carrier IQ software can be used by a mobile phone company to capture keystroke, phone call, SMS, or URL information, the company needs to inform the public immediately. One does not need a very fertile imagination to see what a formidable surveillance tool Carrier IQ might be in the hands of a totalitarian government, and users in such countries ought to know whether their mobile devices can be used to expose intimate personal information.

More generally, the Carrier IQ incident offers an object lesson on the importance of collecting and retaining the least amount of data required to accomplish a given task. There is no reason to doubt Carrier IQ's statement in its media alert that its software is designed to “assist operators and device manufacturers in delivering high-quality products and services to their customers” by “counting and measuring operational information in mobile devices.” That being said, there is no reason that keystroke, phone number, URL, or SMS data needs be collected in the level of detail in which Carrier IQ seems capable to optimize mobile devices or their network use. Reducing the amount of data collected to the bare minimum required is not only a good strategy for protecting user privacy and preventing data breaches, but it also helps companies avoid the glare of negative publicity when overbroad data collection capabilities are revealed.
 

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In less than two months, on January 1, 2012, the California Transparency in Supply Chains Act will go into effect. Companies impacted by the legislation will be required to disclose their efforts, if any, to ensure that their direct supply chains are free from slavery and human trafficking.

As discussed in previous posts, the legislation applies to retail sellers and manufacturers doing business in California that have annual worldwide gross receipts exceeding one hundred million dollars.

Today, a group of investors released a best practices guide for companies seeking to comply with the California legislation. The guide, Effective Supply Chain Accountability: Investor Guidance on Implementation of The California Transparency in Supply Chains Act and Beyond, was released by the Interfaith Center on Corporate Responsibility, Christian Brothers Investment Services, and Calvert Investments. 

Beyond making the minimum disclosures required by the legislation, the guide urges companies to implement a comprehensive approach to the management of human rights risks in their supply chains. Specifically, the authors call on companies to develop a comprehensive management approach to human rights-related risks that includes the following elements:

• A human rights policy;
• Human rights due diligence;
• Human rights risk assessments;
• Verification and traceability mechanisms;
• Training/capacity building;
• Collaboration; and
• Disclosure/transparency. 

This guidance is responsive to the expectations of key corporate stakeholders, including shareholders, legislators, and consumers, who are increasingly demanding that companies identify and manage the human rights impacts of their operations, including human trafficking.  As the guide states,   

[g]iven the enactment and proposal of similar laws protecting human rights, including Section 1502 of the Dodd-Frank Act and HR 2759, the Business Transparency on Trafficking & Slavery Act, it has become clear that human rights risks within business value chains are becoming more widely acknowledged. As such, it is imperative that companies take active steps to combat human trafficking within their direct operations as well as supply chains to ensure that they are not complicit in human rights abuses.

In a press release accompanying the guide, David Schilling, Program Director for Human Rights at the Interfaith Center on Corporate Responsibility, observed that

We believe that additional legislation, at both the state and the federal levels, addressing these egregious human rights violations in company supply chains is inevitable.  The California Supply Chain Act may be the first law of its kind in the nation, but it will most certainly not be the last.

We believe that stakeholder expectations regarding the corporate responsibility to respect human rights will be increasingly embedded in state, national, and international legislative and regulatory frameworks. This "convergence of expectations" is a trend reflected by the California legislation and the advice provided in the new guide is intended to assist companies in meeting both current and future compliance requirements.

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Business Ethics magazine recently published an interview with John Ruggie, the former U.N. Special Representative on Business and Human Rights who recently joined Foley Hoag's CSR practice as a senior advisor. Michael Connor, Editor and Publisher of Business Ethics, conducted the interview.  The conversation focused on the Guiding Principles on Business and Human Rights, the business drivers for respecting human rights, and the ways in which the Principles have been adopted by both public and private stakeholders.  

Speaking about the corporate responsibility to respect human rights, Professor Ruggie observed that,

The corporate responsibility to respect human rights is a social responsibility over and above compliance with applicable laws. It is the minimum expectation society has of business conduct in relation to human rights. It means that as business goes about its business, it should not infringe on the rights of others. So manufacture your mouse traps, deliver whatever services you provide, but don’t infringe on others’ human rights in the process.

He also discussed the "business case" for respecting human rights, in particular noting some of the costs that may be associated with lawsuits and community opposition when companies fail to address human rights concerns.  In this context, he referenced recent research on the costs of conflict that was initiated under his former mandate.  Specifically with regard to mining companies, he noted that,

For a world-class mining operation, which requires about $3-5 billion capital cost to get started, there’s a cost somewhere between $20 million and $30 million a week for operational disruptions by communities. Another estimate used by the mining industry is that an asset manager is supposed to spend between 5% and 10% of his or her time on community engagement issues. We found that it can be anywhere from a one-third to 50%, and in some cases 80% of their time. So there are opportunity costs, financial costs, legal costs and reputational costs. 

Finally, speaking about the fundamental concept of human rights due diligence, which is a core element of the Guiding Principles, Professor Ruggie observed the extent to which this normative obligation has been adopted in both voluntary and legislative standards:

Human rights due diligence is now...in the requirements of the OECD (Organisation for Economic Development and Cooperation) guidelines on multinational enterprises. ..The principle has been incorporated into a new ISO (International Standards Organisation) standard, ISO 26000. The International Finance Corporation has updated the performance standards it requires of clients, which now reference the business responsibility to respect human rights. The European Commission has incorporated the same principles, including human due diligence, into a new EU strategy on corporate social responsibility. In the U.S., the Dodd-Frank Act includes a due diligence element for companies sourcing certain minerals closely tied to conflict in the Democratic Republic of Congo.

The full text of the interview is available here. 

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Almost one year ago, we wrote about the long history of Sarei v. Rio Tinto, an Alien Tort Statute ("ATS") case filed in 2000 against Rio Tinto Plc involving allegations stemming from the company's mining operations on the island of Bougainville, Papua New Guinea. Last week, on October 25, the Ninth Circuit Court of Appeals reversed the District Court's dismissal of plaintiffs' claims for genocide and war crimes.  In doing so, the Court upheld corporate liability under the ATS.  

Notably, this decision comes shortly after the Supreme Court's decision to grant plaintiffs' petition for a writ of certiorari in Kiobel v. Royal Dutch Petroleum Co. In Kiobel, the Second Circuit held that corporations are not proper defendants in ATS cases. The Ninth Circuit disagreed and emphasized the importance of looking to the statute's "language and purpose." The Court noted that it had previously held that Torture Victim Protection Act's "express language and documented legislative history reflected congressional intent to limit liability under that statute to individuals." (citing Bowoto v. Chevron, 621 F.3d 1116 (2010)). In comparison, the Court found that

The ATS contains no such language and has no such legislative history to suggest that corporate liability was excluded and that only liability of natural persons was intended. We therefore find no basis for holding that there is any such statutory limitation.

The Ninth Circuit thus joins the D.C. Circuit, the Seventh Circuit, and the Eleventh Circuit in upholding corporate liability under the ATS. In response to the Ninth Circuit's ruling, one legal observer stated, "[t]his opinion reiterates that Kiobel is an outlier." 

Notably, one year ago, the case had been referred to a mediator “to explore the possibility of mediation.” Sarei v. Rio Tinto, 02-cv-56256 (9th Cir. October 26, 2010). In February 2011, the case was returned to the en banc Court. Sarei, 02-cv-56256 (9th Cir. February 11, 2011).

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On Monday, October 17, the U.S. Supreme Court granted plaintiffs' petition for a writ of certiorari in Kiobel v. Royal Dutch Petroleum Co. In Kiobel, the Second Circuit Court of Appeals held that corporations cannot be sued under the Alien Tort Statute (“ATS”) for violations of customary international law. The question of corporate liability under the ATS was left unsettled by the Supreme Court in Sosa v. Alvarez-Machain (2004) and the Court's decision to grant certiorari in Kiobel was widely anticipated. 

Cases brought by plaintiffs in the United States under the ATS represent the largest body of domestic jurisprudence on corporate responsibility for violations of international human rights law.  Kiobel itself is one of a series of cases arising from claims that Royal Dutch Petroleum was complicit in human rights abuses against the Ogoni people in Nigeria. Three related cases (the Wiwa cases) settled on the eve of trial in June 2009 for a disclosed settlement of $15.5 million. 

The September 2010 decision in Kiobel was suggested by some legal scholars to be the beginning of the end for ATS litigation again corporate defendants. Since the Second Circuit's ruling, however, the Seventh Circuit and the D.C. Circuit have both issued decisions finding that corporate liability is proper under the ATS. The Eleventh Circuit has also upheld corporate liability under the ATS. 

The Supreme Court also granted certiorari in Mohamed v. Rajoub, in which the D.C. Circuit held that non-natural persons were not proper defendants under the Torture Victims Protection Act. In Mohamed, plaintiffs had sought damages against the Palestine Liberation Organization and Palestinian Authority. In its orders granting certiorari, the Supreme Court directed that Kiobel and Mohamed be argued in tandem.

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Corporate social responsibility and nuclear power? Indeed. In September, the very first code of conduct for the nuclear power plant industry was launched.

The development of the "Principles of Conduct" was facilitated by the Carnegie Endowment for International Peace. Representatives of all of the major exporters of nuclear power plants participated in the drafting process, which was initiated in 2008. I had the honor of being selected by the Carnegie Endowment to help facilitate the negotiations.

The Principles set forth expectations in the following areas: 

1. Safety, Health, and Radiological Protection; 
2. Physical Security;
3. Environmental Protection and the Handling of Spent Fuel and Nuclear Waste;
4. Compensation for Nuclear Damage;
5. Nonproliferation and Safeguards; and
6. Ethics.

While the Principles were initiated prior to the Fukushima nuclear accident, the completed text reflects certain initial lessons learned from that disaster, especially in the area of safety. At the time of the Principles' launch, Richard Giordano, Chairman of the Board of Trustees for the Carnegie Endowment, observed

Whatever lessons particular countries draw from Fukushima over time, new nuclear plants will continue to be built, some in countries that have only recently begun to utilize nuclear power. It is therefore imperative that nuclear energy is implemented safely and responsibly in both emerging and developed markets. 

I was especially involved in the drafting of Principle 6, which focuses on ethics. Principle 6 helps nuclear exporters meet three primary objectives:

1. Safeguarding the environment and the wellbeing of communities near nuclear power plants, including through effective communication with those communities;
2. Respecting human rights, including the fundamental labor rights of employees; and
3. Fighting corruption.

Principle 6 is important because it addresses measures to mitigate the potential effects of nuclear power on communities and the environment. Principle 6 states that the exporters will work with their customers to consult with communities near nuclear power plants regarding the social and environmental effects of planned activities. The exporters also agree to take sustainable development into account in their activities.

Principle 6 also states that the exporters will respect the fundamental labor rights of their employees, including the right to collective bargaining. They also pledge to respect the Universal Declaration on Human Rights -- a commitment which has implications for their interactions not only with employees, but also with communities and other stakeholders.

Finally, Principle 6 addresses the challenge of corruption, which can arise in the context of large infrastructure projects. The exporters commit to having internal programs in place to fight corruption, and to seek a reciprocal commitments from customers.

The Principles represent a significant new development for the nuclear industry.  As stated on the Principles'  website, 

The Principles of Conduct reflect a recent trend in the management of global challenges. Leading industries, including those in the oil and gas, apparel and pharmaceutical sectors, increasingly have recognized the value of their reputations as socially responsible actors to their long-term business success.

Ultimately, the launch of these new Principles reflects a convergence of international expectations regarding corporate behavior and self-discipline: companies in every industry are expected to demonstrate responsible stewardship with regard to the social and environmental impacts of their operations.

To date, the following companies have adopted the Principles:

• AREVA
• ATMEA (an AREVA-Mitsubishi joint venture)
• Atomstroyexport
• Candu Energy (the successor exporting company to Atomic Energy of Canada Limited)
• GE Hitachi Nuclear Energy
• Hitachi-GE Nuclear Energy
• Korea Electric Power Company (KEPCO)
• Mitsubishi Heavy Industries (including Mitsubishi Nuclear Energy Systems, a subsidiary)
• Toshiba
• Westinghouse Electric Company

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More than a Resource: Water, Business, and Human Rights, a recent report by the Institute for Human Rights and Business ("IHRB") calls on companies to take action to respect the human right to water.

The report references the emerging consensus among international institutions that businesses have a responsibility to respect human rights, and highlights the Guiding Principles on Business and Human Rights, drafted by the former U.N. Special Representative on Business and Human Rights, John Ruggie, as providing the most authoritative guidance on how to implement this responsibility. The Guiding Principles specifically state that companies should conduct human rights due diligence in order to assess and respond to the actual and potential human rights impacts of their operations. 

As previously discussed, in July 2010, the U.N. General Assembly declared access to safe water to be a human right.  Soon thereafter, in September 2010, the U.N. Human Rights Council adopted a resolution recognizing access to clean water and sanitation as a fundamental human right, “equal to all other human rights” (emphasis added) and capable of legal enforcement.  These developments came at the same time as increasing water scarcity is impacting communities, and companies, around the world. 

The new report by IHRB suggests that

[i]n view of the fact that the right to drinking water and sanitation was formally recognized in 2010, all businesses should take account of this right when they implement human rights due diligence procedures and develop a human rights policy statement

as called for in the Guiding Principles.  In our previous analysis of the human right to water, we noted that companies will likely find that stakeholders increasingly expect due diligence efforts, especially with regard to human rights impacts, to include assessments of corporate impacts on community water resources. 

Notably, the IHRB report also predicts that "governments and intergovernmental organizations will increasingly call on businesses to be transparent and accountable for their impacts in relations to water, in human rights terms." That said, as the report observes, "most businesses do not yet consider water to be a social issue, and the great majority do not explicitly address the human rights impacts of their policies and operations in this area."  This is an emerging challenge that many companies, especially those with water-intensive operations, will need to address in order to manage their operations and stakeholder relationships effectively.

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Last week, I gave the keynote address at an Extraordinary Plenary Meeting of the Voluntary Principles on Security and Human Rights, held in Ottawa, Ontario on September 15-16, 2011. (Note: I did not deliver my remarks in my capacity as Senior Advisor to Foley Hoag's CSR practice. As noted previously on this blog, however, Foley Hoag serves as the Secretariat for the Voluntary Principles.) 

In my remarks, I observed that the Voluntary Principles "deals with the most palpable and widely recognized of all human rights: the physical security and integrity of the person."  I also recognized that the multi-stakeholder nature of the Voluntary Principle provides critical support to companies operating in difficult environments. Specifically, I noted that "companies need granular advice and assistance from home and host states alike. They need to be able to count on the in-country government-to-government interface that is a critical component of the [Voluntary Principles]—for example, to address the challenges of security sector reform, or to provide assistance in managing the predictable influx of people and corresponding demand for infrastructure when a new site opens."

The full text of my remarks can be found here.  

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Human trafficking is a problem that is often hidden from sight, especially in the United States. The statistics on human trafficking and commercial sexual exploitation are unsettling. Nearly 800,000 people are trafficked across international borders every year. The U.S. Department of State’s 2010 Trafficking in Persons Report estimated that 2,000,000 children are exploited in the global commercial sex trade. ECPAT International, an international non-governmental organization, estimates that between 100,000 – 300,000 children are potentially subject to commercial sexual exploitation in the United States.

The U.S. Department of Justice has identified human trafficking as the fastest growing criminal industry in the world. Correspondingly, the level of advocacy seeking to address this problem has increased significantly in recent years, with a specific focus on engaging the private sector in efforts to combat the efforts of traffickers. Companies, especially in the travel industry, are facing increased pressure from stakeholders to play a role in addressing the problem. Companies have been subject to shareholder resolutions, online petitions, and legislative pressure asking companies to implement policies and procedures intended to promote the identification and reporting of trafficking activity.

For example, in June 2011, the Interfaith Center on Corporate Responsibility issued a statement asking 90 companies, including four companies in the travel industry, to take a leadership role in abolishing human trafficking and slavery. At the time of the statement, a representative of Boston Common Asset Management observed, “[i]t is no longer acceptable for companies to avoid this issue: each must do its part to eradicate the threat of human trafficking and slavery within its spheres of influence.”

Congress has also taken an interest in the travel industry’s actions to combat human trafficking. At a hearing in June 2011, Rep. Christopher Smith (R-NJ) observed, “No country and few industries are untouched by [human trafficking]. Traffickers use airlines to move their victims, [and] hotels to exploit sex trafficking victims.” His remarks focused on the potential for public-private partnerships. The U.S. Department of State, through the Office to Monitor and Combat Trafficking in Persons, has been involved in a number of these partnerships, working with companies in the travel sector on programs to protect and assist victims of trafficking.

As part of this advocacy and engagement, many companies have been asked to sign The Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism (“The Code”). The Code, originally developed over ten years ago by ECPAT International, is not technically a code of conduct, but rather a set of business principles that can be adopted and implemented by companies in a manner appropriate to their business models. Consistent with The Code’s principles, advocates have urged companies to: adopt corporate policies against sexual exploitation; train staff to be observant to potential victims; provide staff with information on how to report suspicious activity; build alliances with police, anti-trafficking organizations, and child welfare agencies; and provide information to guests regarding national laws, hotline numbers to report potential incidents, and the penalties imposed for trafficking and the sexual abuse of children.

In 2004, Carlson became the first American company to sign on. In a recent statement, Beathe-Jeanette Lunde, Executive Vice President for People Development, Responsible Business, Safety and Security at Carlson, stated that affiliation with The Code represents “an opportunity to be open and proactive” about the crime of child exploitation and child trafficking “so all our stakeholders, be it employees, guests or suppliers, can feel safe while working or doing business with us.” More recently, in 2011, Delta Air Lines and Hilton Worldwide have also signed on to The Code.

That said, few American travel industry companies have signed The Code since its initiation over ten years ago. Some companies have policies against signing external codes of conduct, but the reluctance to adopt these business principles has also reflected industry concern regarding the legal and reputational risks of being associated with human trafficking. In recent remarks before a Congressional committee, Ambassador Luis CdeBaca, Director of the U.S. State Department’s Office to Monitor and Combat Trafficking in Persons, noted that many companies have stated that they “would love to do something” but find the notion of having their brands in any way associated with trafficking activity to be too “nerve-wracking.”

As companies worry about creating associations between their brands and human trafficking, the reality is that external stakeholders are already making this association. Companies increasingly risk being perceived as failing to address this criminal activity and its associated human rights concerns. Ultimately, companies are in the position of needing to define the narrative, rather than letting external advocates define it for them. As more and more companies are growing comfortable with taking proactive steps, those who have not yet addressed the issue will likely face increased scrutiny.

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Press Release

September 7, 2011 -- John G. Ruggie, the former U.N. Secretary-General’s Special Representative for Business and Human Rights and current Harvard professor, has joined Foley Hoag LLP’s Corporate Social Responsibility Practice as a senior advisor.

Ruggie authored the Guiding Principles on Business and Human Rights, which the U.N. Human Rights Council unanimously endorsed in June after six years of development. The Guiding Principles set a standard of practice that is now expected of companies with regard to human rights. They also make recommendations to governments and are likely to affect legal and policy developments at national and international levels.

Key elements of the Guiding Principles have also been incorporated into the updated OECD Guidelines for Multinational Enterprises, under which complaints can be brought against companies in the 42 adhering countries. And the International Finance Corporation, the private sector arm of the World Bank, has updated its sustainability policy and corresponding performance standards it requires clients to meet to explicitly reference the business responsibility to respect human rights. More than 70 financial institutions worldwide and several national credit export agencies track the IFC standards.

As a senior advisor in Foley Hoag’s Corporate Social Responsibility Practice, Ruggie will help multinational companies navigate the Guiding Principles and apply them to their global business practices. He will also provide broad-based guidance in the area of business and human rights. Ruggie will continue to serve as the Berthold Beitz Professor in Human Rights and International Affairs at Harvard’s John F. Kennedy School of Government and as an Affiliated Professor in International Legal Studies at Harvard Law School.

Foley Hoag’s Corporate Social Responsibility Practice advises multinational corporations, governments, and multilateral institutions on a range of social, political, and environmental issues in the global business marketplace. Foley Hoag helps clients anticipate social, ethical, and environmental accountability challenges and limit their risks by incorporating internationally recognized standards into their strategies and operations and relationships with stakeholders.

Ruggie has long been involved in practical policy work, initially as a consultant to various agencies of the United Nations and the U.S. government. From 1997-2001 he served as U.N. Assistant Secretary-General for Strategic Planning, where he was responsible for establishing and overseeing the U.N. Global Compact, now the world’s largest corporate citizenship initiative; proposing and gaining General Assembly approval for the Millennium Development Goals; advising Secretary-General Kofi Annan on relations with Washington; and broadly contributing to the effort at institutional renewal for which Annan and the United Nations as a whole were awarded the Nobel Peace Prize in 2001.

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As discussed in an earlier post, the International Finance Corporation ("IFC") recently released an updated version of its Performance Standards on Environmental and Social Sustainability.  The IFC uses the Performance Standards to manage the social and environmental risks and impacts associated with projects receiving IFC financing.  The revised Standards reflect a number of important changes, particularly on the topic of engaging with communities, with special guidance related to indigenous peoples. 

The Performance Standards, in essence, lay out three tiers of community engagement:

(1)   Baseline Consultation

Pursuant to Performance Standard 1, companies are required to have a social and environmental management system ("ESMS") in place throughout the life of each project receiving IFC financing.  As part the ESMS, companies must engage in consultation with communities that are subject to risks and adverse impacts from the project, and must respond to concerns raised by those communities.  The depth of the required consultation is dependent on the specific risks associated with the project, and the concerns raised by affected communities. 

The consultation requirements in the updated Performance Standards are substantially similar to the requirements reflected in the previous version, released in 2006.  Specifically, the consultation should: 

• Begin early;
• Be based on prior disclosure of information to communities in an accessible format;
• Be free from coercion; and
• Be documented. 

(2)   Informed Consultation and Participation

The revised  Performance Standards establish additional consultation requirements for projects with “potentially significant adverse impacts" on local communities.  In such instances, a company must conduct an “Informed Consultation and Participation” (“ICP”) effort, building on the basic consultation process.  The company is supposed to utilize the information gathered in this consultation to mitigate impacts, tailor its implementation, and identify appropriate mechanisms for the sharing of project benefits. 

It is not yet clear how much ICP will differ from the basic consultation process outlined above, although ICP will likely involve a more in-depth exchange of views and information.  Until the IFC releases the Guidance Notes that will accompany the revised Performance Standards, companies face uncertainty regarding when ICP is triggered, and how, exactly, it differs from the baseline consultation that the Performance Standards require.  The Guidance Notes are expected to be released in October 2011.

(3)   Free, Prior, and Informed Consent of Indigenous Peoples

Most notably, IFC Performance Standard 7 now requires that a company seek the “free, prior, and informed consent” ("FPIC") of affected indigenous peoples.  The IFC previously required that a company engage in “free, prior, informed consultation” with indigenous peoples. 

The IFC has not yet provided detailed parameters regarding how a company would know that it has obtained FPIC, although the Guidance Notes may do so.  Performance Standard 7 acknowledges that the process must involve the indigenous peoples’ representative bodies.  The IFC seems to contemplate that the process is not one-size-fits-all and may look different from project to project or community to community, because it will depend in part on the customs of the affected population.  Therefore, the Performance Standard calls on a company to:

• Document that it has agreed upon a process with the affected community – presumably a process through which the community would express its consent or lack thereof; and
• Document evidence of an agreement between the company and affected indigenous communities.

Performance Standard 7 notes that consent does not always require unanimity.  Presumably, what is required will depend on the process that the company agreed upon with the community. 

*     *     *     *     *     

With the release of the revised Performance Standards, companies face a number of new questions related to community engagement.  For instance, when are different consultation or consent requirements triggered?  What processes are adequate to fulfill them?  Finally, when indigenous peoples are not involved, the IFC must still define in the Guidance Notes when projects have “potentially significant impacts” sufficient to trigger an ICP process, rather than a baseline consultation process. 

In upcoming posts, we will look in more depth at revised Performance Standard 7 and its implications for companies.

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On August 1, Rep. Carolyn Maloney (D-NY) introduced H.R. 2759, the Business Transparency on Trafficking and Slavery Act (.pdf), a bill modeled after the California Transparency in Supply Chains Act.  The bill would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery, and the worst forms of child labor in their supply chains. 

The requirements of the California statute, which goes into effect on January 1, 2012, have been described in several previous posts.  Similar to the California legislation, the proposed federal legislation would only apply to companies with annual worldwide gross receipts exceeding one hundred million dollars.  Notably, however, the federal legislation is not limited to retailers and manufacturers.  If enacted, the legislation would be applicable to any publicly-traded or private company currently required to submit annual reports to the Securities and Exchange Commission ("SEC"), as long as the company meets the annual gross receipts threshold. 

Specifically, H.R. 2759 would require companies to include, in their annual reports to the SEC, disclosures describing to what extent, if any, they:

• Maintain policies to identify and eliminate risks of forced labor, slavery, human trafficking, and the worst forms of child labor within their supply chains;
• Maintain policies prohibiting the use of company products, facilities, or services to obtain or maintain conditions of forced labor, slavery, human trafficking, and the worst forms of child labor;
• Engage in verification of product supply chains to evaluate and address risks of forced labor, slavery, human trafficking, and the worst forms of child labor;
• Ensure that audits of suppliers are conducted, including specifications as to whether audits are independent and unannounced;
• Assess the supply chain management and procurement systems of suppliers to verify whether suppliers have appropriate systems in place to address risks of forced labor, slavery, human trafficking, and the worst forms of child labor within their own supply chains;
• Require suppliers to certify that materials incorporated into products comply with the laws regarding forced labor, slavery, human trafficking, and the worst forms of child labor in the country or countries in which they are doing business;
• Maintain internal accountability standards, supply chain management and procurement systems, and procedures for employees or contractors that fail to meet company standards regarding forced labor, slavery, human trafficking, and the worst forms of child labor;
• Provide training to employees and management on forced labor, slavery, human trafficking, and the worst forms of child labor;
• Ensure that recruitment practices of all suppliers comply with company standards for eliminating exploitive labor practices that contribute to forced labor, slavery, human trafficking, and the worst forms of child labor; and
• Ensure that remediation is provided to those who have been identified as victims of forced labor, slavery, human trafficking, and the worst forms of child labor.

The bill is co-sponsored by Rep. Christopher Smith (R-NJ), Rep. Jackie Speier (D-CA), and Rep. Jim McGovern (D-MA).  Rep. Maloney and Rep. Smith are co-chairs of the Congressional Human Trafficking Caucus.

While the ultimate passage of this proposed legislation is uncertain at best, given the current Congressional climate, the introduction of the bill reflects increased attention to the issue of human trafficking by public policy leaders.  Looking ahead, it is likely that legislative and regulatory efforts to eradicate human trafficking and other human rights abuses will involve provisions seeking to engage companies in addressing these concerns.  As noted in a recent article in Ethical Corporation magazine,

[n]ew efforts to combat human trafficking and slave labour have placed growing pressure on larger companies throughout the world to work towards eradicating trafficked and forced labour from their supply chains....Companies worldwide are being increasingly presed to become more transparent about their efforts to eliminate all formes of forced labour.

H.R. 2759 has been referred to the House Committee on Financial Services for further consideration.  We will be tracking the progress of this legislation closely.

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The International Finance Corporation ("IFC") released its updated Sustainability Framework today, reflecting changes adopted by the IFC's Board of Directors in May 2011. The Framework includes the IFC's Policy and Performance Standards on Environmental and Social Sustainability.  The updates reflect a number of important changes, including both the scope of Framework's application and the nature of the substantive requirements for borrowers. The new Framework will be effective on January 1, 2012.

Notably, the scope of application for the Performance Standards has expanded substantially. Previously, the Performance Standards only applied to project financing.  Going forward, the Standards will apply to a wider array of the IFC’s financing activities, significantly increasing the types of projects and entities that will need to meet the Standards' requirements.

With regard to substantive revisions, we will address several key updates in future posts, but a number of changes are worthy of immediate note. Specifically, the revised Performance Standards: 

• Recognize the responsibility of companies to respect human rights. The IFC also notes that following the Performance Standards will allow companies to address many relevant human rights issues, but acknowledges that additional human rights due diligence may be necessary to address all human rights risks, especially in high risk circumstances. 
• Require companies to develop emergency preparedness and response systems to address potential social or environmental impacts of projects, working with local stakeholders and the government as appropriate.
• Require due diligence to identify gender-specific social and environmental risks and impacts.
• Address migrant workers and trafficked persons for the first time, creating an expectation that migrant workers will receive pay similar to that of other employees, and classifying trafficked workers as a form of forced labor.
• Require “free, prior, and informed consent” when a business activity will affect specified interests of indigenous peoples. When a proposed business activity triggers this requirement, the IFC plans to conduct an in-depth review of the company's efforts to ensure they meet applicable standards. The Performance Standards also call on companies to obtain external expertise in certain circumstances in order to effectively manage issues pertaining to indigenous peoples.

As of May 2013, with regard to extractive sector projects financed by the IFC, the updated Framework will require the public disclosure of the principal contract between a company and the relevant government, with appropriate redactions of commercially sensitive information.  In lieu of full contract disclosure, a company will also be allowed to publish a summary of the key terms and conditions of the relevant contract. 

Notably, the IFC has not yet released the updated Guidance Notes that will elaborate on the Performance Standards and their associated requirements. The Guidance Notes are expected to be released in October.

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On Monday, July 11, for the second time in four days, a U.S. appellate court issued a decision stating that corporations are proper defendants in cases involving claims under the Alien Tort Statute (“ATS”). The Seventh Circuit Court of Appeals dismissed plaintiffs’ claims in Flomo v. Firestone, but held that “corporate liability is possible” under the ATS.

In a decision written by Circuit Judge Richard Posner, the Court observed that appellate courts in the Eleventh, District of Columbia, Second, Fifth, and Ninth Circuits have all held, or assumed, that corporations can be liable under the ATS. The Court then noted that the “outlier” decision on the question of corporate liability is Kiobel v. Royal Dutch Petroleum, and found that “the factual premise of the majority opinion in the Kiobel case is incorrect."  The Second Circuit's decision held that because corporations have never been prosecuted, civilly or criminally, for violating customary international law, there can’t be a principle of customary international law that binds a corporation. The Court disagreed with this premise, citing the dissolution of German corporations after World War II under the authority of customary international law.

After stating that Kiobel’s factual premise was incorrect, the Court then observed:

And suppose no corporation had ever been punished for violating customary international law. There is always a first time for litigation to enforce a norm; there has to be.

Ultimately, the Court found “[i]nternational law imposes substantive obligations and the individual nations decide how to enforce them.” Finding that corporate civil liability is proper in U.S. courts, the Court stated that corporate liability for violations of customary international law is “limited to cases in which the violations are directed, encouraged, or condoned at the corporate defendant’s decisionmaking level.”

The case involved allegations that children at the Firestone Natural Rubber Company’s rubber plantation in Liberia worked in such hazardous conditions that the work violated customary international law. The Court upheld the dismissal of plaintiffs' claims, finding that the conditions under which the children were alleged to have worked did not provide “an adequate basis for inferring a violation of customary international law.”

While the dismissal of plaintiffs’ claims was upheld, this decision, and the D.C. Circuit’s decision in Doe v. Exxon Mobil, represent two significant victories for those seeking to hold corporations liable under the ATS. As one of the plaintiffs’ lawyers, Terry Collingsworth, observed after the announcement of the Flomo decision, “We won the war, but lost the battle.” 

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On July 8, the D.C. Circuit Court of Appeals reinstated a lawsuit brought against Exxon Mobil Corp. (“ExxonMobil”) by Acehnese villagers, alleging that the company and its Indonesian subsidiary are liable for killings, torture, and other human rights abuses committed by the Indonesian military. In a lengthy 2-1 decision, the D.C. Circuit held that companies are proper defendants under the Alien Tort Statute (“ATS”), expressly disagreeing with the Second Circuit’s decision in Kiobel v. Royal Dutch Petroleum, 621 F.3d 111 (2d Cir. 2010).

The ExxonMobil case, originally filed in 2001, has a complex history. In 2005, the District Court for the District of Columbia dismissed plaintiffs’ claims under the ATS and the Torture Victim Protection Act, and held that aiding and abetting was not a proper theory of liability under the ATS. Plaintiffs were subsequently allowed to amend their original complaint and proceed under D.C. tort law. In 2009, the District Court dismissed plaintiffs’ remaining claims in an unusual decision relying on the “prudential standing” doctrine. Plaintiffs appealed the dismissal, and ExxonMobil raised the question of corporate liability on cross-appeal.

In reinstating plaintiffs’ claims, the D.C. Circuit stated “neither the text, history, nor purpose of the ATS supports corporate immunity for torts based on heinous conduct allegedly committed by its agents in violation of the law of nations.” The Court stated that the Kiobel decision “overlooks the key distinction between norms of conduct and remedies” and found that while international law provides the norms of conduct applicable in ATS cases, citing to Sosa v. Alvarez-Machain, 542 U.S. 692 (2004), federal common law governs the available remedies.

The Court also agreed with plaintiffs that aiding and abetting is a proper theory of liability under the ATS. Notably, the Court found that the proper standard for aiding and abetting liability is “knowing assistance that has a substantial effect on the commission of the human rights violation.” In stating that a “knowledge” standard is proper for aiding and abetting claims, the Court disagreed with the Second Circuit’s holding in Presbyterian Church of Sudan v. Talisman, 582 F.3d 244 (2d Cir. 2009). In that case, the Second Circuit held that defendants may only be found liable for violations of customary international law under an aiding and abetting theory of liability if they provide substantial assistance to the primary violator with the intent of furthering the human rights violation.

In its decision,  the D.C. Circuit observed that the Eleventh Circuit has also upheld corporate liability for ATS claims, citing Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252 (11th Cir. 2009), Romero v. Drummond Co., Inc., 552 F.3d 1303 (11th Cir. 2008), and Aldana v. Del Monte Fresh Produce N.A., 416 F.3d 1242 (11th Cir. 2005).  Unlike the D.C. Circuit's decision, the Eleventh Circuit cases do not include much analysis of the question of whether corporations are proper defendants.  The D.C. Circuit’s opinion establishes a clear split with the Second Circuit's analysis in Kiobel.  In June, plaintiffs in the Kiobel case have filed a petition for a writ of certiorari with the Supreme Court.  Some commentators believe that the clear split between the Circuits may lead the Supreme Court to take up the question of corporate liability under the ATS, an issue which was left unanswered in Sosa.

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On June 16, the U.N. Human Rights Council formally endorsed the Guiding Principles on Business and Human Rights prepared by the U.N. Special Representative for Business and Human Rights, Professor John Ruggie. The Human Rights Council's endorsement represents the conclusion of the Special Representative's mandate, which began in 2005. 

The Principles are intended to provide guidance on the implementation of the "Protect, Respect, and Remedy" Framework first introduced by the Special Representative in 2008. As observed in our earlier commentary, while the Principles are not law, they are likely to influence national law and policy in jurisdictions around the world. At the time of the endorsement, Professor Ruggie himself observed

The Council's endorsement establishes the Guiding Principles as the authoritative global reference point for business and human rights.

In his final presentation to the Human Rights Council (.pdf), delivered on May 30, Professor Ruggie noted that

For business enterprises, the Guiding Principles outline a human rights due diligence process. This entails assessing actual and potential human rights impacts; integrating and acting upon the findings; tracking the effectiveness of responses; and communicating how impacts are addressed. Human rights due diligence is meant to include dealings with third parties linked to the business enterprise.

In our experience advising companies on how to identify, prevent, and mitigate the adverse human rights impacts of their operations, Professor Ruggie's work has been a key reference point since the outset of his mandate.

The Principles provide high-level guidance applicable to all business enterprises, and many companies have already begun the hard work of interpreting how best to apply this guidance to their specific activities. In a manner appropriate to their industry and the scope of their operations, companies face the challenge of developing adequate mechanisms to assess the actual and potential human rights impacts associated with their activities. Companies must then determine how best to integrate the findings from these assessments into their management plans and into their dialogues and contracts, as appropriate, with business partners. While this work is challenging, ultimately it can play a key role in managing a company's legal, reputational, and operational risks.

In the resolution endorsing the Guiding Principles, the Human Rights Council also announced the formation of a new working group, consisting of five independent experts, to promote the effective dissemination and implementation of the Principles. The five experts will be appointed at the Council's eighteenth session in September 2011. As part of its work, the working group will host an annual Forum on Business and Human Rights.

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On June 3, the U.S. District Court for the Southern District of Florida declined to dismiss certain claims brought by Colombian plaintiffs against Chiquita Brands International ("Chiquita") alleging that the company knew, or should have known, that its material support for the United Self-Defense Forces of Colombia (“AUC”), a paramilitary organization, would lead to the death or torture of their family members. In Re: Chiquita Brands International, Inc., Alien Tort Statute and Shareholders Derivative Litigation, 08-1916 (S.D. Fla. June 3, 2011).

In March 2007, Chiquita admitted that it had provided payments to the AUC, stating that it had done so in order to ensure the protection of Chiquita employees and banana plantations in Colombia.  At the time of its admission, the company agreed to pay a $25 million fine for providing funds to an organization on the United States’ list of terrorist organizations and to cooperate in an investigation by the U.S. Department of Justice. 

After Chiquita's admission, cases were filed against Chiquita in several jurisdictions. Plaintiffs' claims were brought pursuant to the Alien Tort Statute ("ATS") and the Torture Victim Protection Act.  Plaintiffs also brought state law tort claims under the laws of Florida, New Jersey, Ohio, and the District of Colombia, as well as several claims under Colombian law.

Generally, to survive a motion to dismiss, plaintiffs are required to plead facts that, if accepted as true, state a claim to relief that is plausible on its face.  Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).  In its June 3 order, the District Court upheld plaintiffs' ATS claims for torture, extrajudicial killing, war crimes, and crimes against humanity. The Court dismissing several other ATS claims, including claims for terrorism, material support for terrorism, and for cruel, inhuman, and degrading treatment, finding that these claims were not actionable under the ATS. The Court upheld plaintiffs' TVPA claims for torture and extrajudicial killing.  Finally, the Court dismissed plaintiffs' state law claims, as well as claims brought under Colombian law. 

In upholding several of plaintiffs' ATS claims, the District Court recognized certain theories of indirect liabilty under the ATS, including aiding and abetting and conspiracy.  In upholding these indirect theories of liability, the Court stated that

[I]n order for Plaintiffs to allege that Chiquita is secondarily liable for the AUC's violations of international law, they must allege that Chiquita assisted or conspired with the AUC with the purpose or intent to facilitate the commission of the specific offenses alleged. Thus, to plead aiding and abetting liability, Plaintiffs must allege that (1) the AUC committed an international-law violation, (2) Chiquita acted with the purpose or intent to assist in that violation, and (3) Chiquita's assistance substantially contributed to the AUC's commission of the violation....To plead conspiracy liability, Plaintiffs must allege that (1) Chiquita and the AUC agreed to commit a recognized international-law violation, (2) Chiquita joined the agreement with the purpose or intent to facilitate the commission of the violation, and (3) the AUC committed the violation.

In upholding these indirect theories of liability, the Court cited to several appellate court decisions, including Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244 (2d Cir. 2009), Cabello v. Fernandez-Larios, 402 F.3d 1148 (11th Cir. 2005), and Aldana v. Del Monte Fresh Produce, N.A., 416 F.3d 1242 (11th Cir. 2005).  Notably, the Court rejected plaintiffs' agency theory of indirect liability, observing that "Plaintiffs point to no authority recognizing agency liability under international law."

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On May 25, forty-two countries, including the 34 countries that are members of the Organization for Economic Co-operation and Development ("OECD"), committed to promote an updated version of the OECD Guidelines of Multinational Enterprises.

The OECD Guidelines (.pdf) are a non-binding code of conduct containing recommendations for responsible business conduct in a global context. The countries that adhere to the Guidelines agree to promote the guidelines among the business sector. Notably, the revised OECD Guidelines reflect a new focus on business and human rights.

The Guidelines state explicitly that "[r]espect for human rights is the global standard of expected conduct for enterprises."  Respect for human rights means that companies "should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved" and should "[c]arry out human rights due diligence as appropriate to their size, the nature and context of operations and the severity of the risks of adverse human rights impacts." The Guidelines note that this due diligence can be included within broader enterprise risk management systems "provided that it goes beyond simply identifying and managing material risks to the enterprise itself to include the risks to rights-holders." 

 The Guidelines observe that 

Enterprises can have an impact on virtually the entire spectrum of internationally recognised human rights. In practice, some human rights may be at greater risk than others in particular industries or contexts, and therefore will be the focus of heightened attention. However, situations may change, so all rights should be the subject of periodic review. (emphasis added)

In the complex social, political, and economic contexts in which companies operate, risks to human rights are constantly fluctuating.  Human rights due diligence is not a one-time event, and while certain human rights may be the focus of greater attention depending on a company's operating context, all internationally recognized rights should be considered as part of the due diligence process.

The new revisions to the OECD Guidelines reflect the tremendous influence and rapid adoption of the United Nations Framework for Business and Human Rights ("Protect, Respect, and Remedy"), which was put forward by the U.N. Special Representative for Business and Human Rights in 2008, and subsequently adopted by the U.N. Human Rights Council.  The Guidelines were drafted in order to be aligned with the new Guiding Principles on Business and Human Rights, which the U.N. Human Rights Council is expected to adopt later this month.

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Last week, the Ninth Circuit Court of Appeals reversed and remanded a lower court's decision to dismiss Bauman v. DaimlerChrysler Corp. The case involves allegations by residents of Argentina stating that one of DaimlerChrysler's subsidiaries, Mercedes-Benz Argentina, collaborated with state security forces to kidnap, detain, torture and/or kill plaintiffs or their relatives during Argentina's "Dirty War."  Plaintiffs have asserted claims under both the Alien Tort Statute ("ATS") and the Torture Victims Protection Act.

The District Court for the Northern District of California had held that plaintiffs could not properly assert personal jurisdiction over defendant DaimlerChrysler AG (now known as Daimler AG). Bauman v. DaimlerChrysler AG, 2005 WL 3157472 (N.D. Cal. 2005), Bauman II, 2007 WL 486389 (N.D. Cal. 2007). Plaintiffs sought to assert jurisdiction over DaimlerChrysler AG through its wholly-owned U.S.-based subsidiary Mercedes-Benz USA, LLC.

The Ninth Circuit's decision that personal jurisdiction is proper in this case (assuming all plaintiffs' allegations are true) relied upon a traditional minimum contacts analysis. The decision does not address questions of subject matter jurisdiction and the validity of specific claims under the ATS.  Nor does it address the question of whether corporations are proper defendants under the ATS.

That said, in addressing whether California has an interest in adjudicating the suit, the Court observed that "California partakes in 'the shared interest of the several States in furthering fundamental substantive social policies.'" (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292 (1980). Continuing on, the Court stated that

as the [plaintiffs'] claims are predicated upon the ATS and TVPA, that policy is providing a forum to redress violations of international law by defendants who have enough connections with the United States to be brought to trial on our shores, even though the injury is to aliens and occurs outside our borders...American federal courts, be they in California or any other state, have a strong interest in adjudicating and redressing international human rights abuses.

As American courts continue to evaluate the ultimate impact of Kiobel v. Royal Dutch Petroleum, 621 F.3d 111 (2d Cir. 2010) (in which the Second Circuit found that corporations are not proper defendants under the ATS), the Ninth Circuit's decision in Bauman is a reminder of the divisions between the appellate courts on the nature and import of the policy considerations at issue in these cases.

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Foley Hoag recently issued commentary on the Guiding Principles on Business and Human Rights. As noted in an earlier post, an advance copy of the Guiding Principles was released in March by the U.N. Special Representative for Business and Human Rights, John Ruggie. The Principles will be considered by the U.N. Human Rights Council at its June 2011 session.

As noted in our commentary (a copy of which is available here)

The Principles are not binding international law. Nevertheless, they are the most authoritative international statement to date regarding the responsibilities of business with respect to human rights. It is likely that they will begin to influence national law and policy in jurisdictions including the United States and Europe.

The immediate value of the Principles is the guidance they provide to companies seeking to understand and manage the human rights impacts of their operations. The Principles set forth the central components of human rights due diligence and suggest that all companies should undertake such due diligence efforts with regard to their operations. We believe that human rights due diligence can help companies avoid and mitigate adverse human rights impacts which, in turn, can reduce legal, reputational, and operational risks.

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Earlier this week, a coalition of companies, investors, and organized labor announced a major new initiative in support of sustainable business practices. The Investor-Business Roundtable for a Sustainable Economy was launched during the 2011 Ceres Conference. Founding signatories include CalPERS and CalSTRS, the AFL-CIO, Levi Strauss & Co., Pacific Gas & Electric, SAP, Jones Lang LaSalle, Generation Investment Management, and the Skoll Foundation.

Participants in the Roundtable have agreed to leverage their position as "industry leaders and key market influencers to accelerate adoption of sustainability approaches and solutions across [their] networks, including employees, customers, supply chains, media and marketing." (.pdf) Individual commitments made by the founding signatories include:

• Levi Strauss & Co. announced new "terms of engagement" for its supply chain under which the company "will require contract factories to help make employees’ lives better by supporting programs for their workers that align with the UN Millennium Development goals."
• CalPERS, the largest pension fund in the United States, announced that it would integrate environmental, social, and governance factors into its investment decision-making across all asset classes.
• SAP, one of the largest business software companies in the world, announced that it will release new energy management solutions in the next quarter to assist companies in implementing energy saving initiatives. SAP estimates that its 170,000 customers emit 1/6th of the world's manmade greenhouse gas emissions.

In addition to the nine founding signatories, Ceres has said that it intends to engage more organizations in future Roundtable meetings. The Roundtable has its origins in a meeting hosted by Ceres and CalPERS in December 2010 which brought together companies, investors, and labor groups to discuss global sustainability challenges. The launch of the Roundtable highlighted the 21st Century Corporation: The Ceres Roadmap to Sustainability, a report and framework announced last year that is intended to help companies imbed sustainability into all aspects of their operations.  

Also this week, CalPERS and CalSTRs announced that they will join a group of more than twenty other investors in sending letters to all companies in the Russell 1000 index requesting that management teams and boards of directors address sustainability challenges in all aspects of company operations, including supply chains. The Russell 1000 tracks the largest 1000 U.S. securities.

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Retailers and manufacturers seeking to evaluate the potential applicability of The California Transparency in Supply Chains Act to their businesses should make certain that they are aware of recent changes in the California Revenue and Tax Code.  Specifically, Section 23101 of the Revenue and Tax Code was amended in a way that creates a more expansive definition of "doing business" in the state for taxable years beginning on or after January 1, 2011. 

As discussed in previous posts, the transparency legislation will go into effect on January 1, 2012 and applies to retail sellers and manufacturers doing business in California that have annual worldwide gross receipts exceeding one hundred million dollars.  These companies will be required to disclose their efforts, if any, to ensure that their product supply chains are free from slavery and human trafficking.  The transparency legislation states that "doing business in this state" shall have the same meaning as set forth in Section 23101.

As revised, Section 23101 states that a retailer and manufacturer may be found to be "doing business" in California if its sales in California exceed the lesser of $500,000 or 25 percent of its total sales. The manufacturer or retailer need not have a physical presence in California for sales to count as California sales. Retailers and manufacturers located outside California should evaluate the effects of these changes and the extent to which their businesses may now be subject to the transparency legislation's disclosure requirements.

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The Securities and Exchange Commission ("SEC") has delayed the release of final rules applicable to companies that source "conflict minerals" from the Democratic Republic of Congo ("DRC") and adjoining countries. Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies that utilize tin, tungsten, tantalum, and gold to conduct and disclose due diligence on their supply chains in order to identify whether the sourcing of these minerals is supporting the ongoing conflict in the Democratic Republic of Congo.

In an announcement regarding "upcoming activity" related to the implementation of Dodd-Frank, the SEC has indicated that final rules for Section 1502 will be adopted between August and December 2011. Final rules were originally scheduled to be issued no later than April 15.

Even as the federal rules on conflict minerals have been delayed, companies impacted by Section 1502 should pay attention to recent legislative activity in California. On April 12, the California State Senate passed a bill that would prohibit the state government from doing business with companies that fail to comply with federal regulations on conflict minerals. The California legislation, even if passed, is unlikely to impact many companies: it would apply only to companies against which the SEC has filed a civil or administrative enforcement action. That said, California's legislative activity reflects significant stakeholder concern, as well as advocacy activity, regarding the ways in which the sourcing of specific minerals may be contributing to the ongoing conflict in the DRC.

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Gare Smith and I recently co-authored an article on corporate social responsibility ("CSR") and risk management for Executive Counsel magazine. In the article, "Making Corporate Social Responsibility Systemic," one issue we discuss is the potential risk to companies that "claim to have embraced CSR and then simply point to glossy reports reflecting anecdotal philanthropic initiatives to demonstrate the degree of their commitment." We believe that

such companies fail to develop the internal policies and mechanisms necessary to ensure that the correct people, in the right functional areas, are held accountable for following specific environmental and social standards. References to good deeds do not mitigate against the risks associated with lack of internal commitment and oversight.

We observe that a lack of executive-level oversight with regard to a company's approach to CSR may leave companies with little capacity to develop strategic and comprehensive responses to stakeholder concerns about the social and environmental impacts of the company's operations. 

A copy of the full article is available here (.pdf).

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The U.N. Special Representative for Business and Human Rights, John Ruggie, has released his final report, Guiding Principles on Business and Human Rights: Implementing the United Nations "Protect, Respect, and Remedy" Framework.  The report will now be submitted to the U.N. Human Rights Council for consideration at its June 2011 session.

The Guiding Principles are intended to provide concrete and practical recommendations on how best to operationalize the "Protect, Respect, and Remedy" Framework first introduced by the Special Representative in 2008.  The Framework is built around the following three "pillars":

• States have a duty to protect against human rights abuses by third parties, including companies;
• Companies have a responsibility to respect human rights; and
• Victims of human rights abuses must have access to effective remedies.

The Guiding Principles represent the conclusion of a six-year effort by the Special Representative to provide guidance and coherence to debates regarding the impacts of business activity on human rights.  As stated in the introduction:

[U.N. Human Rights] Council endorsement of the Guiding Principles, by itself, will not bring business and human rights challenges to an end.  But it will mark the end of the beginning: by establishing a common global platform for action, on which cumulative progress can be built, step-by-step, without foreclosing any other promising longer-term developments...The Guiding Principles' normative contribution lies not in the creation of new international law obligations but in elaborating the implications of existing standards and practices for States and businesses; integrating them within a single, logically coherent and comprehensive template, and identifying where the current regime falls short and how it should be improved.

We have previously discussed an earlier version of the report, which was released in December 2010 for public comment.  In the coming months, we will publish a series of posts looking at the Guiding Principles and the implications of the Special Representative's recommendations, especially those that are directed at companies. 

One of the issues we will explore in future posts is the potential for companies to be "linked" to human rights abuses through business relationships, including those with suppliers and clients. The final version of the Guiding Principles is more explicit than the previous draft in addressing concerns around business relationships, and states that the responsibility to respect human rights includes a requirement that companies "[s]eek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts."

With regard to business relationships, the Guiding Principles discuss the concept of a company's "leverage" over entities that may be the direct cause of adverse human rights impacts.  As defined in the Principles, "[l]everage is considered to exist where the business enterprise has the ability to effect change in the wrongful practices of an entity that causes a harm." 

Companies are expected to take "appropriate action" to prevent or mitigate adverse human rights impacts that may be associated with their operations.  The final version of the Guiding Principles states that "appropriate action" will vary according to whether the company "causes or contributes to an adverse impact or whether it is is involved solely because the adverse impact is linked to its operations, products, or services through a business relationship."  Appropriate action will also vary according to "the extent of [the company's] leverage in addressing the adverse impact." 

One of the issues we will explore in future posts is the concept of "leverage" and the ways in which companies should evaluate both the extent, and the implications, of their leverage in different business relationships.  The Guiding Principles emphasize the role of human rights due diligence as a central component of the corporate responsibility to respect human rights.  Through this due diligence, companies should assess the potential for adverse human rights impacts with regard to their own activities, but should also assess the degree to which they may be linked to abuses through the activities of business partners.  In situations where adverse human rights impacts are directly linked to a company’s operations, products or services by their business relationships, and stakeholders perceive that companies have the leverage to prevent or mitigate abuses by other entities, companies will find themselves under pressure to either exercise this leverage or to end the business relationship.

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Foley Hoag's CSR practice serves as the Secretariat for the Voluntary Principles on Security and Human Rights (the "Voluntary Principles”).  The Voluntary Principles, a tripartite multi-stakeholder initiative established in 2000, provide guidance to companies in extractive industries on maintaining the safety and security of their operations within a framework that ensures respect for human rights and fundamental freedoms. The Voluntary Principles urge companies to

recognize a commitment to act in a manner consistent with the laws of the countries in which they are present, to be mindful of the highest applicable international standards, and to promote the observance of applicable international law enforcement principles.

This week, Voluntary Principles participants gathered in Washington, D.C., for the two-day Annual Plenary Meeting.  The meeting was hosted by the U.S. State Department, and Secretary of State Hillary Clinton delivered remarks to the attendees. 

The press release copied below provides more details on this annual event.   

                                                           *      *      *      *     *      *      

Voluntary Principles on Security and Human Rights Focus on Promotion of Human Rights and Increasing Total Number of Participants

WASHINGTON, March 22, 2011 /PRNewswire/ -- Participants in the Voluntary Principles on Security and Human Rights (the "Voluntary Principles") have gathered in Washington, D.C., this week for the two-day Annual Plenary Meeting. 

Since their inception, the Voluntary Principles have been used by extractive companies to strengthen their capacity to address complex security and human rights issues in their operations around the world. Members of the Plenary include representatives from three pillars: governments, companies, and NGOs. There are currently seven member governments, eighteen companies, and nine NGOs participating in the initiative. This year, the Voluntary Principles are pleased to welcome Barrick Gold Corporation as a new corporate participant.

At the 2010 Annual Plenary Meeting, participants collectively adopted a vision to:

Strengthen the Voluntary Principles on Security and Human Rights' significance as a business and human rights best practice framework by: increasing our participants' base, strengthening accountability, and actively promoting universal respect for human rights.

Consistent with this vision statement, during the past year, participants have focused on initiatives intended to promote the future growth of the framework, including the drafting of new entry criteria for governments, companies, and NGOs, as well as the creation of documents intended to facilitate outreach to potential participants in all three pillars. On March 21, 2011, to promote the Voluntary Principles with potential government participants, the U.S. State Department hosted an open house at which participants spoke with representatives of a number of interested governments regarding the benefits of joining the framework.

Participation in the initiative is voluntary. For questions on how to participate, contact the Secretariat at VoluntaryPrinciples@foleyhoag.com.  For more information about the VPs, visit www.voluntaryprinciples.org.

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Institutional Shareholder Services ("ISS") recently released a report on engagement between investors and public corporations in the United States that included the finding that this “engagement is expanding beyond financial and strategic issues and ‘traditional’ governance topics to include more environmental and social issues.” The report, The State of Engagement between U.S. Corporations and Shareholders, was based on a survey of 355 issuers of stock and 161 investors.

While popular attention to shareholder advocacy often focuses on the filing of shareholder resolutions, engagement between shareholders and companies often begins with letters and phone calls. Asset managers reach out to investor relations departments, corporate secretaries, and other senior executives, to initiate dialogue about issues of shareholder concern. The report notes that

Asset managers with an ESG (environmental, social, and governance) or SRI (socially responsible investment) orientation often contact an issuer's CSR (corporate social responsibility) or sustainability office, and one such asset manager noted that ‘the most effective engagements tend to be with the people actually working on the issue.’

Notably, the report found that both investors and issuers believe that “constructive dialogue” is indicative of a successful engagement, but investors were, unsurprisingly, much more likely to be satisfied with concrete corporate actions. Both sides felt that a withdrawn shareholder proposal was as much a sign of accomplishment as a proposal with high support votes. A withdrawn proposal is often a sign of productive discussions.

The report by ISS is intended to provide a comprehensive picture of engagement between investors and issuers and, in doing so, raises a number of questions for those monitoring shareholder advocacy on social issues, particularly in the area of human rights.

In the 2011 proxy season, members of the Interfaith Center on Corporate Responsibility have filed a number of resolutions raising human rights concerns including: resolutions asking for the adoption or amendment of human rights policies (e.g., Carnival Corporation, Caterpillar); resolutions asking for the identification of gaps in existing human rights policies (e.g., General Dynamics, KBR); and resolutions asking for companies to adopt policies articulating respect for the human right to water (e.g., Johnson & Johnson, Green Mountain Coffee Roasters).

Resolutions like the ones noted above likely reflect unsuccessful attempts at constructive dialogue. It is important therefore to ask what needs to happen, on both sides, for these resolutions to lead to the types of discussions, and/or actions, that each side can view as successful.

What types of engagement might preclude the filing of resolutions? Who, on the corporate side, should be engaged in responding to the shareholder concerns regarding human rights policies and impacts? Who are the people "actually working on the issue" that can respond effectively? The answers to these questions are likely to vary considerably depending on the company and the specific issues involved. That said, they are important questions for both sides to consider as shareholder concerns about social concerns, especially with regard to human rights, continues to grow.

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Earlier today, the District Court for the Southern District of New York entered an order dismissing, with prejudice, plaintiffs' claims in Abdullahi v. Pfizer, 01-cv-8118 (S.D.N.Y.). The case involved allegations that Pfizer conducted nonconsensual testing of Trovan, an experimental drug, during a meningitis outbreak in Nigeria in 1996.  Earlier this month, plaintiffs and Pfizer had filed a stipulation of dismissal after the parties reached an agreement to settle all claims.

The Nigerian plaintiffs had originally filed suit in 2001, bringing claims under the Alien Tort Statute ("ATS"), alleging that Pfizer's testing was done on children without their parents’ informed consent. Eleven children died as a result of their participation in the drug trial. 

In 2009, as discussed in an earlier post, the Second Circuit held that plaintiffs could properly bring claims against Pfizer under the ATS for “violation of the norm of customary international law prohibiting medical experimentation on human subjects without their consent.” Abdullahi v. Pfizer, Inc., 562 F.3d 163 (2d Cir. 2009). In that decision, the Second Circuit found that the international law norm prohibiting nonconsensual medical testing is sufficiently “universal, specific, and obligatory” so as to meet the standard for subject matter jurisdiction under the ATS established in the Supreme Court’s decision in Sosa v. Alvarez-Machain, 542 U.S. 692 (2004).

Plaintiffs' case against Pfizer, however, was subject to potential dismissal in light of the Second Circuit's more recent decision in Kiobel v. Royal Dutch Petroleum, 621 F.3d 111 (2d Cir. 2010), in which the court held that corporations cannot be properly sued under the ATS for violations of customary international law.

Pfizer faced pressure as the result of a recent increase in the level of media attention to the case. The heightened scrutiny came about, at least in part, as the result of disclosures in certain diplomatic cables released by Wikileaks, which called into question the propriety of Pfizer's efforts to settle two related cases brought in Nigeria. Those cases were settled in July 2009 for a total of $75 million and attorneys fees.

The most recent settlement, the specific terms of which are confidential, reportedly allows a maximum of $175,000 to be paid per child to people who can prove death or permanent disability due to the 1996 trial.  Any payments would come from a $35 million trust fund set up as part of the earlier settlement of the Nigerian claims.

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Last week, Sarah Altschuller was interviewed on Capital Thinking, an internet radio program on VoiceAmerica Business Network. During the interview, she addressed several recent legal developments in the field of corporate social responsibility, including the Dodd-Frank provisions on conflict minerals and disclosure of payments to governments, as well as the California Transparency in Supply Chains Act. She also discussed the Draft Guiding Principles recently released by the U.N. Special Representative on Business and Human Rights. A podcast of the interview is available here (.mp3).

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This year’s Super Bowl, held on February 6, provided advocates with an opportunity to shine a spotlight on one of the darkest sides of major sporting events: the trafficking of sex workers. At an anti-trafficking event held in January, Texas Attorney General Greg Abbott stated that “the Super Bowl is one of the biggest human trafficking events in the United States.”

When large numbers of people attend events like the Super Bowl, a correspondingly large number of sex workers reportedly come, or are brought to, the site of the event. Many of these workers may be underage and brought to the site against their will. The Federal Bureau of Investigation has estimated that more than 100,000 underage girls may be exploited for commercial sex in the United States each year. 

In the weeks and months leading up to the Super Bowl, a wide variety of advocates sought to enlist the help of companies in addressing the problem. In a statement shortly before the game, Rev. David Schilling of the Interfaith Center on Corporate Responsibility observed that “shareholders are requesting that the travel and tourism industry in Texas play a vital role in addressing human trafficking in the lead-up to the Super Bowl.” 

Hotels and airlines were the focus of much of the advocacy attention. The week before the Super Bowl, Airline Ambassadors International, a non-profit organization, organized a training at Dallas-Fort Worth Airport for the employees of several major airlines that was intended to provide flight staff with information on how to identify, and help, children who might be trafficking victims.

The attention paid to the Super Bowl was not an isolated occurence. Earlier in 2010, in the lead-up to the World Cup in South Africa, Christian Brothers Investment Services ("CBIS") produced a report evaluating the efforts of several major hotel chains to combat child sexual exploitation. The CBIS report highlighted The Code, a hospitality industry code of conduct intended to facilitate efforts to combat the sexual exploitation of children, and noted that only one major U.S. hotel chain - Carlson Companies (with brands including Radisson and Country Inns & Suites) has adopted The Code to date.

ECPAT-USA, a non-governmental organization, has identified four steps that hotels can take to help combat human trafficking. These steps were highlighted by CBIS in its advocacy efforts leading up to both the Super Bowl and the World Cup.  Adopted from The Code, the steps include:

• Adopting a corporate policy against sexual exploitation;
• Training staff to be observant to potential victims and, should they observe anything suspicious, making them aware to whom they should report such incidents;
• Building alliances with police, anti-trafficking organizations, and child welfare agencies; and
• Providing information to guests regarding national laws, hotline numbers to report potential incidents, and the penalties imposed for trafficking and the sexual abuse of children, reinforcing the fact that it is not accepted by the hotel.

As companies seek to address stakeholder concerns about human trafficking, it is important to note that Congress is paying attention to role of the private sector in addressing the problem. In July 2010, the House of Representatives organized a hearing on human trafficking during which Rep. Christopher Smith (R-NJ) declared that “[t]he airline and hotel industries should be on the front lines of the fight."

Human trafficking for sexual exploitation remains a problem that is often hidden from sight, especially in the United States, but the level of advocacy on this issue continues to increase. Companies, especially in the hospitality and transportation industries, are likely to face increasing pressure from stakeholders to play a role in addressing the problem.

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The Global Network Initiative ("GNI") released its first annual report (.pdf) last month. This is a milestone worth celebrating by all who continue to believe in the power of the information and communications technology ("ICT") sector to promote freedom and development (and development as freedom) worldwide.

Although the changes wrought in the last decade by the proliferation of ICT companies to the furthest reaches of the globe are almost unimaginable, the first decade of the new century has seen a decided dampening of the panglossian optimism that surrounded the early growth of what was then called the "information superhighway.” The myth that cyberspace is a sphere whose very architecture prevents governments from extending their writ there has now been shattered. 

As the GNI's inaugural annual report documents, some 40 countries worldwide – ranging from authoritarian China to antipodean Australia – filter internet content with varying degrees of effectiveness and heavy-handedness; and practically every government in the world has asked ICT companies to turn over user-identifying data for purposes ranging from bona fide law enforcement to the suppression of dissent.

Founded as they were by young idealists who believed in the early conception of cyberspace as an information commons, many ICT companies were initially caught off guard by government demands to disclose information that could pierce the cloak of anonymity behind which many internet users believed they were operating. Following criticism from civil society groups, academic commentators, and socially responsible investors for their responses to such incidents, the GNI was founded as a multi-stakeholder organization bringing together these disparate actors to develop a set of principles to protect and promote privacy and free expression online from unwarranted government intrusion.

As its inaugural annual report documents, the GNI has made substantial progress in furthering its four goals of fostering accountability, promoting policy engagement, enabling shared learning between its member organizations, and perhaps most importantly, establishing a framework for responsible company decision-making and action in responding to government requests. What is more, the GNI's report documents how its core principles have already been put into effect by its three current corporate members, Google, Microsoft, and Yahoo!:

• Faced with revelations that its servers in China were being attacked to obtain information pertaining to human rights activists, Google decided to restructure its activities in that market by discontinuing its filtered search services.
• Following media reports that prosecutors in Russia were harassing nettlesome NGOs by trumping up charges that they were pirating Microsoft software, the software giant consulted widely in the human rights community -- including with its GNI partners -- to develop a special licensing program for eligible organizations in certain countries.
• Finally, prior to expanding its polyglot offerings to yet another language, Yahoo! decided to manage and operate its new Vietnamese-language services from Singapore, owing to the stronger regulatory environment for protecting user privacy offered by the island-state.

With the recent appointment of its first-ever executive director, Susan Morgan, and an independent chair, Jermyn Brooks, the GNI is set to build on its already impressive accomplishments and continue to articulate the defining set of best practices on how to manage the unintended human rights consequences of the information revolution. Other ICT companies – particularly from the hardware and Web 2.0 sectors – would do well to take advantage of the opportunity for multi-stakeholder engagement that the GNI presents, before they too come face to face with the unintended consequences of their technologies.

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On February 4, the Second Circuit Court of Appeals denied plaintiffs' petition for a rehearing en banc in Kiobel v. Royal Dutch Petroleum, 621 F.3d 111 (2d Cir. 2010).  Plaintiffs filed the petition after the Second Circuit held, in a controversial September 2010 decision, that corporations cannot be properly sued under the Alien Tort Statute (“ATS”) for violations of customary international law.

The Court was divided 5-5 on the decision of whether to grant en banc review.  Several judges prepared separate opinions, and these opinions reflect a deeply divided court.

In support of the decision to deny a rehearing, Chief Judge Dennis Jacobs stated that "no international consensus has arisen (or is likely to arise) supporting corporate liability" for violations of customary international law.  He warned that allowing ATS cases to go forward against corporations could provoke "invasive discovery" that might "coerce settlements that have no relation to the prospect of success on the ultimate merits."

Chief Judge Jacobs also observed that the Second Circuit's decision in Presbyterian Church of Sudan v. Talisman, 582 F.3d 244 (2d Cir. 2009), had limited aiding and abetting liability under the ATS to those cases in which "conduct is done with the positive intention of bringing about a violation of the Law of Nations."  He found, therefore, that the "incremental number of cases actually foreclosed by the majority opinion in Kiobel approaches the vanishing point."  He warned, however, that unless Kiobel was upheld, "plaintiffs would be able to plead around Talisman in a way that would delay dismissal of ATS suits against corporations[.]"  He concluded that "this case has no great practical effect except for the considerable benefit of avoiding abuse of the courts to extort settlements."

Judge Leval dissented from the denial of a rehearing, in an opinion that echoed his vigorous dissent from the original September 2010 decision.  He noted the Chief Judge's argument that Kiobel "can have no more than trivial detrimental effect because, under our holding on Talisman, liability may be imposed for aiding and abetting only in the most serious cases -- those in which the defendant acted with a purpose to violate the law of nations."  Judge Leval then argued that "[t]o justify a rule that exempts certain defendants from liability on the ground that the rule protects only the very worse offenders is strange logic." 

Judge Leval noted many of Chief Judge Jacobs' concerns and found that "[t]o the extent Judge Jacobs airs reasonable grievances, these can be ameliorated by less drastic measures, which do not leave juridical entities free to conduct businesses based on the abuse of human rights without exposure to civil liability."

In a short dissenting statement attached to the order denying the request for rehearing, Judge Lynch, joined by Judge Pooler, Judge Katzmann, and Judge Chin, observed that "this case presents a significant issue and generates a circuit split," citing to the Eleventh Circuit's decision in Romero v. Drummond, 552 F.3d 1303 (11th Cir. 2008), which upheld corporate liability under the ATS.  This observation of the circuit split may foreshadow the ultimate resolution of the question of corporate liability under the ATS as the split provides a basis for a petition to the U.S. Supreme Court.

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The Securities and Exchange Commission ("SEC") has extended the time period for comments on proposed rules issued pursuant to Section 1502 (conflict minerals) and Section 1504 (disclosure of payments to governments) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The proposed rules are now open for comment until March 2, 2011.

The extension applies to rules proposed pursuant to:

• Section 1502 of the Dodd-Frank Act, which requires companies that utilize certain conflict minerals to conduct and disclose due diligence on their supply chains in order to identify whether the sourcing of these minerals is supporting the ongoing conflict in the Democratic Republic of Congo; and
• Section 1504, which lays out transparency provisions requiring oil, gas, mining, and other extractive industry companies to report their payments to governments to the SEC.

As stated by the SEC in the notices of extension (.pdf),

The nature of the proposed disclosure requirements differs from the disclosure traditionally required by the Exchange Act…The Commission believes that providing the public additional time to consider thoroughly the matters addressed by the release and to submit comprehensive responses to the release would benefit the Commission in its consideration of final rules. 

Many companies and industry groups had requested an extension of the comment period because of the new and complex issues raised by the proposed disclosure provisions.

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This post was originally published on January 21, 2011 by Vault.com's CSR Blog, "In Good Company."

Last week’s post, "Why Don’t Executives Understand CSR?" prompted me to reflect on the risks to companies where executives claim pride in corporate CSR programs, but don’t really see CSR as a core element of their business strategy.

As a lawyer, it’s hard for me not to talk about risk. I see CSR as critical to corporate risk management, and it worries me when I see companies that state a commitment to CSR, but, in reality, limit CSR to a section on the corporate website and a few standards that no management-level personnel are accountable for implementing.

There is a Business Case for Well-Managed CSR

Why the worry? Many people talk about the business case for CSR, but I qualify this slightly – there is a business case for well-managed CSR. A CSR approach that is not sufficiently integrated into the company’s operations and that very few people, especially at the executive level, actually understand, can present business risks.

What are those risks?

1. Disconnect With Stakeholders

A poorly managed CSR program can diminish corporate capacity to understand the concerns of its stakeholders about the social and environmental impacts of its operations. Companies may think that by stating a commitment to CSR they are somehow responsive to these concerns, and this may preclude the diligent effort required to evaluate legitimate and evolving stakeholder expectations. This lack of understanding is then revealed when corporate contributions to local charities fail to preclude a community from lobbying against company activity.

References to acts of corporate citizenship do not mitigate against the risks associated with a lack of internal commitment to CSR.

2. All Talk, No Action

If CSR is limited to high-level policies and glossy philanthropic reports, few people within the company are actually tasked with assessing and understanding the complex impacts of company operations. Even fewer are developing strategies to respond in both the short- and the long-term.

Many people talk about how to define CSR, but I think it is more interesting to ask "What does CSR do?" and "What is its function within the company?" At its core, I think CSR creates a culture of listening and provides the discipline to know when, and how, to respond to what is being said.

What can companies do?

1. Listen

Companies need to be skilled at listening to a range of stakeholders, including employees, investors, governments, and local communities. They need to develop a strong understanding of stakeholders’ expectations of the company and their concerns about the impacts of corporate activity. Listening is an active process: it requires proactive engagement and seeking out new perspectives, both internally and externally. Giving a voice to stakeholders provides companies with invaluable information and perspectives on how to run their operations, if they are willing to hear what is being said.

2. Respond

If CSR begins with listening, it ends with a management system that is responsive to the information that stakeholders provide. If stakeholder concerns and expectations are not understood--and the company seen as unresponsive--stakeholders begin to take action. Employees leave, consumers shop elsewhere, investors express concern, and communities protest. And perhaps, legislation is passed and lawsuits get filed.

In order to be responsive to stakeholder concerns, a company needs to develop the internal capacity to evaluate these concerns, assess potential responses, and make decisions about corporate strategy. A strong CSR approach requires both active stakeholder engagement and an internal management system that provides the oversight mechanisms and training resources necessary to develop the capacity of employees in many functional areas to engage effectively on these issues.

And this is why executive-level understanding is key.

I’m not saying that executives need to be CSR experts. But they need to understand that CSR, to be effective, is not something that is solely the responsibility of a few people within the company. Without high-level support and oversight, CSR policies are drafted but not implemented, and stakeholders are heard, but not understood.

Ultimately, executives need to understand the relevance of CSR programs to the company’s overall business strategy and to its engagements with internal and external stakeholders, who will always be sole arbiters of its future success.

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In previous posts, we have discussed the requirements and implications of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), which requires companies that utilize certain conflict minerals to conduct and disclose due diligence on their supply chains in order to identify whether the sourcing of these minerals is supporting the conflict in the Democratic Republic of Congo.  The Security and Exchange Commission released its proposed rule on conflict minerals in on December 15, 2010.  The rule is open for comment until January 31, 2011.

Recently, Sarah Altschuller, one of the attorneys in our CSR practice, recorded a podcast on the SEC's proposed conflict minerals rule for Compliance Week.  The podcast is available here.  Conflict minerals consist of columbite-tantalite (tantalum precursor), wolframite (tungsten precursor), cassiterite (tin precursor), and gold.  As noted in the podcast, these minerals are used in the production of automobiles, jet engines, computers, cell phones, jewelry, medical equipment and many other products, and the rule will thus affect a broad range of industries. 

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2010 was a big year for indigenous rights. By the end of the year, the four countries that had voted against the U.N. Declaration on the Rights of Indigenous Peoples (“UNDRIP”) in 2007 – the United States, Canada, Australia, and New Zealand – had reversed their positions and declared their support for the Declaration. This development reflects the rising importance of indigenous rights on the international stage, and points to specific implications for business in 2011 and beyond.

Although the UNDRIP is not binding international law, it nevertheless will have an increasingly significant impact on the acquisition of land and intellectual property by companies in situations where indigenous peoples have conflicting property claims.

The UNDRIP sets forth the responsibility of governments to gain free, prior, and informed consent from indigenous peoples for development projects. It has already been cited in national court cases, particularly in Latin America, as support for the requirement that governments seek free, prior, informed consent from indigenous peoples and cease giving concessions to companies until consent is obtained. Thus, although the UNDRIP addresses governments, it will directly impact companies.

In an upcoming development, this spring the International Finance Corporation ("IFC") will release a revised version of its Environmental and Social Performance Standards, which apply to companies receiving its loans. It is rumored that the IFC will add language requiring free, prior, informed consent of indigenous peoples to the revised standards.

Companies engaged in oil, gas, mining, or other projects with significant physical footprints should consider the implications of evolving indigenous peoples’ rights. Companies seeking to use products that are the cultural heritage of indigenous peoples for pharmaceutical or beauty products may also be impacted by recent trends.

Foley Hoag's recent report, Implementing a Free, Prior, and Informed Consent Policy: Benefits and Challenges, outlines some of the considerations for companies seeking to effectively address indigenous rights in their policies and practices. For companies seeking to address concerns about indigenous peoples' rights in specific national contexts, the following due diligence steps may help manage potential legal, reputational, and operational risks:

• Identify national laws regarding consultation or consent of indigenous peoples.
• Evaluate whether the national government, in fact, observes laws on consultation, and work with the government, to the extent possible, to ensure that the relevant law(s) are fully implemented. 
• Review any pending cases against the host country in national courts or regional courts, such as the Inter-American Court of Human Rights, regarding the taking of land from indigenous peoples for development projects. 
• In challenging country contexts, consider following the IFC Performance Standards as a way to demonstrate to investors, civil society, and indigenous groups that the company is following best practices.

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Today is National Human Trafficking Awareness Day.  In less than one year, on January 1, 2012, The California Transparency in Supply Chains Act will go into effect.  As discussed in previous posts, many large retailers and manufacturers doing business in California will be required to disclose their efforts, if any, to ensure that their product supply chains are free from slavery and human trafficking.

Companies that will be impacted by the legislation include both brand name retailers that have already faced considerable scrutiny with regard to human rights issues in their supply chains, as well as companies that have not historically received much attention with regard to these issues.  All impacted companies must make the required disclosures on their corporate websites.

What should companies doing business in California be doing to prepare for this legislation?

• Identify whether the legislation applies to your company.  If your company does business in California and is identified on its tax returns with a "principal business activity code" that falls within the category of “manufacturing” or “retail trade”, the legislation applies if your company’s annual gross receipts exceed one hundred million dollars.  This will impact a range of companies, including clothing retailers, grocery stores, and metal manufacturers.

• Review any human rights policies and standards applicable to your product supply chain.  If the legislation applies, it is time to closely review your corporate policies and supplier standards that address issues of human rights.
  • Does your company have policies in place that address forced labor and human trafficking?
  • How does your company inform its suppliers of these policies?
  • Does your company have procedures to evaluate the risk of forced labor or human trafficking associated with the manufacture of its products?
  • Do your supplier standards require certification that the raw materials used in the manufacture of products were sourced in compliance with applicable laws on slavery and human trafficking?

These are all important questions to consider when evaluating your company’s capacity to produce the required disclosures.

• Review, or implement, auditing and verification mechanisms.  Policies and procedures must be implemented and verified.  It is important to evaluate the capacity of existing verification procedures: 
  • How does your company verify compliance with its human rights policies? 
  • Does your company have systems in place to audit suppliers for compliance with corporate human rights policies? 
  • Are existing, or planned, auditing procedures sufficient to evaluate the specific risks of forced labor and human trafficking associated with your product supply chain? 
  • Does your company use independent auditors? 

Note that the legislation will require companies to specify whether verification of supplier compliance is done through independent, unannounced audits.

• Review internal accountability mechanisms and training procedures.  Your supplier policies and standards provide little assurance unless they are effectively integrated into the management of your supply chain.
  • Are corporate human rights policies integrated into supplier guidelines and standards?
  • What functional areas within your company are best-positioned to implement policies on forced labor and human trafficking?
  • Are the correct people within the functional areas noted above held accountable for implementing corporate policies on forced labor and human trafficking?
  • Is your company providing sufficient training to the right personnel to ensure that corporate policies are carried out effectively?  

Note that the legislation specifically calls for disclosures regarding internal accountability mechanisms and training programs for employees and management.

• Start thinking about the content of disclosures.  When planning public disclosures, one year can go by very quickly.  It is important to begin internal discussions about the content of the required disclosures within your company.  The California statute requires disclosure of corporate efforts "if any" -- and this allows for a range of potential approaches.  It may be appropriate to engage in discussions with external, as well as internal, stakeholders when determining what information should be provided. 

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Looking back at 2010, there have been a number of significant legal developments in the field of corporate social responsibility.  New federal and state statutes have imposed due diligence requirements on companies with the specific intent of addressing human rights concerns, ranging from forced labor to the ongoing conflict in the Democratic Republic of Congo.  Courts continue to grapple with the potential scope of corporate liability under the Alien Tort Statute (“ATS”).  At the international level, the concept of the corporate “responsibility to respect” human rights continues to gain credence, at the same time as access to water was recognized as a human right by the United Nations.

As lawyers, we advise clients on developments in both “hard law” requirements and “soft law” expectations for companies in the area of human rights and social responsibility.  The intersection of what is required and what is expected of companies can present both challenges and opportunities.  In no specific order, here are five “big developments” that we think will impact corporations, and the expectations of corporate stakeholders, in 2011 and beyond.

• The SEC, Conflict Minerals, and Disclosure of Payments.  Buried in the Dodd-Frank financial reform legislation are two provisions that impose significant new disclosure requirements on companies.  Section 1502 requires companies that utilize certain conflict minerals to conduct and disclose due diligence on their supply chains in order to identify whether the sourcing of these minerals is supporting the conflict in the Democratic Republic of Congo.  Section 1504 requires companies in the extractive sector to report on taxes, royalties, fees, and other material benefits paid to foreign governments and the United States.  Compliance with these provisions will be a significant challenge for many companies.  In mid-December, the SEC released proposed rules pursuant to these two provisions, and final rules are expected to be in place by April 2011, although under the new Congress implementation of these rules may be delayed.

• Ruggie's Draft Guiding Principles.  The U.N. Special Representative on Business and Human Rights, John Ruggie, released his Draft Guiding Principles for the implementation of the three-part “Protect, Respect, and Remedy” framework first set forth in his 2008 report to the U.N. Human Rights Council.  Institutions ranging from the European Parliament to the OECD have already cited certain provisions of the framework, especially with regard to the corporate responsibility to respect human rights -- that is, not to infringe on rights -- and its central component of human rights due diligence.

• Water is a Human Right.  In July, the U.N. General Assembly declared access to safe water to be a human right.  In September, the U.N. Human Rights Council adopted a resolution recognizing access to clean water and sanitation as a fundamental human right, “equal to all other human rights” and capable of legal enforcement.  These developments came at the same time as increasing water scarcity is impacting communities, and companies, around the world.  Companies will likely find that stakeholders increasingly expect due diligence efforts, especially with regard to human rights impacts, to include assessments of corporate impacts on community water resources.

• The Second Circuit Declares that Companies are Not Proper Defendants Under the ATS.  In a controversial opinion, the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum that corporations cannot be properly sued under the ATS for violations of customary international law.  Already cited by other courts, and by many defendant briefs, this opinion, whether or not it is upheld, stands as one of the most significant ATS decisions to date.

• California Transparency in Supply Chains Act.  Retailers and manufacturers operating in California with global receipts in excess of $100 million will now be required to disclose what efforts they are taking, if any, to “evaluate and address” the risks of slavery and human trafficking in their supply chains.  This requirement applies to a wide range of companies, ranging from apparel companies that have grappled with concerns about their supply chains for many years, to companies in other sectors for which these due diligence requirements represent a new challenge.

As the New Year begins, we will continue to monitor these developments, and others, in the dynamic field of corporate social responsibility and the law.

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A resolution adopted by the European Parliament on November 25, 2010 increases the likelihood that the days of CSR as a purely voluntary initiative are numbered. Approved by a margin of 480 votes to 48, the resolution on corporate social responsibility in international trade agreements calls on the European Commission to include a CSR clause in all of the European Union’s trade agreements.

Such a clause would require, inter alia, companies to publish “CSR balance sheets,” report on due diligence, and seek free, prior and informed consultation with local stakeholders.  The proposed CSR clause would also provide for monitoring and judicial cooperation in pursuing and punishing breaches of CSR commitments.  More generally, the resolution also calls on the Commission to reinforce its promotion of CSR in multilateral trade policies and to conduct sustainability impact assessments before and after trade agreements are signed.

According to its explanatory note, the resolution was drafted in recognition of the reality that for “ordinary people throughout the world, the expansion in international trade is justified only if it contributes to economic development, to job creation and to improved living standards.”

The note provides moral, socio-economic, and political justifications for Europe to address CSR in the context of its trade agreements:

• First, European companies enjoying the benefits of trade must be asked to conduct themselves in a socially and environmentally responsible manner in developing countries and elsewhere. 
• Second, “non-compliance with CSR principles constitutes a form of social and environmental dumping” in developing countries to the detriment of companies and workers in Europe, who are required to meet more stringent social and environmental standards. 
• Third, the EU’s trade policy must be consistent with and complimentary of its other foreign policy priorities on matters such as environmental protection and development aid.

Many of the EU’s international trade agreements already address social and environmental concerns. The significance of the proposed CSR clause is that it would place an onus on companies – not just the State parties to the trade agreements – to act in a socially and environmentally responsible manner.  Also, while recent trade agreements concluded by the EU with South Korea, Colombia and Peru vaguely mention the State parties’ intent to promote CSR, the proposed CSR clause would require specific actions by companies.  Among the proposed requirements for the CSR clause are the following:

• Companies would be required to publish CSR balance sheets in two or three year intervals in order to reinforce transparency and reporting and encourage visible and credible CSR practices;
• Companies would be required to conduct due diligence in order to identify and prevent  "violations of human and environmental rights, corruption or tax evasion, including in their subsidiaries and supply chains";
• Companies would be required to commit to "free, open and informed prior consultation" with local and independent stakeholders prior to commencing a project that impacts a local community.

The resolution envisions that other provisions enforcing implementation of CSR would accompany the CSR clause.  It recommends, for example, that in addition to establishing appropriate investigatory mechanisms, State parties should be willing to "name and shame" companies in serious breach of their CSR commitments.  The resolution also foresees judicial cooperation and training as a means of facilitating judicial redress for victims of inappropriate corporate conduct.

The European Parliament’s resolution is a non-legislative act and thus not enforceable.  It is now up to the European Commission to decide whether to incorporate the Parliament’s proposals into binding legislation.  Although some companies will balk at any attempts to limit the voluntary nature of CSR, others, especially those that already seek to operate in a socially and environmentally responsible manner, may welcome the prospect of all companies being required to operate by the same rules in the context of particular trade agreements.

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Foley Hoag's Emerging Enterprise Center blog has recently published several posts on a preliminary staff report, recently released by the Federal Trade Commission ("FTC"), which sets out a proposed framework for protecting privacy in the digital economy.  Specifically, the report endorses the implementation of a “Do Not Track” mechanism to allow consumers to choose whether to allow the collection of data regarding their online activities.

The most recent post on the Emerging Enterprise Center blog is copied below and reflects the tensions that exist between companies that depend upon tracking technologies and consumer advocates seeking more protection over their personal data.  As summarized by our Security, Privacy and the Law practice, two key predictions are worthy of note:

1. The industry powers will fight against “Do Not Track” and will win that fight.  
2. Industry will accept some other form of regulation in exchange for defeating “Do Not Track.”

From a corporate social responsibility perspective, the current debate on protecting consumer privacy online needs to recognize that the right to privacy is a basic human right. At first glance, the collection by corporations of isolated bits of data about our activities online may appear to be trivial -- especially when compared to the systems that authoritarian governments have been building to monitor and filter Internet traffic.  But as an infamous class project conducted last year at Fordham Law School demonstrates, the aggregation of many isolated bits of data about an individual can end up taking a major "byte" out of their privacy.

Multi-stakeholder groups like the Global Network Initiative have been working for the last several years to protect and advance the human rights of freedom of expression and privacy in the information technology sector.  Instead of accepting alternative regulation in exchange for defeating "Do Not Track", industry heavyweights might want to consider redoubling their commitment to multi-stakeholder processes that could generate an industry-wide code of conduct that addresses the core concerns raised by the FTC's report.

                                                           *    *    *    *    *    *

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Yesterday, the Securities and Exchange Commission (“SEC”) posted proposed rules pursuant to Section 1502 (conflict minerals) and Section 1504 (disclosure of payments to governments) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The proposed rules are open for comment until January 31, 2011.  Final rules will be issued no later than April 15, 2011.

We will be providing further analysis of both of these proposed rules.  Based on an initial review, key points include:

Section 1502 (Conflict Minerals)

• The proposed reporting requirements apply to all SEC issuers who file reports with the Commission, including foreign private issuers and smaller reporting companies, for which conflict minerals are "necessary to the functionality or production of a product manufactured" or contracted to be manufactured by such an issuer.  Conflict minerals consist of columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin), and gold.  The rules apply even if only small amounts of such minerals are utilized. 
• If an issuer determines through a "reasonable country of origin inquiry" process that the conflict minerals it uses did not originate in the Democratic Republic of the Congo or adjoining countries ("DRC countries"), it will be required to disclose this determination in its annual 10-K report.  The annual report must also state what "reasonable country of origin inquiry" process the issuer undertook.  The issuer would be required to maintain records demonstrating that its conflict minerals did not originate in the DRC countries.
• If an issuer either determines that its conflict minerals originated in the DRC countries, or cannot conclude that they did not originate in the DRC countries, the issuer will be required to disclose this information in its annual report. The issuer must then furnish a Conflict Minerals Report as an exhibit to the annual report, and must disclose the Internet address at which this exhibit is available.
• The Conflict Minerals Report must describe the due diligence that the issuer conducted on the source and chain of custody of its conflict minerals.  Issuers will be required to describe: products that are not "DRC conflict free"; the country of origin of those conflict minerals; the facilities used to process those minerals; and efforts taken to locate the mine or source of the minerals with the greatest possible specificity.
• The Conflict Minerals Report must be audited by an independent private sector auditor. Issuers must identify the auditor and certify the audit. 
• Issuers will be required to provide their first disclosures after their first full fiscal year following the promulgation of the final rules.

Section 1504 (Disclosure of Payments by Resource Extraction Issuers)

• All U.S. and foreign companies engaged in the commercial development of oil, natural gas, or minerals that are required to file annual reports with the SEC are subject to the rule, regardless of size. Commercial development encompasses exploration, processing, export, and other “significant actions,” but does not include ancillary activities such as producing equipment utilized in commercial development or providing transport.
• Covered companies must report on taxes, royalties, fees, production entitlements, bonuses, and other material benefits paid to foreign government and the Federal Government that are not de miminis. The SEC does not plan to define "de minimis." These benefits can be in cash or in kind.
• Covered companies must report the type and total amount of payments made to a government for each project. The SEC does not propose to define the term "project."
• Covered companies must report on such payments made by subsidiaries or entities under their control, where the definition of control is taken from existing securities law.
• Covered companies must disclose a brief statement of this information in their annual 10-K reports, which refers investors to detailed information provided in two exhibits that would be furnished to the SEC as part of the 10-K. One of the two exhibits would include information in XBRL format, an interactive data format.
• Disclosure will be required in annual reports relating to fiscal years ending on or after April 15, 2012.

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Early last week, the Ninth Circuit Court of Appeals revived a tort case brought by 25 members of the Peruvian Achuar indigenous group and Amazon Watch against Occidental Petroleum ("Occidental").  Plaintiffs allege that the company's operations in the Peruvian Amazon resulted in severe contamination of the land and rivers in the region and that, as a result, they have suffered adverse health effects and negative impacts on their livelihoods.

Plaintiffs originally filed suit in 2007 in state court and asserted common law tort claims including negligence, fraud and misrepresentation, trespass, and strict liability.  Plaintiffs also brought claims under California's Unfair Competion Law.  The case was subsequently removed to federal court and, in April 2008, the District Court for the Central District of California dismissed the case on forum non conveniens grounds.

The Carijano litigation is notable in part due to the fact that plaintiffs have sought redress through common law tort claims rather than through claims asserted pursuant to the Alien Tort Statute.  The ultimate viability of plaintiffs' claims remains uncertain, as the litigation has only dealt with jurisdictional issues to date.  Those seeking to hold corporate defendants liable in U.S. courts for acts outside the United States will be watching the future progression of this case closely.

Last week's Ninth Circuit decision also raises important considerations for litigants in cases where an alternate forum may be available outside the United States.  Based on the facts of the case, the Court found that the district court had abused its discretion in finding that Peru represented an adequate alternate forum for this litigation.  The Ninth Circuit observed that Occidental had consented to jurisdiction in Peru without waiving the statute of limitations defense that would be available under Peruvian law, and found that dismissal on the basis of forum non conveniens is improper when the lawsuit would be time-barred in the alternate jurisdiction.  Specifically, the Court said that

where there is reason to believe that a defendant will seek immediate dismissal based on the foreign forum's statute of limitations, dismissal should be conditioned on waiting any statute of limitations defenses that would not be available in the domestic forum.

In addition, the Ninth Circuit found that the district court had failed to weigh plaintiffs' expert testimony which stated that Peru did not offer a practical remedy for plaintiffs, especially with regard to damages.  The Court also found that insufficient deference was given to plaintiffs' choice of forum. 

Finally, the Court found that a dismissal on forum non conveniens grounds should have been conditioned with certain requirements, including a commitment that Occidental would waive the statute of limitations defense.  The Court also noted that "[w]hen there is reason to beliveve that enforcing a judgment in a foreign country would be problematic, courts have required assurances that a defendant will satisfy any judgment as a condition of dismissal."

As noted above, this case raises the question of whether common law tort claims may support litigation by plaintiffs on the basis of corporate activities, and alleged abuses, outside the United States.  The Ninth Circuit's dismissal also raises key concerns for defendants seeking to dismiss foreign plaintiffs' claims on the basis of forum non conveniens, especially where certain claims and defenses are available in one forum and not the other.

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The U.N. Special Representative for Business and Human Rights, John Ruggie, has released the long-awaited draft of his final report, the Guiding Principles for the Implementation of the United Nations "Protect, Respect and Remedy’" Framework (.pdf).  The Guiding Principles are the culmination of the Special Representative’s mandate, which began in 2005, and which will conclude when the final report is delivered to the U.N. Human Rights Council in June 2011.  The draft is open for public comment until January 31, 2011.

The Guiding Principles build on the Special Representative’s previous reports and are organized around the three-pillar “Protect, Respect and Remedy” policy framework first set forth in his 2008 report (.pdf).  Under this framework:

• States have a duty to protect against human rights abuses by third parties, including companies;
• Companies have a responsibility to respect human rights; and
• Victims of human rights abuses must have access to effective remedies.

As noted by the U.N. Special Representative, this three-pillar policy framework “has already influenced policy development by Government and international institutions, business policies and practices, as well as the analytical and advocacy work of trade unions and civil society organizations.”  Through the Principles, the Special Representative has not created “new international legal obligations,” but rather has elaborated “the implications of existing standards and practices for States and business” and integrated them around a comprehensive framework.

There are 29 principles in all, each with detailed commentary.  Corporate leaders, and their stakeholders, should not limit their attention to the 11 principles specific to the “corporate responsibility to protect” pillar of the Special Representative’s policy framework.  All of the principles have important implications for the business community.  In future posts, we will provide a deeper analysis of several specific elements of the Guiding Principles.  In the text below, we provide an overview of key points, as well as questions, raised by the draft report.

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CDP Water Disclosure, a program of the Carbon Disclosure Project, released its first water disclosure report (.pdf) last week.  The report summarizes the results of a survey of 302 companies from 34 countries regarding their water use and their management of water-related risks.  The findings highlight the degree to which water-related challenges are capturing the attention of a wide range of corporate stakeholders.

Of the 150 companies that responded to CDP’s questionnaire: 67% reported that responsibility for water-related issues lies at the Board or Executive Committee level; 89% have developed specific water policies, strategies, and plans; and 60% stated they have established water-related performance targets.

As companies evaluate approaches to water management, they must confront a wide range of operational, reputational, regulatory, and legal risks, including:

• scaled-back production or production interruptions due to water shortages in water-stressed areas;
• community opposition as a result of a company’s real or perceived impacts on local watersheds, and the potential loss of a social license to operate;
• regulatory changes leading to changes in available supply and/or higher costs; and
• litigation stemming from disputes regarding corporate usage of, and impacts on, local watersheds.

Notably, 96% of the respondents to CDP's questionnaire were able to identify water-related risks in their own operations, while only 53% were able to identify such risks in their supply chains.  This is surprising given the potential impact of supply chain concerns.  A 2008 report by JPMorgan Global Environmental, Social, and Governance Research found that the risks associated with water scarcity “may actually be greater in companies’ supply chains than in their own operations.”

As companies identify the water-related risks specific to their operations, the information they gather will increasingly inform dialogues with two distinct groups of stakeholders: investors and the communities living in the vicinity of company facilities. 

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On November 9, at a signing ceremony hosted by the Swiss Government in Geneva, fifty-eight industry-leading private security companies ("PSCs") signed an International Code of Conduct for Private Security Service Providers (.pdf). 

The publication and signature of the Code represents a milestone achievement for a multi-stakeholder initiative, launched in June 2009 and sponsored by the Swiss Government, aimed at creating a set of universally recognized standards for private companies engaged in providing security services.  The signing ceremony was attended by representatives of industry, civil society, and participating and supporting governments including Swiss Secretary of State Peter Maurer, U.K. Ambassador John Duncan, and U.S. Department of State Legal Advisor Harold Hongju Koh.

PSCs have received significant scrutiny recently, both in the United States and abroad, largely as a result of high-profile incidents in Iraq and Afghanistan.  A recent report of the Senate Armed Services Committee (.pdf) sheds light on the political challenges faced by PSCs in the United States as a result of both real and perceived fallout from some of those incidents.

Given that backdrop, the Code has received a largely positive reception, not only from within the private security industry but from non-governmental organizations ("NGOs"), many of which participated in the Code's development.  A representative of Human Rights First stated at the signing ceremony that the "Code is a strong document and an important step in building an effective scheme for improving this industry's human rights performance." 

Participants and observers have applauded the inclusion of concrete requirements governing vetting, training and conduct of PSC personnel as well as commitments to implement accessible incident reporting and grievance procedures aimed at preventing and/or enhancing the investigation of alleged abuses. 

Participants and observers have also recognized that while signature of the Code represents a major step forward, it is not the end of the process.  Future challenges include the establishment of objective and measurable standards consistent with the Code and the development of a transparent and effective oversight and auditing mechanisms to which participants will be expected to submit.  The Code calls for these objectives to be met within eighteen (18) months. 

Human Rights First noted that the "true value" of the Code "will depend on how it's enforced. Companies signing the Code have committed to establishing a mechanism for robust oversight and governance. The Code's credibility will rest upon the ability of that mechanism to hold signatory companies to account." 

Despite the challenges that remain, signature of the Code is a significant and positive step forward for an industry that, despite recent scrutiny, will continue to play a critical role in enabling operations in high-threat environments.

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Ten years ago today, plaintiffs filed an Alien Tort Statute (“ATS”) suit against Rio Tinto Plc alleging that they were the victims of numerous violations of international law as the result of Rio Tinto’s mining operations on the island of Bougainville, Papua New Guinea.  Almost ten years later, on October 26, an en banc panel of the Ninth Circuit Court of Appeals referred the proposed class action, Sarei v. Rio Tinto, to a mediator “to explore the possibility of mediation.”  Sarei v. Rio Tinto, 02-cv-56256 (9th Cir. October 26, 2010) (.pdf).

The selected mediator is scheduled to report before the end of November whether the case will proceed to mediation or whether it should be returned to the en banc panel of the Ninth Circuit for further consideration. 

In its long history, this case has already been before the Ninth Circuit several times.  In an earlier decision, Sarei v. Rio Tinto, 550 F.3d 822 (9th Cir. 2008), the Court had remanded the case to the District Court for the Central District of California, stating that certain claims brought under the ATS “are appropriately considered for exhaustion under both domestic prudential standards and core principles of international law.”  In July 2009, the District Court declined to find that a prudential exhaustion requirement was appropriate given the nature of the plaintiffs’ claims.   

There is certain merit to the Ninth Circuit’s attempt to find an alternate resolution to a case that could drag on for many years before reaching final resolution.  In a separate statement, Judge Reinhardt observed that “[i]f the mediation succeeds, we will simply have helped to resolve a complex legal dispute of great importance to the various litigants by means of a peaceful settlement rather than through extended litigation.” 

A recent paper (.pdf) published by the Corporate Social Responsibility Initiative at Harvard University’s Kennedy School of Government argued that “mediation has a legitimate and compelling role to play alongside litigation as a means of addressing human rights-related disputes between companies and individuals or communities.” Whether the Ninth Circuit’s attempt to find an alternate resolution to this case will be successful remains to be seen. 

Notably, the Ninth Circuit’s order provoked a vigorous dissent by Judge Kleinfeld, who argued that it was improper for the Court to refer the case to mediation before determining that it had jurisdiction to hear the case. Judge Kleinfeld stated that jurisdiction in the case was doubtful because the case involves foreign policy issues that raise political questions and because “we lack subject matter jurisdiction on account of extraterritoriality.”  He argued “it is risible to think that the first Congress wrote the Alien Tort Statute intending to adjudicate claims of war crimes committed abroad.” 

Judge Kleinfeld’s dissent is at odds with the vast majority of ATS jurisprudence in which courts have found that the ATS provides for jurisdiction over claims stemming from events outside the United States.  His dissent, however, highlights the fact that the Ninth Circuit has not yet ruled definitively on the appropriateness of jurisdiction in this case.  Whether mediation is appropriate is ultimately up to the parties, but the lengthy history of this case reflects the inherent inefficiencies of litigation as a means to resolve complex disputes and to vindicate rights. 

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Raise the topic of due diligence in a room of corporate lawyers and you might expect the conversation to turn to a discussion of mergers and acquisitions or environmental site assessments.   Increasingly, however, corporate counsel are being asked to help clients develop due diligence strategies and systems to identify the human rights concerns that may be associated with their existing, or potential, operations. 

Corporate stakeholders, including both legislators and shareholders, are requesting that companies demonstrate that they have due diligence mechanisms in place to assess, and respond to, human rights concerns in their supply chains and operating areas.

Recent legislative developments in this area include:

• Section 1502 of the new Dodd-Frank financial reform legislation requires companies using minerals originating in the Democratic Republic of Congo (“DRC”), or adjoining countries, to report on their “due diligence measures” regarding the source and chain of custody of those minerals. This provision, meant to address concerns that the purchase of “conflict minerals” is fueling conflict in the DRC, could impact companies in a wide range of industries depending on the final language of implementing regulations. 
• The new California Transparency in Supply Chains Act of 2010 asks retailers and manufacturers operating in California to disclose their efforts to “evaluate and address" the  risks of human trafficking and slavery in their product supply chains. 

Compliance with these requirements will not be straight-forward.  It is frequently hard to identify consistently reliable sources of information regarding, for example, the source of specific minerals or the veracity of supplier assurances regarding the status of certain workers.  What is clear is that these new requirements reflect a desire on the part of corporate stakeholders to ensure that corporate commitments to human rights go beyond short policy statements.  Stakeholders increasingly expect companies to demonstrate that they have systems in place to assess, avoid, and mitigate the adverse impacts of their activities on human rights. 

In the 2010 proxy season, socially responsible investors filed resolutions with a number of companies, including Caterpillar, Hewlett-Packard, Motorola, and KBR, asking for the adoption of comprehensive human rights policies and assessment mechanisms.  The resolutions filed with Motorola and Hewlett-Packard urged these companies to develop policies sufficient to provide assurance that their “products and services are not used in human rights violations.”  The resolution filed with KBR asked the company to report on the extent to which the company’s “contractors and suppliers are implementing human rights policies in their operations, including monitoring, training, [and] addressing issues of non-compliance[.]”

The legislative provisions and shareholder resolutions cited above are consistent with the recommendation put forward by the U.N. Special Representative for Business and Human Rights that companies carry out “human rights due diligence” in order to discharge their responsibility to respect human rights.  As framed by the Special Representative (.pdf), human rights due diligence involves the implementation of policies, assessment mechanisms, and internal oversight and control systems to identify, prevent, and address the actual and potential adverse human rights impacts associated with a company's operations. 

With the recent emergence of human rights due diligence as a mechanism to ensure accountability for the adverse human rights impacts associated with corporate activity, companies, and their counsel, should evaluate the extent to which they have developed policies and oversight mechanisms sufficient to address stakeholder concerns and expectations.

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Earlier today, the United States Supreme Court issued an order (.pdf) declining to grant a writ of certiorari in response to plaintiffs' petition, and defendant's conditional cross-petition, seeking review of the Second Circuit's decision in Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244 (2nd Cir. 2009).  The Second Circuit upheld a lower court decision dismissing the case, which involved allegations that Talisman Energy aided and abetted the Sudanese Government in committing human rights abuses in Southern Sudan. 

The Second Circuit's earlier decision, widely cited in Alien Tort Statute ("ATS") jurisprudence, held that companies may only be found liable for violations of customary international law under an aiding and abetting theory of liability if they provide substantial assistance to the primary violator with the intent of furthering the human rights violation.  The Court determined that international law is the proper source for establishing a standard for accessory liability, and that “the mens rea standard for aiding and abetting liability in ATS actions is purpose rather than knowledge alone.”  Notably, the 2009 decision predates the Second Circuit's recent decision in Kiobel v. Royal Dutch Petroleum, in which the Court held that corporations cannot be sued under the ATS for violations of customary international law. 

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On September 30, California Governor Arnold Schwarzenegger signed The California Transparency in Supply Chains Act of 2010 into law.  The legislation will require companies to disclose their efforts to ensure that their supply chains are free from slavery and human trafficking. 

The legislation will go into effect on January 1, 2012 and applies to retail sellers and manufacturers doing business in California that have annual gross receipts exceeding one hundred million dollars.

Once the legislation goes into effect, companies will be required to disclose what actions they are taking, if any, to:

• Evaluate and address the risks of human trafficking and slavery in their product supply chains. These disclosures must state if companies are not using third parties to verify the risks in their supply chains.
• Require their direct suppliers to certify that the materials incorporated into company products comply with laws regarding slavery and human trafficking in the countries in which they are doing business.
• Conduct audits of their suppliers to evaluate compliance with company standards on trafficking and slavery.  These disclosures must state whether independent, unannounced audits are conducted.
• Maintain accountability standards and procedures for employees or contractors that fail to meet corporate standards regarding slavery and human trafficking.
• Provide employees and managers, who have direct responsibility with supply chain management, with training on the mitigation of human trafficking and slavery risks.

Companies are required to make these disclosures on their websites.  If a company does not have a website, the information must be made available in writing within 30 days of a consumer request for the disclosure.  The exclusive remedy for failure to comply with the law is an action brought by the Attorney General of California for injunctive relief.

A coalition of institutional investors, faith-based investors, and research firms had urged Governor Schwarzenegger to sign the legislation, which was passed by California's Senate and Assembly in July.  Rev. David M. Schilling, program director for human rights at the Interfaith Center on Corporate Responsibility, recently observed that the legislation's requirements are in line with the recommendations of the U.N. Special Representative for Business and Human Rights, specifically with regard to corporate implementation of human rights due diligence processes (.pdf). 

Initial estimates suggest that the legislation will impact approximately 3,200 companies.  That said, as was noted by the legislation's supporters, many companies are already disclosing detailed information about the human rights risks associated with their supply chains.  The intent of the legislation is to provide consumers with the information they need to make purchasing decisions with the elimination of slavery and human trafficking in mind.  The language of the bill specifically cites a September 2009 report by the U.S. Department of Labor (.pdf) that lists 122 goods from 58 countries that the Department of Labor has reason to believe were produced with either forced labor or child labor, and states that "[a]bsent publicly available disclosures, consumers are at a disadvantage in being able to distinguish companies on the merits of their efforts to supply products free from the taint of slavery and trafficking."   

The legislation does not require companies to take specific actions other than the disclosure of what, if any, efforts are being made to address the risks of slavery and human trafficking in their direct supply chains.  Ultimately, the impact of the legislation will depend on both consumer behavior and the extent to which advocates, including investors, are able to use the required disclosures to pressure companies to monitor, and mitigate, the human rights risks in their supply chains. 

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On September 17, in a controversial opinion, the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum that corporations cannot be properly sued under the Alien Tort Statute (“ATS”) for violations of customary international law.  The case is one of a series of cases arising from claims that Royal Dutch Petroleum was complicit in human rights abuses against the Ogoni people in Nigeria.  Three related cases (the Wiwa cases) settled on the eve of trial in June 2009 for a disclosed settlement of $15.5 million.

In an opinion written by Judge Jose Cabranes, the Second Circuit concluded that

Because customary international law consists of only those norms that are specific, universal, and obligatory in the relations of States inter se, and because no corporation has ever been subject to any form of liability (whether civil or criminal) under the customary international law of human rights, we hold that corporate liability is not a discernable—much less universally recognized—norm of customary international law that we may apply pursuant to the ATS. Accordingly, plaintiffs’ ATS claims must be dismissed for lack of subject matter jurisdiction.

The Kiobel opinion has some legal scholars wondering whether this may be the beginning of the end for ATS litigation against corporations.  The decision will certainly be appealed, and this may be the case that results in Supreme Court clarification on the applicability of the ATS to corporate actors.  The question of whether corporations are properly liable under the ATS was left unsettled by the Supreme Court in Sosa v. Alvarez-Machain, and the Supreme Court declined to take up the issue when it recently denied Pfizer’s writ of certiorari in Pfizer v. Abdullahi.

In Kiobel, the majority stated that “the fact that corporations are liable as juridical persons under domestic law does not mean that they are liable under international law (and, therefore, under the ATS).”  In doing so, the Court directly addressed the question posed in a footnote in Sosa.  In that footnote, the Supreme Court stated that an evaluation of whether a norm of international law was sufficiently definite to support a cause of action under the ATS involved the "related consideration" of “whether international law extends the scope of liability for a violation of a given norm to the perpetrator being sued, if the defendant is a private actor such as a corporation or individual.”  The Court in Kiobel took up this "related consideration" and found that corporations are not proper defendants in ATS cases because “the principle of individual liability for violations of international law has been limited to natural persons—not ‘juridical' persons such as corporations.”

Before Kiobel, several post-Sosa appellate court decisions have upheld jurisdiction over corporate defendants.  Notably, many of these decisions have not involved much analysis of whether corporations were proper defendants.  In Presbyterian Church v. Talisman, decided in 2009, the Second Circuit assumed “without deciding, that corporations...may be held liable for the violations of customary international law[.]”  In Khulumani v. Barclays Nat. Bank Ltd., decided in 2007, defendants did not raise the question of corporate liability on appeal, but the Second Circuit observed that  “[w]e have repeatedly treated the issue of whether corporations may be held liable…as indistinguishable from the question of whether private individuals may be.”  Other appellate courts, including the Eleventh Circuit in Romero v. Drummond Co., decided in 2008, and Aldana v. Del Monte Fresh Produce, decided in 2005, have similarly upheld corporate liability under the ATS.   

These cases have left unsettled the question of whether the ATS properly applies to corporate defendants.  In Kiobel, the Second Circuit noted this uncertainty and cited a recent decision by the District Court for the Central District of California that declined to find corporate liability under the ATS.  In Doe v. Nestle, decided on September 8, the District Court first observed that “domestic courts have almost uniformly concluded that corporations may be held liable for violations of international law” and then found that “existing cases have not adequately identified any international law norms governing corporations. Accordingly, the Court concludes that corporations cannot be held directly liable under the Alien Tort Statute for violating international law.”

Advocates for corporate liability will find support in the concurring opinion in Kiobel, written by Judge Pierre Laval, in which he strongly critiqued the majority opinion's finding on corporate liability as “[w]ithout any support in either the precedents or the scholarship of international law[.]”  In his critique, Judge Laval questioned the potential impact of the majority's ruling, stating that

according to the rule my colleagues have created, one who earns profits by commercial exploitation of abuse of fundamental human rights can successfully shield those profits from victims’ claims for compensation simply by taking the precaution of conducting the heinous operation in the corporate form.

The policy arguments contained in Judge Laval's concurrence echo a 2005 opinion in In re Agent Orange Prod. Liab. Litig. in which the District Court for the Eastern District of New York found that “[l]imiting civil liability to individuals while exonerating the corporation directing the individual's action through its complex operations and changing personnel makes little sense in today's world.” 

It is certain that the Kiobel decision represents one of the most significant ATS decisions in years, although it is far too early to state that this is the end of ATS litigation for companies.  Both the majority and concurring opinions in Kiobel will find many advocates and detractors and all parties will continue to look to the Supreme Court for final resolution.

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On September 13, Microsoft Corporation announced a major change in policy whereby the company will make a new unilateral software license available to NGOs and certain journalist organizations in Russia. 

Microsoft's announcement came shortly after The New York Times published a front-page article stating that Microsoft’s local counsel had provided assistance to Russian authorities in the criminal prosecution of NGOs and independent journalists on the basis of allegations that these groups were utilizing pirated Microsoft software.  Although software piracy is a serious problem across Russia, Russian authorities allegedly targeted journalists and advocacy groups for criminal prosecution. This is not surprising, given ongoing reports that journalists and advocacy groups in Russia are subject to increasing and often violent government repression. 

Microsoft's announcement indicated that the software license would be granted to organizations in a "number of countries" in addition to Russia, but did not name the other countries specifically.  The license will apply automatically, and the company stated that the terms of the license will "fully exonerate" any qualifying organization that is investigated for software piracy.  The license will be valid until 2012 (with the possibility for extension).  Between now and the expiration of the unilateral license, Microsoft stated that it will work to inform NGOs of an existing donation program whereby NGOs can obtain certain Microsoft software licenses free of charge.

Many technology companies are struggling with the ways in which their products can be used to violate human rights.  In Microsoft's case, it was not the company's technology that was used to curb lawful dissent, but rather the selective enforcement of intellectual property laws -- laws that undeniably protect property rights in which the company has a clear interest.  This situation presents complex legal and political challenges, and Microsoft announced that it will retain international legal counsel to conduct an investigation and recommend measures the company should take in the future.  Microsoft noted that "we aim to reduce the piracy and counterfeiting of software...in a manner that respects fundamental human rights" and observed that:

we want to be clear that we unequivocally abhor any attempt to leverage intellectual property rights to stifle political advocacy or pursue improper personal gain.  We are moving swiftly to seek to remove any incentive or ability to engage in such behavior...We must accept responsibility and assume accountability for our anti-piracy work, including the good and the bad.

What are the wider lessons from Microsoft’s experience?  Ideally, Microsoft should have been able to preemptively address this problem before it appeared on the front page of a major newspaper.  The company's announcement described meetings of internal counsel to assess the issues raised by The New York Times, but these issues were apparent before journalists chose to highlight them. 

In an open letter to the company published on September 14, Human Rights First suggests that Microsoft should engage in a dialogue with civil society groups in Russia about the use of technology for political repression.  Whether Microsoft engages in a formal or informal dialogues, Microsoft -- and its peers -- should consistently hold discussions with civil society so that new techniques aimed at suppressing potential dissent are identified and addressed.  Because these topics are politically sensitive, high-level company managers need to be aware of the concerns at stake and should lead the process of addressing them.  Notably, Microsoft is a participant in the Global Network Initiative, a multi-stakeholder initiative working to assist information and communications technology companies protect the human rights of freedom of expression and privacy.  These types of multi-stakeholder forums can be very useful to companies, but only if the lessons learned in these engagements are both communicated to top management and implemented on the ground. 

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On September 10, the Ninth Circuit Court of Appeals upheld a jury verdict in favor of Chevron Corporation (.pdf) in a case involving plaintiff allegations that Chevron was complicit in human rights abuses committed by Nigerian security forces in 1998.  Plaintiffs brought claims under the Alien Tort Statute (“ATS”) and the Torture Victim Protection Act (“TVPA”).

The primary events at issue in the litigation took place at an offshore platform belonging to Chevron’s Nigerian subsidiary.  After protesters spent several days at the platform in May 1998 protesting Chevron’s drilling activities, Chevron’s Nigerian subsidiary contacted the Nigerian Government Security Forces. The security forces that came to the scene ultimately fired on the protesters, killing two and injuring a number of others.

Plaintiffs originally filed the case in 1999 and almost ten years of litigation preceded the final commencement of trial.  In December 2008, after a seventeen-day trial, a jury in the District Court for the Northern District of California ruled in favor of Chevron on all counts.  One of the issues at trial was the nature of the protest activity at the platform.  Plaintiffs alleged that the protesters were unarmed and peaceful, while Chevron witnesses insisted that the protesters were armed and threatened violence against the platform and its crew.  Plaintiffs appealed the jury verdict, raising challenges to the jury instructions and the District Court’s evidentiary rulings.  Plaintiffs also appealed two points of law, including the District Court’s ruling that the TVPA does not apply to corporations.

The Court of Appeals fully affirmed the District Court’s judgment, including the finding that plaintiffs' ATS claims were preempted by the Death on the High Seas Act.  With regard to the TVPA claims, the Court determined that "the plain language of the TVPA does not allow for suits against a corporation."  This decision conflicts with a 2005 Eleventh Circuit decision in which the TVPA was held, without discussion, as applicable to corporate actors. (Aldana v. Del Monte Fresh Produce, N.A., Inc., 416 F. 3d 1242 (11^th Cir. 2005).)  This is a significant issue in part because most cases brought against companies for complicity in human rights abuses committed by public security forces abroad include claims under both the TVPA and the ATS. 

Although Chevron has prevailed in the judgments issued in this case, the length of the litigation and the considerable publicity surrounding it are powerful reminders of the legal and reputational risks that can accrue to companies operating abroad in states with poor human rights practices. Such risks have led Chevron and peer companies to participate in initiatives like the Voluntary Principles on Security and Human Rights as a means to identify and manage security force-related risks, as well as to include human rights due diligence processes in their management systems.

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Isa Saharkhiz, an Iranian journalist who has been in detention in Iran since June 2009, and his son, a resident of New Jersey, recently filed suit against Nokia Siemens Networks (“NSN”), a joint venture of Nokia Corporation and Siemens Corporation.  The lawsuit, filed on August 16 in the District Court for the Eastern District of Virginia, includes claims under the Alien Tort Statute ("ATS") and the Torture Victim Protection Act and alleges that NSN aided and abetted the Iranian Government in detaining and torturing Mr. Saharkhiz.

Plaintiffs specifically allege that the Iranian Government used technology supplied by NSN to monitor the mobile communications of, and locate, Mr. Saharkhiz prior to his arrest.  Both Nokia and Siemens were also individually named in the lawsuit.

NSN has admitted that it sold mobile networks to Irancell as well as Mobile Communications Company of Iran (“MCI”), which is Iran’s largest cellular operator and is owned by the state-controlled Telecommunication Company of Iran (“TCI”).  These networks included lawful intercept capability, as is required by law in most countries and by the global standards developed by the European Telecommunications Standards Institute.  More controversially, NSN provided a monitoring facility to MCI/TCI which allowed Iranian authorities to utilize the intercept capability to monitor local calls made within Iran.  NSN subsequently halted all work related to the monitoring facility in Iran in 2009.

NSN’s provision of telecommunications monitoring capabilities to Iran has brought the company under significant levels of international scrutiny and criticism.  In a June 2010 statement to the European Parliament Subcommittee on Human Rights, Barry French, Head of Marketing and Corporate Affairs for NSN, conceded that monitoring facilities are “problematic and have a risk of raising issues related to human rights that we are not adequately suited to address.”  Mr. French also observed that  "we believe that we should have understood the issues in Iran better in advance and addressed them more proactively.” 

In his June 2010 remarks, Mr. French also emphasized that NSN provides "technology that is intended to be used in ways that support human rights.  When that technology is misused, the accountability must sit with those who misuse it."

NSN and the other defendants in the lawsuit brought by Mr. Saharkhiz will likely challenge both the forum of the suit as well as the ability of the court to properly assert jurisdiction over the defendants.  If the case proceeds, it could bring to the forefront the question of what standard courts should use in evaluating "aiding and abetting” claims in ATS cases.  If the Court reaches this issue, it may decide to endorse the Second Circuit’s standard, as set forth in Presbyterian Church of Sudan v. Talisman Energy, Inc. 582 F.3d 244 (2d Cir. 2009), which held that defendants may only be found liable under an aiding and abetting theory of liability if they provide substantial assistance to the primary violator with the purpose of furthering the human rights violation.  This a high barrier to plaintiffs’ claims.

Under a less strict “knowledge” standard for aiding and abetting liability, plaintiffs may have an easier time surviving a motion to dismiss.  In In Re South African Apartheid Litigation, 617 F. Supp. 2d 228 (S.D.N.Y. 2009) (decided before the Second Circuit's decision in Presbyterian Church of Sudan), the Court held that a defendant could be held liable if it knew that its actions would substantially assist a perpetrator in the commission of a crime or tort in violation of the law of nations.  By that standard, the Court said “[o]ne who substantially assists a violator of the law of nations is equally liable if he or she desires the crime to occur or if he or she knows it will occur and simply does not care.”

In thinking through the implications of a lower “knowledge” standard for the NSN case, it is notable that the Court in the South Africa case denied defendants’ motion to dismiss plaintiffs' claims that International Business Machines ("IBM") aided and abetted the South African Government in carrying out acts of apartheid.  The Court relied upon plaintiffs’ allegations that IBM provided the South Africa Government with computers, software, training and technical support that was specifically used to produce identity documents and administer a denationalization program.  The Court found that “given that IBM provided the programming expertise as well as the hardware, there is a plausible inference that the company understood the nature of the projects it assisted.”  With the standard for aiding and abetting liability unsettled, litigation in the case against NSN will likely involve in-depth inquiry into the nature of the company’s assistance to Iranian officials, particularly with regard to the monitoring facility. 

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In his latest report to the U.N. Human Rights Council, John Ruggie, the U.N. Special Representative on Business and Human Rights, highlighted the significant costs associated with stakeholder challenges and resistance to company operations.  The report noted that one company consulted by his office may have experienced a US $6.5 billion “value erosion” over a two-year period as a result of non-technical factors, including stakeholder opposition. 

The Special Representative's report stated that stakeholder challenges to company operations, which are typically on environmental and human rights grounds, may result in:

• delays in design, siting, granting of permits, construction, operation and expected revenues;
• problematic relations with local labour markets;
• higher costs for financing, insurance and security;
• reduced output;
• collateral impacts such as diverted staff time and reputational hits; and
• possible project cancellation, forcing a company to write off its entire investment and forgo the value of its lost reserves, revenues and profits[.]

The Special Representative noted that current evidence for these costs comes largely from the extractive and infrastructure sectors, but suggested that similar concerns are likely to be a concern for other industry sectors.  He reported that a recent study of 190 projects operated by international oil majors found that “the time for new projects to come on stream has nearly doubled in the past decade, causing significant cost inflation” and that major factor in these delays was “stakeholder-related risks.” 

These findings should raise serious questions for corporate management in many industry sectors.  Many companies do not have adequate internal systems in place to assess the total costs associated with poor stakeholder engagement practices.  For certain industries and companies, depending on the nature of their operations, these costs may be significant.  This is especially true for companies whose operations depend upon land concessions as well as companies operating in conflict-prone areas. 

Failure to assess the costs associated with stakeholder resistance may leave companies ill-equipped to evaluate the effectiveness of existing stakeholder engagement programs and to develop sufficient internal training programs and accountability mechanisms.  High-level standards on stakeholder engagement are often developed at corporate headquarters, but the costs associated with failures to develop and implement sufficient stakeholder engagement plans will first be reflected in project-specific costs and delays. 

Furthermore, in our experience, poor management of stakeholder relations often undermines a project's objectives at the very earliest stages of project exploration and development -- often before an adequate community relations staff, or budget, is in place.  Unless companies have systems in place to evaluate the aggregate costs of poor stakeholder engagement practices, insufficient incentives may exist to ensure that these risks are assessed and mitigated.

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On August 9, many people around the world will observe International Day of the World's Indigenous People, which was first established by the United Nations in 1994.   This year, many stakeholders are using the opportunity to urge the United States to endorse the U.N. Declaration on the Rights of Indigenous Peoples.  As was noted in an earlier post,  the United States government is undertaking a formal review of its position on the Declaration.

Members of the socially responsible investment community have been among the many groups urging the United States to endorse the Declaration.  Calvert Investments, a investment company which manages over $14.5 billion in assets, recently observed, in a letter to Secretary of State Hillary Clinton (.pdf), that U.S. support for the Declaration might "allow more companies to be responsive to our requests to develop policies and programs to promote Indigenous Peoples’ rights or to publicly disclose those that are already established as a model for others."

As discussed in our recent report on free, prior, and informed consent, the Declaration on the Rights on Indigenous Peoples is soft law, not legally binding on states, but the rights and values set forth within the Declaration are increasingly being recognized by national governments. 

Companies, especially those in the extractive sectors, should be familiar with the key international instruments recognizing the rights of indigenous peoples, including both the Declaration and ILO Convention No. 169.   Familiarity with the requirements of these international standards is essential to effective engagement with a wide range of stakeholders. 

Ultimately, companies will be most impacted by the ways in which these standards are integrated into national legislation and regulations.  It is crucial that companies understand national-level requirements, especially regarding indigenous peoples’ consultation rights, as set forth in legislation, regulations, administrative guidelines, and court decisions.  Recent national level developments include:

• In May 2010, Peru adopted legislation in May 2010 recognizing indigenous peoples’ consultation rights with regard to project that impact their collective rights.
• In  November 2009, Chile’s Supreme Court applied ILO Convention No. 169, which Chile ratified in 2008, in finding that indigenous communities had customary rights to a specific source of groundwater. The case involved attempts by a company to secure rights to bottle and sell freshwater from a source historically used by members of the Aymara indigenous population. 

Failure to understand and integrate current requirements regarding consultation with indigenous peoples, or to anticipate future changes that may have retroactive effect, could be quite costly for companies.  For example, in 2003, the South African Constitutional Court found that the Richtersveld indigenous community had a right of communal ownership to land which South Africa had granted to Alexkor Ltd., a diamond mining company. The Court ordered the land returned to the community.  

Failure to consult with indigenous populations can lead to significant reputational, as well as legal, liability.  A recent report (.pdf) by EIRIS, an investment research firm, observed that, by failing to adequately consult with indigenous communities in Orissa, India before proceeding with plans to develop a bauxite mine, Vedanta Resources had subjected itself to intense scrutiny, as well as several divestment actions, on the part of major investors. 

In light of the increasingly clear expectations of the international community, and well as the requirements of national law, companies engaged in operations that have, or may, impact indigenous populations are well-advised to verify that their activities have been conducted in a manner consistent with relevant consultation requirements. 

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On July 28, the United Nations General Assembly passed a non-binding resolution recognizing access to clean water as a fundamental human right (.pdf).  This U.N. resolution will likely feature in corporate dialogues with stakeholders regarding water use, water access, water production, and the impact of corporate activities on local watersheds. 

Finding solutions that provide for the current and future needs of all water users is imperative. The stakes for both companies and communities are significant: a recent report by the 2030 Water Resources Group, a coalition of major multinational companies, observed that:

growing competition for scarce water resources is a growing business risk, a major economic threat that cannot be ignored, and a global priority that affects all sectors and regions. It is an issue that has real implications for the stability of countries in which businesses operate and the sustainability of communities and the ecosystems they rely upon. 

Community concerns about water use, and water access, have affected the social license to operate of companies in a wide range of business sectors.  Another recent report, Water Scarcity & Climate Change: Growing Risks for Businesses and Investors, produced by Ceres and the Pacific Institute, found that food and beverage, oil, and chemical companies are particularly exposed to advocacy, and litigation, in this area.  Examples include:

• In Newmont Mining’s recent Community Relationships Review, based on a study of six of the company's mines, we observed that community perceptions of mining's impact on local water resources was significant factor in the company's capacity to engage with local communities. 
• The Coca-Cola Company and PepsiCo Inc. have faced widespread community protests, and litigation, in India due to community allegations that the companies’ use of local groundwater supplies has contributed to water scarcity and the pollution of available water supplies.

In this context, and prior to the adoption of the U.N. resolution, a number of companies have faced pressure to recognize water as a human right.  In 2010, shareholder resolutions were filed against ExxonMobil and Intel asking them to adopt water policies articulating respect for and commitment to the human right to water.  Similar resolutions were filed against Pepsi and American International Group in recent years. In the face of such pressure, Pepsi and Intel have both formally recognized the human right to water. 

Shareholder activity around water is likely to continue. The Ceres/Pacific Institute report cited above observed that:

investors are now filing resolutions asking companies for more disclosure on water practices and performance, including water policies, environmental and social impacts of water use, and water usage throughout the value chain. A large number of resolutions also ask for new company-wide policies on the human right to water, water reuse and recycling, and water-efficient technology.

In this context, the U.N. resolution will likely increase pressure on companies to incorporate water access into their human rights policies and assessments.  Although the resolution is non-binding and does not impose specific obligations on companies (or countries), it represents a clear declaration by the international community that corporate use of water resources has fundamental human rights implications.

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Foley Hoag recently released a ground-breaking report on the relationship between companies and indigenous peoples.  Talisman Energy commissioned this report at the request of two responsible investors, Bâtirente and Regroupement pour la responsabilité sociale des entreprises (“RRSE”).  The World Resources Institute (“WRI”), a think tank and thought leader on indigenous rights, was asked to provide a third party commentary on it.  The report was developed with substantial input from business and civil society.  The report focuses on the benefits and challenges of implementing a corporate free, prior, and informed consent (“FPIC”) policy, and also provides guidance on best practice for community engagement. The final report:

• Reviews the international legal standards that address the responsibilities of states and companies to indigenous peoples, as well as the implications of evolving case law in domestic and international human rights courts. 
• Highlights the evolution of voluntary commitments to respect indigenous rights, including commitments to obtain the FPIC of indigenous peoples.  
• Concludes with recommendations regarding the components of a FPIC policy and implementation steps.

Indigenous rights constitute a rapidly evolving area in both international law and the practices of companies. Although international law principally creates obligations for governments, rather than companies, to respect indigenous rights, it nevertheless affects corporations. For example, international legal standards increasingly influence domestic courts, which can lead to the revocation of a company’s license if the government fails to carry out its duty to consult or obtain the consent of indigenous peoples. It is, therefore, timely for companies to consider revising their policies on indigenous peoples.

Companies that seek to implement a policy on free, prior, informed consent face a number of challenges. These include:

• Identifying the customary users of land and the traditional representatives of the community.
• Balancing the rights of indigenous peoples against the expectations of non-indigenous populations.

On the other hand, companies that implement a FPIC policy will enjoy benefits, such as a stronger social license to operate and a reduced risk of legal challenges to their projects.

The report is particularly timely, as the International Finance Corporation is reviewing its lending requirements regarding indigenous rights, including with regard to FPIC.  In addition, the U.S. government, one of four governments that voted against the U.N. Declaration on the Rights of Indigenous Peoples in 2007, is formally reviewing its position on the Declaration.  New Zealand, Australia, and Canada, the other three governments that initially voted against the Declaration, have already changed their positions and now support the Declaration.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), signed into law by President Obama on July 21, contains provisions requiring publicly traded companies that utilize certain "conflict minerals" to report regarding whether their products are “conflict free” – meaning that they should report on any due diligence steps taken to demonstrate that their products are not fueling conflict in the Democratic Republic of Congo ("DRC"). The legislation does not prohibit companies from using minerals from conflict areas. Rather, it relies on the reputational effects of public reporting to push companies to rely on conflict free sources. Human rights organizations believe that the sale of conflict minerals -- tantalum (coltan), cassiterite (tin), wolframite (tungsten), and gold – helps armed groups fund the purchase of weapons and the continuation of hostilities in the DRC.

For over a year, civil society has pushed the U.S. Congress to implement these provisions (.pdf) as an attempt to address the ongoing conflict in the eastern DRC, and have used a variety of means, including viral videos, to focus the public's attention on this issue. 

The minerals in question are commonly utilized in a variety of commercial products, such as automobiles, cellular phones, and airplane engines. The legislation therefore affects a large spectrum of industries, including mining, automotive, aerospace, and jewelry. The aim of the legislation is not to ban the use of these minerals if they originate from the DRC, but rather to ensure that the minerals do not come from conflict areas of the DRC or otherwise help fund the conflict. Given the due diligence that may be necessary to decisively demonstrate that products are conflict free, some have argued that the legislation will unintentionally create a de facto ban on minerals from the DRC and neighboring countries. On the other hand, if the SEC provides appropriate guidance, the legislation is likely to offer a clearer path for companies to demonstrate that they are not supporting conflict in the DRC.

Requirements imposed by the legislation include:

• A company that uses conflict minerals must produce an annual disclosure to the Securities and Exchange Commission ("SEC") if the minerals are "necessary to the functionality or production of a product" manufactured by the company. The company must also report on its public website.
• The annual disclosure must state whether the conflict minerals originated in the DRC or an adjoining country (including Angola, Burundi, Central African Republic, Republic of Congo, Rwanda, Sudan, Tanzania, Uganda, and Zambia).
• If the minerals used by a company originate in the DRC or an adjoining country, the company must report on the due diligence measures that it took regarding the source and chain of custody of those minerals. These measures are expected to include an audit by an independent professional audit company.
• Companies must also submit a description of any products manufactured by the company that are not "DRC conflict free." Products are conflict free if they do not contain minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country. Products are considered to benefit such groups if they come from areas where armed groups physically control mines or force civilians to mine, transport, or sell conflict minerals; tax, extort, or control any part of trade routes for the minerals up to the point of export; or tax, extort, or control trading facilities, in whole or in part.

Unfortunately, many key aspects of the legislation remain uncertain at this time. It is not clear exactly which companies will be required to produce reports.   In addition, it is not clear whether the information must be in companies’ 10-Ks or can be contained in other reports, although it is likely that penalties associated with fraud or deceit in SEC reporting will apply. Finally, it is not certain what it means for a mineral to be "necessary to the functionality or production of a product.” The SEC's 270-day rulemaking process should provide greater clarity for many companies.

The legislation is likely to affect all levels of the supply chain for these minerals. At this time, companies that utilize the named minerals should consider how they will demonstrate that they conducted due diligence to ensure that the mines from which their minerals come, as well as the routes and trading depots through which the minerals came, are conflict free. For end-user companies, this will mean ensuring, at a minimum, that smelters have robust due diligence processes on the ground and providing for an independent audit of those due diligence processes.

The legislation allows the U.S. State Department to expand the list of minerals that fuel conflict in the DRC, which would potentially affect a larger number of companies. The legislation currently covers the minerals that human rights organizations believe are primarily funding the conflict, so the expansion of the list seems unlikely unless a new mineral begins to be sourced from the eastern DRC in significant quantities.  

Under the legislation, the Department of Commerce can designate specific independent private sector auditors and due diligence processes as “unreliable.” If, in its reporting, a company relies on a determination of an independent audit or other due diligence process that is deemed unreliable, the report does not satisfy the SEC reporting requirement. Therefore, it is particularly important that due diligence processes are robust.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), signed into law by President Obama on July 21, contains broad-reaching transparency provisions requiring oil, gas, mining, and other extractive industry companies to report their payments to governments to the Securities Exchange Commission (“SEC”).

The premise of the bill is that transparency, in the long run, supports human rights, and helps limit corruption in countries where few benefits from mineral wealth typically reach the general population.

Key elements of the legislation include:

• Companies that are securities issuers under U.S. law must report annually to the SEC on their payments, as well as those of their subsidiaries and entities under their control, to the U.S. and foreign governments. The law does not exempt foreign issuers, and it is likely that the legislation will cover many issuers of ADRs, as well. The legislation does not specify whether the annual report must be the company’s 10K or another form of reporting, leaving this decision to the SEC rule-making process. It is likely that the penalties related to fraudulent or deceptive reporting to the SEC will apply. 
• Companies must report on the type and total amount of payments made on a project basis to both the U.S. and foreign governments. It is unclear whether companies must report on projects for which they do not serve as the operator, nor hold a majority interest in the project. 
• The payments that companies must report include taxes, royalties, fees, production entitlements, bonuses, and other material benefits, to the extent that the SEC determines that these are part of the commonly recognized revenue stream for extractive projects. Payments do not include de minimis payments. The SEC rulemaking process should help clarify the extent to which this information must be disaggregated. 

The legislation covers most, but not all, major multinational companies, but likely does not encompass a number of state-owned companies that are primarily active in their own jurisdictions and have no presence in the United States. The SEC rule-making process will help determine whether contractors and service providers must comply with the legislation.

The legislation is intended to reinforce the Extractive Industries Transparency Initiative, which is a multi-stakeholder initiative consisting of oil, gas, and mining companies; civil society; and governments. Under the Extractive Industries Transparency Initiative, many U.S. companies already report their payments to some, although not all, governments around the world. The bill may require the reporting of more detailed payment information than the Extractive Industries Transparency Initiative demands, depending on the SEC’s interpretation of the legislation. 

The SEC’s rulemaking process will help define more clearly how companies will need to change their accounting practices. For instance, the SEC will presumably define a de minimis payment. Companies are advised to monitor the SEC’s rulemaking process closely.

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In late June, Foley Hoag's CSR practice was selected to serve as the new Secretariat for the Voluntary Principles on Security and Human Rights (“The Voluntary Principles”).  On June 30 and July 1, three Foley Hoag attorneys, Gare Smith, Sarah Altschuller, and Amy Lehr, helped facilitate a special Mid-Year Special Session of the Voluntary Principles hosted by the United States Government, the current chair of the Voluntary Principle's Steering Committee.

The Voluntary Principles, a tripartite multi-stakeholder initiative established in 2000, provide guidance to companies in extractive industries on maintaining the safety and security of their operations within a framework that ensures respect for human rights and fundamental freedoms. The Voluntary Principles urge companies to

recognize a commitment to act in a manner consistent with the laws of the countries in which they are present, to be mindful of the highest applicable international standards, and to promote the observance of applicable international law enforcement principles.

More than sixty representatives of companies, governments, and nongovernmental organization, representing the Principles’ “three pillars”, attended the Mid-Year Special Session, and engaged in collaborative discussions aimed at formulating a common vision for the future as the Principles enter their second decade.

Notably, John Ruggie, the U.N. Special Representative on Business and Human Rights, addressed participants. (.pdf)  Citing a three part framework under which states have a duty to protect human rights, companies have an obligation to respect human rights, and access to remedies must be provided to rights-holders, (as set forth in his 2008 report to the UN Human Rights Council (.pdf)) the Special Representative observed that the Voluntary Principles “address a critical subset of issues encompassed by the Protect, Respect and Remedy Framework. They cut across all three of the Framework’s pillars. And they literally can affect life and death issues.”  He noted that

the worst forms of corporate-related human rights abuse take place in conflict or otherwise stressed governance zones. They account for the largest number of foreign direct liability claims against multinational companies, such as the Alien Tort Statute, brought in domestic courts but often invoking international standards.

The Special Representative then observed that companies operating in areas of conflict "increasingly suffer significant financial costs as a result of stakeholder-related risks to their operations—which in turn reflect push-back by communities for harms they associate with company activities."  The Voluntary Principles aims to address both the security concerns of companies as well as the common interest of companies and communities to prevent security-related human rights abuses.

Foley Hoag's new role as Secretariat of the Voluntary Principles allows our attorneys to build upon a wealth of experience in advising clients on specific in-country efforts to comply with the Principles as well as the development of corporate policies that that incorporate respect for human rights and enhance compliance with host and home-government laws and voluntary codes, including the Voluntary Principles.  

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