Every plaintiff wants to grab something from the world’s deepest pockets. As the world’s largest company, Wal-Mart Stores Inc. is an international target for lawsuits. In 2004 female employees of the retail chain filed the largest class action in the nation’s history alleging sexual discrimination. A suit that went to court in September accuses Wal-Mart of denying employees meal breaks and overtime pay. As of this writing, a group of former employees in Quebec is awaiting the go-ahead to seek compensation for the closure of one of Wal-Mart’s only unionized stores.
Now Wal-Mart has a new challenger, the International Labor Rights Fund (ILRF). The Washington D.C.-based advocacy group filed a class action in Los Angeles Superior Court in September on behalf of employees of Wal-Mart’s overseas suppliers. The basis for the complaint is an alleged breach of contract. Specifically, ILRF argues Wal-Mart isn’t holding its business partners to its “Standards for Suppliers.” The document is a code of conduct Wal-Mart established for its overseas suppliers, which covers such things as wages, hours of labor and environmental conditions. The workers say they are subject to conditions that fall short of Wal-Mart’s policies and claim that as third-party beneficiaries of the contract, they have a right to make Wal-Mart enforce its written standards. The workers are seeking monetary damages and better workplace conditions.
Tenuous as the contract claim may seem, the ILRF isn’t just any underdog. It’s an underdog with a reputation. Last year ILRF filed a similar suit against Unocal Corp. Right before the case went to a jury trial, Unocal settled.
“Our premise here is that Wal-Mart and many other companies issued these codes of conduct as public relations devices,” says Terry Collingsworth, ILRF’s general counsel. “They never expected that someone would take it seriously and use it as an affirmative tool to actually make them do what they promised to do.”
In a statement, Wal-Mart says that the ILRF “has a history of presenting opinions as facts,” and that Wal-Mart has an audit system that ensures compliance.
A code of conduct for suppliers can be a powerful public relations tool. But the ILRF is using the company’s guidelines against it, claiming that publishing the policy created a binding contract. If the court decides in ILRF’s favor, companies may need to scrutinize their policies more carefully.
“The real question becomes whether the corporate handbook or corporate code of conduct become a contract with the employees,” says Sheryl Willert, a partner at William, Kastner & Gibbs in Seattle. “A violation of internal policy can make you look bad, but it doesn’t necessarily mean that you have violated the law.”
The ILRF decided to go after Wal-Mart after being emboldened by its success against energy giant Unocal. In 1996, ILRF alleged that Unocal knowingly used forced labor to construct a gas pipeline in Burma. ILRF claimed that government soldiers hired to protect the pipeline forced people to work with little food and water. The suit also claimed that the soldiers raped and murdered relatives of the workers.
ILRF argued Unocal should be held liable because its foreign subsidiaries acted as its agents. Soon after a court granted a trial, Unocal decided to settle in December 2004. This case paved the way for the Wal-Mart litigation.
ILRF decided to try its tactics in California courts again. If it can convince the court that the standards are a contract and that Wal-Mart is obligated to enforce these standards, then Wal-Mart may bear responsibility for worker mistreatment by overseas suppliers.
Stephen Fink, a partner at Thompson & Knight in Dallas, believes that with the development of SOX, courts are more likely to treat policies and practices as contractual obligations. The fact that companies intended these codes of conduct to only be aspirations may not hold up in court as a credible defense.
“There are people out there arguing that these core codes of conduct that have been adopted more recently because of SOX ought to be treated differently,” Fink says. “[They argue] that even the codes must be treated as binding legal obligations and not simply as aspirational standards.”
This new development creates new liabilities. If a company establishes and publicizes a code of conduct, plaintiffs may use it as a weapon against the company if it is lax in enforcement. No longer are these standards merely statements of good intentions, they may be legally binding.
“In the fervor to have these codes of conduct and codes of ethics that sounded very strong, positive and good, there probably wasn’t sufficient attention given by many companies to this possibility that people would turn around and say, ‘Well you said these things, and now we are going to hold you to them not as standards but as promises,’” Fink says.
Even if the ILRF can convince the court that the code of conduct serves as a contract, the organization still has to prove that the workers of the suppliers are the intended beneficiaries of that contract and therefore have standing to sue.
That’s not a given according to Laura Christa, managing partner at Christa & Jackson in Los Angeles who specializes in business and contract litigation. “From a commonsense point of view, a lay person would say, ‘Obviously that code of conduct is there to protect the workers who are working for the suppliers.’ But as a legal matter, it’s not something that is readily established by the court.”
Whether Wal-Mart wins this case may have a sweeping influence across the corporate landscape. If Wal-Mart loses, companies may have to revise their codes of conduct. To fend off such claims, companies need to work with their GCs to refine their corporate codes and ensure that the company enforces its published standards.
Wal-Mart’s misstep may have been in establishing a code for suppliers over whom they have little oversight and influence.
“Basically, if you are going to adopt a code of conduct, adopt a code that has to do with things that you can control,” Willert says. “If you can’t control it, don’t adopt a standard about it.”
Retooling the language of the codes is another route that companies can take. However, it is important not to water-down the language to a point where the codes are so general that they don’t set any goals for the company.
“Language, if it is not already there, needs to be added to the codes to make it clear that they are standards and not promises or binding obligations,” Fink says. “It is tricky because you don’t want to put out a code of conduct that says we only want to comply with this when we feel like it or when we feel it is right.”
What companies don’t want to do, however, is get rid of their codes of
“If everyone else has a code of ethics or a code of conduct and you don’t, you are going to look as if you don’t care about those things,” Fink says. “Also, you don’t want to present your company as having less integrity or being less reliable than your competitor.”