Will Saipan legal battle stretch the limits of liability?

Recent Saipan litigation charges upstream companies with sweatshop abuses, and the outcome of the cases could stretch the limits of liability in the apparel supply chain.

There's nothing like the hard smack of a lawsuit to bring blush back to the cheeks of the apparel industry, which has been fiddled over the past few years with allegations of sweatshop abuses. The industry's latest bout with bad press stems from litigation filed on behalf of garment workers in Saipan: Eighteen top retailers, manufacturers and designers were charged in January with racketeering and violating human rights laws.

The lawsuits, which are outlined on page 18, raise some billion-dollar questions. Will U.S. corporations be forced to obey American labor and human rights standards wherever they do business? Have self-imposed "codes of vendor conduct" become a liability?

Saipan, the capital of the Commonwealth of the Northern Mariana Islands (CNMI), has been called many things, from a free-market success to the capital of slave labor. Regardless of the perspective, it's hard to argue that Saipan hasn't been profitable. According to a recent report by the U.S. Department of Commerce (DOC), Office of Textiles and Apparel (OTEXA), the island exported nearly $1 billion in goods into the United States in 1998. But, according to labor and human rights groups, those profits have come at great expense to "guest workers," a group of foreign laborers, mostly from China, who work under one-year permits and make up 90 percent of Saipan's private work force.

The alleged abuses of these workers - which have been well publicized - include: peonage, unhealthy living conditions, unsafe working conditions, physical abuse, infringement upon civil liberties and unpaid overtime work. At question in the legal battle will be whether the alleged abuses occurred at facilities where U.S. companies source goods and whether these companies knew about the work environment.

In what has been labeled a "public relations nightmare" by the media, the unfolding situation has provided ammunition for critics who have long contended that a majority of apparel is made in sweatshops. The legal battle has raised the stakes for this round, and there has been much speculation over its outcome and its cost to the industry.

Placing the Blame Up the Chain

Last year, the U.S. Department of Labor recovered more than $2.1 million in fines for labor violations in the CNMI. In addition to these cases, the Labor Department has collected more than $1 million in back wages for more than 3,000 employees in the islands' garment, hospitality, security guard and construction industries.

However, the current litigation concerning Saipan differs from any previous legal action in that it is an unprecedented attempt to hold upstream retailers and manufacturers liable for downstream abuses allegedly caused by contractors. This is also the first time a big-name law firm - Milberg Weiss Bershad Hynes & Lerach - has taken on the burden of proving who is to blame. The firm, which specializes in class-action suits, has a strong reputation for winning difficult cases and is known most notably for negotiating a $1.2 billion settlement with Swiss banks to reimburse Holocaust victims.

In an interview with Bobbin, Al Meyerhoff, one of the lead attorneys for the plaintiffs, asserted that the factories, apparel companies and retailers charged violated the Racketeer Influenced and Corrupt Organizations Act (RICO). He also noted that one case, which was filed in Los Angeles, CA, is very significant in that it charges that upstream retailers were complicit and fully aware of the Saipan operations. Furthermore, it holds that they were profiting from the situation by continuing to source goods there.

To win the RICO lawsuit, the plaintiffs must prove that the companies associated in a criminal enterprise that engaged in illegal acts, specifically involuntary servitude and theft of services. They must also show that these companies were aware of these illegal acts, but continued to associate with the factories because it was financially beneficial for them to do so. In short, the plaintiffs must prove that by purchasing garments produced in Saipan, the defendants benefited directly from the mistreatment of workers.

How will they prove that these upstream companies are to blame? One tactic might be the discovery and examination of the contracts and records of quality control inspectors, establishing that these major firms were in the Saipan contractors' facilities. There is also a national ports database that documents how many pounds of goods different firms are shipping in from all over the world. Information from this source could be used to verify that the defendants are producing in Saipan.

This evidence could be a major bone of contention with some of those charged. For example, Wal-Mart, which is named in two of the suits, has released an official statement saying that it does not conduct business with factories in Saipan or generally accept merchandise from manufacturing facilities in Saipan. Yet, Meyerhoff believes documentation, such as the ports database, will prove otherwise.

Although RICO cases generally are tough to win, most legal experts agree that once a case is won and a precedent has been set, it becomes very difficult to defend future cases. And if the plaintiffs win the case, retailers and manufacturers might be open to a wide range of other litigation.

The Debate Heats Up

With billions of dollars up for grabs, it's likely that both sides are spinning somewhat inflated claims. For instance, some defendants claim to be oblivious of any sweatshops on the island, and the plaintiffs, contend that every worker in Saipan pays a $7,000 recruitment fee. It remains to be seen which claims will make their way to the courtroom, where a distinction between the pumped-up charges and true illegalities must be made.

As another example, amid all the crossfire, the plaintiffs continue to lament that Saipan workers "don't even get paid U. S. minimum wage," while the garments they manufacture are labeled "Made in USA" and shipped quota- and duty-free into the United States. These points are true, but none is currently against the law.

When the commonwealth was established, the U.S. government agreed to allow the Northern Mariana Islands to set their own wage, immigration and customs policies. The lawsuit filed in California state court (see "Case No. 2," this page) asserts that this is a loophole that is being exploited both by U.S. apparel firms looking for "Made in USA" labels - without the U.S. labor costs - and foreign-owned corporations using the Marianas to escape duties and quotas. Last year alone, the federal government estimated that contractors and U.S. retailers avoided more than $200 million in duties from the $1 billion worth of garments shipped from Saipan. However, while this situation has been criticized, the CNMI has extensive rights under U.S. law, which make this "loophole" perfectly legal.

All of this might change if Rep. George Miller (D-CA) is successful in pushing through a number of bills that would impose U.S. federal minimum wage and immigration laws on the CNMI. Miller's bill, H.R 730, also would restrict the use of "Made in USA" labels and the islands' duty-free and quota-free treatment for garments. In the past such bills have been met with resistance by members of Congress who consider the island to be an economic miracle - a once-poor U.S. territory that has worked its way off of welfare.

Moreover, points out Harry Bernard, of the marketing consulting firm Colton Bernard: "Generally speaking, U.S. companies have a strong record of improving facilities, processes and the quality of lite in these countries. You have to compare apples to apples, and because the United States enjoys the highest standard of living in the world, it is not always a fair comparison."

Codes of Conduct: Protection or Liability?

In response to the lawsuits, spokespeople for several of the defendants pointed out that they have strict monitoring procedures in place, contractual rules and codes of vendor conduct which prohibit unfair or illegal working conditions. As Jan Drummond, a spokesperson for Sears, told Bobbin, the retailer's vendors are required to sign a "Universal Terms and Conditions" contract, which among other requirements, has specific and clear wording that prohibits vendors to supply goods made in violation of workplace laws. As another example, The Gap, in its official statement, responded to sweatshop charges by citing similar policies in dealings with its suppliers.

In the past, such self-policing has proved beneficial in deflecting negative press and helping to build good business relationships. However, in a new twist, these companies are finding themselves subject to legal scrutiny over the same codes. As a result, some in the industry are speculating that companies under fire will feel pressured to either own up to having knowledge of abuses if they are identified, or at the very least, admit that current monitoring procedures are not up to par.

For example, one of the lawsuits (see Case No. 2, this page) states that manufacturers and retailers profited by engaging in unfair business practices and misleading advertising by publicizing the "Made in USA" aspects of their business dealings, while not adhering to their own codes of conduct. The plaintiffs charge that companies with codes of conduct and monitoring programs in place would be aware of any abuses; they argue that these companies were fully aware of the abuses, yet continued to advertise their products as "sweatshop free." The charges go on to say that by engaging in business with these contractors, the defendants were trafficking in "hot goods."

Despite the possibility that retailers' and manufacturers' codes of conduct may be used as ammunition in a court of law, there is still very strong industry support for developing credible and effective monitoring programs.

As Larry, Martin, president of the American Apparel Manufacturers Association (AAMA), summed it up: "It is only by credible independent monitoring that American consumers can distinguish between efforts to improve workplace conditions and those designed to generate publicity."

AAMA, for example, recently introduced its Responsible Apparel Production Program (RAPP) initiative, which outlines social, ethical, legal and humane standards. The program is designed to be self-funded through certification fees charged to the participants. (See "CNIV Joins AAMA in Stand Against Sweatshops" in this issue, page 8.)

The Stakes

It's no secret that many companies within the apparel industry have benefited greatly by sourcing in international markets. Low labor costs have made these companies more competitive in the U.S. marketplace and increased their profits. And corporations continue to take their sourcing investments where labor is plentiful. One need only to look at the long list of U.S. textile plants that have recently shut down and the new plants that have opened in Mexico (due in part to cutthroat competition) to see the trends.

Whether the lawsuits against those companies doing business in Saipan will change the rule-book has yet to be seen. In the meantime, the questions linger. Where will the line of accountability be drawn for companies that seek to source internationally? Will global capitalism be forced to adhere to some form of global rules? And if so, what burdens might this put on companies in the hyper-competitive apparel industry?

A future that includes global adherence to U.S. federal and labor laws, liability for downstream abuses and third-party monitoring with public reports is a heavy proposition for the industry, and how and if companies will fight back remains to be seen.

At press time, official and unofficial comments on the issue were scarce, and it was unclear what direction the defendants' defenses would take. However, industry insiders are now taking bets on whether the apparel industry will be faced with long, drawn out and embroiled litigation, the likes of which have been plaguing other large U.S. industries and draining their coffers.

Legal Summary of Saipan Litigation

CASE NO. 1:

Filed in federal district court in Los Angeles, CA, the suit is brought pursuant to the Alien Tort Claims Act and the Racketeer Influenced and Corrupt Organizations Act.

PLAINTIFFS: Current and former garment workers, on behalf of all former and current Saipan garment workers employed by Saipan contractors since 1988. The group is estimated to number more than 50,000.

ALLEGATIONS: The lawsuit asserts that contractors, manufacturers and retailers engaged in and benefited from forced labor and that workers were forced into conditions constituting peonage and involuntary servitude, in violation of human rights laws.

CASE NO. 2:

Filed in state court in San Francisco, CA, under California statutes that prohibit unlawful and unfair business practices and misleading advertising.

PLAINTIFFS: Public interest and labor groups representing labor and human rights interests, including: the Union of Needletrades, Industrial and Textile Employees (UNITE), Sweatshop Watch, Global Exchange and the Asian Law Caucus.

ALLEGATIONS: The lawsuit charges that manufacturers and retailers gained profits by trafficking in "hot goods." Further, it asserts that these companies have codes of conduct and monitoring programs which they do not adhere to, and by not doing so they falsely advertise their clothing, focusing on the "American" nature of its production.

DEFENDANTS: CASES 1 & 2: The Associated Merchandising Corp.; Cutter & Buck Inc.; Dayton-Hudson Inc. (Marshall Fields, Mervyn's, Target); The Dress Barn Inc.; The Gap Inc.; Gymboree Manufacturing Inc.; J. Crew Inc.; JCPenney Co. Inc.; Jones Apparel Group; Lane Bryant Inc.; The Limited Inc.; The May Department Stores Co. (Famous-Barr, Filene's, Foley's, Hecht's, The Jones Store, Kaufmann's, Lord & Taylor, L.S. Ayres, Meir & Frank, Robinson's-May, Strawbridges); Nordstrom Inc.; OshKosh B'Gosh Inc.; Sears, Roebuck and Co.; Tommy Hilfiger USA Inc.; Wal-Mart Corp.; Warnaco Inc.

CASE NO. 3:

Filed in federal district court in the Commonwealth of the Northern Mariana Islands (CNMI), the suit is brought under the Fair Labor Standards Act and CNMI law.

PLAINTIFFS: Current and former garment workers, estimated to number more than 25,000.

ALLEGATIONS: This lawsuit charges that garment contractors failed to properly pay workers, who were forced to "donate" their time when their regular shifts ended. It also charges that workers are forced to work "off the clock" to meet unrealistic quotas.

DEFENDANTS: Twenty-two foreign-owned garment factories in the CNMI.

Editor's Note: Next month's "Labor Forum" column, by contributing editor Alan Rolnick, will offer an in-depth look at the legal aspects of the cases filed in relation to sweatshop allegations in Saipan.

Shawn Meadows is the assistant editor of Bobbin.

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