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  6.  » Supreme Court’s Nestle Decision Signals New Risks for Government Contractors with Foreign Operations

Supreme Court’s Nestle Decision Signals New Risks for Government Contractors with Foreign Operations

8.6.21 – Posted on E&B Alerts – Government Contracts

Can U.S. corporations, including government contractors, be held liable for human rights violations that occurred in their supply chain overseas? According to a recent decision from the U.S Supreme Court, the answer is likely yes – so long as there is a sufficient connection between the violation and the corporations’ conduct in the United States. In Nestle USA, Inc. v. Doe, the Court addressed the jurisdictional scope of the Alien Tort Statute (ATS) and whether it permits direct lawsuits to be brought against corporations. While the Nestle case was dismissed on jurisdictional grounds, a majority of the court held that corporations can in fact be sued under the ATS for overseas human rights violations.

In Nestle, six former child laborers claimed they were enslaved and trafficked into the Ivory Coast to work on cocoa farms. They sued Nestle and Cargill, alleging that the corporations aided and abetted forced child labor to source their cocoa in violation of the ATS. The Alien Tort Statute, originally passed in 1789, grants the federal district courts jurisdiction over civil claims by aliens for “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. Until Nestle, however, it was unclear whether the ATS covered the actions of private actors such as U.S. corporations. In its decision issued on June 17, 2021, the Supreme Court concluded that the ATS does not confer jurisdiction for claims against U.S. corporations that conduct “general corporate activity” in the United States which causes injury in foreign countries. Nestle USA, Inc. v. Doe, 141 S. Ct. 1931, 1933 (2021).

However, the Nestle decision does not immunize U.S. corporations from ATS suits for forced labor in the supply chain; while not immediately clear from the majority opinion, five justices confirmed that corporations can indeed be sued under the ATS. To make out a case against a U.S. corporation under the ATS, a plaintiff must meet a high standard: they must show a sufficient nexus between the foreign violation and the domestic conduct. Such conduct must amount to more than that a U.S. corporation made “major operational decisions from within the United States,” Id. In Nestle, for example, the corporations did not own or operate cocoa farms in the Ivory Coast, and “nearly all the conduct that [the plaintiffs] say aided and abetted forced labor––providing training, fertilizer, tools, and cash to overseas farms––occurred in [the] Ivory Coast.” Id. at 1933. Thus, a plaintiff may have a viable ATS claim if they can allege that more than “general corporate activity” occurred in the United States. Id. While the Court did not define “general corporate activity,” one could infer from Nestle that it includes a corporation making operational plans in the United States and providing resources to offshore contractors.

Although the Court dismissed Nestle on procedural grounds, a majority of the Justices weighed in on a question they have previously avoided––whether a corporation may be sued under the ATS. In separate opinions, five of the nine Justices confirmed they would answer this question in the affirmative: U.S. corporations are not exempt from ATS lawsuits. In his concurrence, Justice Gorsuch, joined by Justice Alito, wrote that “[n]othing in the ATS supplies corporations with special protections against suit.” Id. at 1947, n.4. Justice Sotomayor, concurring with Justices Breyer and Kagan joining, found, “there is no reason to insulate domestic corporations from liability . . . because they are legal rather than natural persons.” Id. at 1941. And although alone in his dissent, Justice Alito agreed with the concurring Justices that “[c]orporate status does not justify special immunity.” Id. at 1950. Thus, while the Court may have narrowed the jurisdictional scope of the ATS, it did not limit the ability for U.S. corporations to be sued. Further, while Nestle involved U.S. corporations, it seems likely that other business entities, such as partnerships and LLCs, would also be subject to liability under the ATS.

 Nestle shows how crucial it is for U.S. businesses to be vigilant and aware of what is happening in their supply chain. This becomes especially pertinent for government contractors supplying the United States (or its prime contractors) with products or labor sourced or transported from other countries. Federal Acquisition Regulation (FAR) § 52.222-50 already requires government contractors to adopt anti-trafficking provisions. Under the Nestle decision, government contractors may now face lawsuits from foreign plaintiffs for human rights violations, in addition to lawsuits or penalties from the United States government for violation of FAR 52.222-50. If your business is sourcing products or labor from foreign countries, it is more crucial than ever that you address human or labor-trafficking risks in your supply chain. This is especially pertinent if your business is actively managing supply chain activities in foreign countries, as this would likely rise beyond “general corporate activity,” and surpass the Nestle threshold.

In conclusion, U.S. corporations are not immune from liability for human rights violations and other injuries that occur in their supply chain overseas. While the recent Nestle decision limits the jurisdictional reach of the ATS, plaintiffs may have a viable ATS claim against a U.S. corporation if they can prove that harmful actions­­––more than just “general corporate activity”––occurred in the United States­­­. Government contractors therefore must proactively ensure the integrity of their supply chain to avoid potential violations.

For additional information regarding the impact of this decision, or for assistance ensuring your business’ compliance with anti-trafficking regulations, please contact the government contract attorneys at Eckland & Blando LLP.