Smart Apparel Will Get a Chance to Prove that It Does Not Rely on Involuntary Labor

I recently had a conversation with Sarah Dadush (below), who works at the intersection of contracts law and international human rights law. From my conversation with Sarah I learned, among other things, about one mechanism for the enforcement of international human rights law that can actually have some teeth. U.S. corporations incorporate human rights standards into their contracts with suppliers and then cancel the contracts if they learn that their counterparties are not abiding by their obligations to safeguard international human rights standards.

I was skeptical that U.S. corporations would take any action against a counterparty, so long as they could virtue signal that they actually care about labor conditions, but Sarah assured me that cases do arise. Sure enough, I soon came across this unpublished opinion in Smart Apparel (U.S.) , Inc. v. Nordstrom, Inc., in which Nordstrom cancelled orders from Smart Apparel. Unfortunately, this case may illustrate how U.S. corporations may contractual provisions intended to protect human rights in order to get out of a deal on which they have soured.

According to the Complaint, on January 13, 2023, Nordstrom informed Smart Apparel that it was canceling all orders to Smart Apparel for which the merchandise had not yet cleared customs in the United States. This decision came after the U.S. Customs and Border Patrol (CPB) issued a press release stating that it would detain merchandise from companies suspected of making use of North Korean labor in their supply chains, in violation of the Countering America’s Adversaries Through Sanctions Act (CAATSA). Smart Apparel was not named in the CPB Press Release. Smart Apparel claims that it has an extensive auditing system, of which Nordstrom is well aware, to assure compliance with CAATSA, among other things. It alleges that the contract cancellation was pretextual and has cost Smart Apparel $6.7 million.

In October 2023, Smart Apparel sued in federal court, alleging breach of contract, breach of the duty of good faith and fair dealing, and promissory estoppel. The District Court granted Nordstrom’s motion to dismiss, but the Ninth Circuit reversed. The Court found that the CPB press release did not provide Nordstrom with reason to believe that either Smart Apparel or its parent corporation had violated CAATSA. It appears that the parent corporation was named in the CPB press release, but that only creates a rebuttable presumption of conduct in violation of CAATSA. In this case, Smart Apparel has alleged that the presumption was effectively rebutted through its extensive audit system designed to show that it did not rely on involuntary labor of North Korean labor at any point in its supply chain.

Smart Apparel’s claim for breach of the duty of good faith and fair dealing also survived. It had alleged that Nordstrom insisted on cancellation even after being presented with new audits proving that Smart Apparel could not be a target of the CPB press release. Smart Apparel had sufficiently alleged that the CPB press release provided a pretext for the cancellation and thus has alleged a breach of the duty of good faith and fair dealing.