The increasing globalization of the economy comes with serious social and economic costs as well as long-term benefits. Author Al Meyerhoff argues that the American legal system can be used effectively to counter some of the adverse effects of this expansion.

Meyerhoff suggests that class actions on behalf of workers can provide a remedy for sweatshop working conditions. He also points out the availability of private attorney general actions under California's Unfair Business Practices law as a tool for challenging an international company's advertising claims. Securities class actions--some brought by union pension funds--can also address domestic concerns, such as a substantial drop in corporate share value due to poor international decisions.

As trade barriers fall and the manufacture of offshore goods targeted for the U.S. market increases, the legal challenges posed by the "new economy" are rather daunting. Whatever its long term benefits, globalization demonstrably comes with serious social and economic costs as companies and, indeed,virtually entire industries, move production halfway around the world in search of low wages and reduced or nonexistent labor standards. The American labor movement and others have responded by pressing for amendments to trade agreements to include a commitment to improvements in labor and human rights. International organizing efforts also are on the rise, as American unions work with their foreign counterparts to improve wages and labor standards.

Many business interests have countered these efforts by championing "free trade" as meaning not only reduced tariffs but also, when doing business with foreign manufacturers, freedom from U.S. legal constraints. That focus raises the $64,000 (or, rather, $1,000,000) question: Do American laws and their underlying principles follow American capital as it travels around the world?

To date, most of this debate has occurred outside the American legal system at the World Trade Organization, in Congress, or in the streets of Seattle or Quebec. Most recently, these issues have been joined in a context of a proposed Western Hemisphere free trade zone. However, this article examines whether, and how, under existing statutory schemes, litigation also may be available to address the adverse impacts of globalization, holding U.S. corporations accountable for violations of U.S. and international law offshore and at least partially redressing the economic consequences at home.

The article is in two parts. In the first, cases are discussed in which U.S. and international laws have been invoked to address alleged sweatshop conditions in foreign-owned factories producing goods for the U.S. market. In one such case, Doe v. Gap Inc., the plaintiffs rely upon the Racketeer Influenced and Corrupt Organizations Act and the Alien Tort Claims Act (also known as the Law of Nations). Initially filed in the U.S. District Court for the Central District of California, the case was brought on behalf of a class of allegedly indentured "guest workers" employed in garment factories on the West Pacific island of Saipan. In another such case, also involving sweatshops, the plaintiff is using California's Unfair Business Practices statute to challenge Nike Inc.'s advertising claims that its goods are manufactured throughout the world sweatshop free.

In the article's second part, litigation approaches are discussed that seek to remedy the adverse domestic impacts that may occur when companies move U.S. production facilities offshore. In these cases, plaintiffs have utilized wellestablished principles of securities class action and corporate derivative litigation to address fraud and insider trading allegedly occurring when globalization goes wrong. These cases include 10(b)(5) litigation against such corporate giants as Fruit of the Loom Inc., Guess? Inc., and Nike.

I. Globalization AbroadA. The Saipan Case

Saipan is one of a chain of fourteen islands in the West Pacific that comprise the Commonwealth of the Northern Mariana Islands (CNMI), located 120 miles from Guam. Following World War II, these islands were a trust territory of the United Nations; the United States served as administrator of the trust agreement. In 1975, the people of the CNMI voted to become a U.S. Commonwealth, a legal status like Puerto Rico. However, the Covenant approved by Congress exempted the CNMI both from federal minimum wage laws and the Immigration and Nationalization Act. Thus, Saipan is at the very edge of the global economy.

Within a decade of the Covenant taking effect in 1986, the population of the Mariana Islands skyrocketed from less than 15,000 to 60,000, the majority of whom were foreign "guest workers" from China, Thailand, Bangladesh, the Philippines, and elsewhere. Laboring under one- to three-year employment contracts, many of the workers are employed in the Islands' garment industry, generating more than $1 billion in textiles for the American market annually. Because Saipan is part of a U.S. Commonwealth, such goods are often labeled "Made in the USA" and may be sold free from production quota or tariff. Companies securing their production in Saipan rather than China or other foreign countries avoid some $200 million in tariffs each year.

Most of the garment factories in Saipan are foreign-owned but do business with a host of major U.S. retailers. According to a series of federal government reports, for years Saipan's garment industry has been plagued by serious violations of U.S. labor laws and international human rights. In one report issued by the U.S. Department of Interior Office of Insular Affairs ("DOI"), workers recruited in China were found to have been required to sign "shadow" contracts before coming to Saipan restricting such basic freedoms as speech, religion and privacy; some were prohibited from "escaping," joining a union, becoming pregnant--even falling in love.1

Many of Saipan's "guests workers" are indentured, required to incur debts of several thousand dollars in "recruitment fees" simply to work in Saipan. They also may be required to work long "volunteer" hours without pay, facing deportation if they complain. As one DOI report put it, "the problems faced by the unemployed legal and illegal populations of foreign contract workers in the CNMI include fraudulent recruitment practices, substandard living conditions, malnutrition, health problems, and unprovoked acts of violence being inflicted upon foreign contract workers that are not being addressed by an ineffective CNMI labor and immigration system. ... Workers describe a Chinese garment work force compelled to work and live under conditions of employment that were tolerated due to the fear of retaliation, economic and otherwise from their Government."

Based upon these and other alleged violations of human rights, on January 13, 1999, a federal class action was filed in the Central District of California for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), the Anti-Peonage Act, and the Alien Tort Claims Act. Defendants included many of the foreign owned garment factories in Saipan, but also many of the nation's largest and best known clothing retailers and fashion houses, such as Gap, J.C. Penney Co., Lane Bryant, and Target Corp. During its initial stages, the litigation primarily involved procedural issues, including challenges to jurisdiction and venue. However, in the coming months, the court will address pending motions to dismiss as well as to approve settlements reached with 19 retailer defendants who collectively purchase more than $400 million in goods per year in Saipan. Settling retailers include such labels as Calvin Klein Inc., Liz Claiborne Inc., Polo Ralph Lauren Corp., and Tommy Hilfige r Corp. The settlements provide for financial relief, the establishment of strict codes of conduct governing working and living standards, and independent monitoring to insure compliance. However, the garment factory owners, together with the remaining non-setting retailers--Target, Gap, Lane Bryant, and J.C. Penney--are currently seeking to block settlement approval and implementation. What follows is a brief summary of the legal theories providing the basis for the Saipan litigation. 1. The RICO Claims

According to the complaint, by participating in a scheme intended to employ "indentured workers" under what are said to be sweatshop conditions, the various defendants violated RICO. The Act provides that "any person injured in his business or property may sue, and shall recover threefold the damages he sustains and the cost of the suit" (18 U.S.C. §1962(c)). To state a claim, plaintiffs must allege (1) unlawful conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity violating specified "predicate acts." RICO broadly defines "enterprise" to "include any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated, in fact, although not a legal entity." (18 U.S.C. §1962(4)). Involuntary servitude or indentured labor are among the "predicate acts" proscribed under RICO.2

"A pattern of racketeering activity" exists when a person commits or aids and abets two or more specified acts that have sufficient continuity and relationship so as to pose a threat of continued criminal activity. The Saipan complaint includes allegations that pursuant to various agreements that were negotiated and executed between the U.S. retailers and Saipan factory owners, the defendants formed a series of association-in-fact enterprises for the purpose of committing numerous acts of racketeering. It further alleges that by recruiting and employing thousands of indentured workers required to pay substantial recruitment fees, waive basic civil rights, and then work in sweatshop conditions, the various factories and retailers alike committed and/or aided and abetted violations of federal and statutory law constituting a pattern of racketeering activity, including violating the Anti-Peonage Statute (18 U.S.C. §1581) and the Hobbs Act prohibiting extortion (18 U.S.C. §1951). 2. The Law of Nations

The Alien Tort Claims Act 28 U.S.C. §1350 was initially enacted by the new republic in 1789 among other things to deal with acts of piracy and punish "the enemies of all mankind." It confers federal subject-matter jurisdiction for human rights violations when: (1) an alien sues (2) for a tort (3) committed in violation of established international law or internationally recognized human rights. The Saipan plaintiffs claimed in their complaint that conditions in the Islands' garment industry constituted violations of the Act by abridging certain universally recognized human rights as evidenced in various treaties and other internationally approved documents.

Prohibitions on forced, compulsory, or indentured labor are universally embraced by the international community as human rights violations that are of universal concern. Often referred to as jus cogens norms, they are "accepted and recognized by the international community of states as norms from which no derogation is permitted." Such basic labor rights are recognized and incorporated into internationally-adopted instruments, such as the Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights, guaranteeing freedom of association and freedom from discrimination. The Declaration and the ICCPR also prohibits all forms of slavery and indentured servitude. The principles announced and agreed upon in these instruments are the core of customary international law of labor and human rights. Bureau of Democracy, Human Rights and Labor, U.S. Department of State, Overview to Country Reports on Human Rights Practices for 1997 (January 30, 19 98), available at [external link] (see VI. Worker Rights).3

For many years, such principles, while laudable, were also effectively unenforceable. Meanwhile, the Alien Tort Claims Act lay dormant. See, e.g., Filartiga v. Pena-Irala, 630 F.2d 876, 887 & n. 21 (2d Cir. 1980) (identifying only two previous cases that had relied upon the Act for jurisdiction). As the result of increasing concern over human rights, in the 1980's the Act began to be used against repressive government regimes. See, e.g., Abebe-Jira v. Negewo, 72 F.3d 844 (11th Cir. 1996) (alleging torture in Ethiopia); In re Estate of Marcos, 25 F.3d 1467 (9th Cir. 1994) (alleging torture and other abuses by former President of Philippines); Tel-Oren v. Libyan Arab Republic, 726 F.2d 774 (D.C. Cir. 1984) (alleging claims against Libya based on armed attack upon civilian bus in Israel); Filartiga (alleging torture by Paraguayan officials); Xuncax v. Gramajo, 886 F. Supp. 162 (D. Mass. 1995) (alleging abuses by Guatemalan military forces).

Now, in a changing economy and an evolving body of law, globalization is testing whether not only governments, but also U.S. corporations can be held accountable in U.S. courts for violations of human rights, including those by their business partners abroad. The law plainly is moving in that direction. Under several recent decisions, private persons may be held liable for certain acts if undertaken under color of state law as well as in derogation of certain norms of international law. Doe v. Unocal Corp., 963 F. Supp. 880, 890 (C.D. Cal. 1997) (Paez, J.); see also Kadic v. Karadzic, 70 F. 3d 232, 238 (2d Cir. 1995); Wing v. Royal Dutch Petroleum Co., 226 F. 3d 88 (2d Cir. 2000).B. The Nike Case

Kasky v. Nike Inc. was brought as a "private Attorney General" case in a California state court challenging as allegedly false or deceptive various statements made by Nike that its products were manufactured throughout the world in compliance with a strict code of conduct and free from sweatshop labor.

Under California's unfair competition law, "unfair competition" includes "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Comm. on Children's Television Inc v. General Foods Corp., 35 Cal. 3d 197 (Cal. 1983). The Act has been broadly defined. To state a false advertising claim "it is necessary only to show that 'members of the public are likely to be deceived' " Id at 211. The Nike complaint identified a host of statements by Nike concerning how the company's products were claimed to have been made that the plaintiff said were false or deceptive. Nevertheless, the case did not initially fare well. Both the trial court and court of appeal dismissed the action on First Amendment grounds. In a novel and rather controversial decision, the appellate court devised a line between "pure" speech and "commercial" speech that turned on whether the statements at issue concerned "specific characteristics of goo ds" (said to be commercial and subject to reasonable regulation) or instead addressed how goods were manufactured that also "were intended to promote a favorable corporate image," (said to be "pure speech") even if such speech was "intended to induce consumers to buy its products." The California Supreme Court has granted review of the case.

Should the plaintiff prevail in Nike and establish that public statements by U.S. companies about the behavior of their foreign business partners--such as often-touted compliance with corporate codes of conduct--are "commercial" speech, then in California at least, such claims will be judicially reviewable. As Justice Scalia has recognized, "commercial speech [enjoys] a limited measure of protection, commensurate with its subordinate position in the scale of First Amendment values." Board of Trustees v. Fox, 492 U.S. 469, 477 (1989). "[C]ommunications can 'constitute commercial speech notwithstanding the fact that they contain discussions of important public issues. ... We have made clear that advertising which 'links a product to a current public debate' is not thereby entitled to the constitutional protection of non-commercial speech." Id. at 475. II. Globalization at Home

Americans now buy 100% of their televisions, most of their other electronics and two-thirds of their textiles from foreign sources. When entire segments of the American manufacturing sector move offshore, there are obvious consequences domestically, including ones for workers and local residents, and sometimes for shareholders. For workers who lost jobs in the past, at least some remedies have been available, such as Trade Re-adjustment Act benefits for job losses due to trade imbalances. However, losses to shareholders that occur from problems associated with globalization and the transition to foreign manufacturing have garnered little attention. This may be changing.

When a publicly-traded company issues a false and misleading statement to shareholders or fails to disclose facts necessary to insure that statements made are not false and misleading, it violates Section 10(b) of the Securities Exchange Act of 1934. Likewise, corporate insiders who trade on undisclosed information may also be liable to "insider trading," and required to disgorge any illegally obtained profits. In addition, various state laws impose upon corporate directors and officers fiduciary duties of candor, good faith and fair dealing. Violating these duties may result in a waste of corporate assets, authorizing "derivative litigation" brought by shareholders, in the company's name, against corporate officers and directors.

In the past two years, several lawsuits have been brought for violations of these laws in which the central allegations concern the failure to truthfully inform shareholders of problems flowing from foreign manufacturing, including losses in quality and inventory control.

Probably the best example of such litigation is a suit brought by a Service Employees International Union (SEIU) pension fund on behalf of purchasers of Fruit of the Loom stock. Indeed, the Fruit of the Loom experience demonstrates the potential hazards of the global economy when promises are made concerning cost-savings and efficiency from moving domestic manufacturing facilities overseas that prove to be false. This once-great American Fruit of the Loom brand known throughout the world is now bankrupt.

A sound and highly profitable company in the past, Fruit of the Loom stock hit an all time high in 1993 of more than $49 per share. According to the SEIU complaint, a series of unsuccessful acquisitions and inventory problems then resulted in losses of $373 million in 1994--resulting in a "restructuring" that included three plant closings and 6,000 layoffs. Fruit of the Loom stock plummeted to $16/share. The company assured investors that it was taking appropriate steps to improve efficiency and lower labor costs, including by moving most of its sewing operations to the Caribbean and Mexico. Business seemed to improve. Assurances about inventories and cash flows were rosy and the stock recovered. Suddenly, in 1997, Fruit of the Loom reported rather astonishing losses--over $530 million—which according to the complaint, were due to problems in its new facilities in Mexico and the Caribbean and losses in quality and sales. More U.S. plant closings were announced and 7,500 more worker s were fired. In the end, Fruit of the Loom suffered a total of over $715 million in losses, fired 16,385 U.S. workers and closed over 20 U.S. plants. The company stock never recovered, and currently the company's remaining assets are being sold off in bankruptcy auctions.

Perhaps recognizing the potential ramifications of this case in the global economy, not only in the human rights context but also for the panoply of "green marketing" and other sometimes questionable corporate image advertising, several amici curiae briefs have been submitted--including ones on behalf of Nike by business interests, conservative legal foundations, and the ACLU, and on behalf of the plaintiff by organized labor, environmentalists, and the California Attorney General.

During the period the stock was inflated, according to the complaint, top Fruit of the Loom executives received over $32 million in cash and stock bonuses. They also allegedly sold 104 million shares--reaping $46 million in profits. Bill Farley, Fruit of the Loom Chairman and CEO, allegedly sold over 1.2 million shares--96% of the stock he owned--reaping $39 million in profits. Other insiders sold 94% of their stock, much acquired as stock options for the Company's "success."

The SEIU complaint alleged that Fruit of the Loom made false representations to shareholders over the economic benefits obtained by moving their operations offshore when the opposite was true. Losses in product quality and inventory were said to have actually led to losses to the company and its shareholders. Fruit of the Loom executives, as insiders, set themselves up to profit personally, the Complaint alleged, while thousands of workers lost their jobs, communities lost their business and shareholders lost millions in stock value. The SEIU's case has survived a motion to dismiss and is proceeding toward trial.4

As this case demonstrates, the Securities Exchange Act offers at least one vehicle to help remedy what are sometimes serious adverse impacts of the rapidly moving global economy. And the use of this approach appears to be on the rise. In the past several months, at least eight securities cases have been filed against GUESS, alleging that the director Marciano Brothers misled investors by making false statements about rising inventories stemming in part from foreign manufacturing problems. Late last year, Paul Marciano was replaced as President of the company. Other companies like Ann Taylor and Nike have also been sued for securities fraud for allegedly withholding from shareholders important information about problems with foreign inventory and quality control from their foreign suppliers.

Conclusion

The response of the American legal system to globalization is obviously at a very early stage. However, the potential is there to utilize existing laws to secure some modicum of justice--both abroad and at home for those caught up in the economic forces of the 21st century, often to their detriment.