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9th Cir.: Walmart Not Joint Employer Of Its Suppliers’ Employees Under FLSA; Employees Not Third-party Beneficiaries Of Standards Contained In Supply Contracts Between Walmart And Plaintiff’s Employers

Doe I v. Wal-Mart Stores, Inc.

The appellants were employees of foreign companies that sell goods to Wal-Mart. They brought claims against Wal-Mart based on the working conditions in each of their employers’ factories. These claims relied primarily on a code of conduct included in Wal-Mart’s supply contracts, specifying basic labor standards that suppliers must meet. The district court dismissed the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The Ninth Circuit affirmed the dismissal on appeal.

For its analysis the Court assumed the following facts to be true:

“In 1992, Wal-Mart developed a code of conduct for its suppliers, entitled “Standards for Suppliers” (“Standards”). These Standards were incorporated into its supply contracts with foreign suppliers. The Standards require foreign suppliers to adhere to local laws and local industry standards regarding working conditions like pay, hours, forced labor, child labor, and discrimination. The Standards also include a paragraph entitled “RIGHT OF INSPECTION”:

To further assure proper implementation of and compliance with the standards set forth herein, Wal-Mart or a third party designated by Wal-Mart will undertake affirmative measures, such as on-site inspection of production facilities, to implement and monitor said standards. Any supplier which fails or refuses to comply with these standards or does not allow inspection of production facilities is subject to immediate cancellation of any and all outstanding orders, refuse [sic] or return [sic] any shipment, and otherwise cease doing business [sic] with Wal-Mart.

Thus, each supplier must acknowledge that its failure to comply with the Standards could result in cancellation of orders and termination of its business relationship with Wal-Mart.

Wal-Mart represents to the public that it improves the lives of its suppliers’ employees and that it does not condone any violation of the Standards. However, Plaintiffs allege that Wal-Mart does not adequately monitor its suppliers and that Wal-Mart knows its suppliers often violate the Standards. Specifically, Plaintiffs claim that in 2004, only eight percent of audits were unannounced, and that workers are often coached on how to respond to auditors. Additionally, Plaintiffs allege that Wal-Mart’s inspectors were pressured to produce positive reports of factories that were not in compliance with the Standards. Finally, Plaintiffs allege that the short deadlines and low prices in Wal-Mart’s supply contracts force suppliers to violate the Standards in order to satisfy the terms of the contracts.”

Initially, the Court found that Plaintiffs’ Complaint could not support a third-party beneficiary claim on behalf of the employees under the contract their employer had with Walmart.

Next, the Court addressed the “Plaintiffs’ theory that Wal-Mart was Plaintiffs’ joint employer, such that they can “sue Wal-Mart directly for any breach of contract or violation of labor laws.” Again, the Court concluded, to the contrary, that Wal-Mart could be considered Plaintiffs’ employer on the facts alleged. “The key factor to consider in analyzing whether an entity is an employer is “the right to control and direct the activities of the person rendering service, or the manner and method in which the work is performed.” Serv. Employees Int’l Union v. County of L.A., 225 Cal.App.3d 761, 275 Cal.Rptr. 508, 513 (1990) (internal quotations and citation omitted). “A finding of the right to control employment requires … a comprehensive and immediate level of ‘day-to-day’ authority over employment decisions.” Vernon v. State, 116 Cal.App.4th 114, 10 Cal.Rptr.3d 121, 132 (2004).”

The Court then addressed “Plaintiffs’ negligence claims, which Plaintiffs bring under four distinct theories: third-party beneficiary negligence, negligent retention of control, negligent undertaking, and common law negligence. Whichever theory is invoked, however, we conclude that Wal-Mart did not owe Plaintiffs a common-law duty to monitor Wal-Mart’s suppliers or to prevent the alleged intentional mistreatment of Plaintiffs by the suppliers. Without such a duty, Plaintiffs’ negligence theories do not state a claim. See *684 Paz v. State, 22 Cal.4th 550, 93 Cal.Rptr.2d 703, 994 P.2d 975, 980-81 (2000) (“The threshold element of a cause of action for negligence is the existence of a duty …”).

Plaintiffs’ “third-party beneficiary” negligence theory relies on the assumption that Wal-Mart owes Plaintiffs a duty under Wal-Mart’s supply contracts. Because we have already determined that no legal obligation flows from Wal-Mart to Plaintiffs under Wal-Mart’s supply contracts, Plaintiffs do not state a claim for third-party beneficiary negligence.

In order to state a claim for “negligent retention of control and supervision,” Plaintiffs must allege facts that, if proven, would show that Wal-Mart exercised significant control over Plaintiffs and that “exercise of retained control affirmatively contributed to the employee’s injuries.” Hooker v. Dep’t of Transp., 27 Cal.4th 198, 115 Cal.Rptr.2d 853, 38 P.3d 1081, 1083 (2002) (emphasis in original). We have already determined that Wal-Mart is not Plaintiffs’ employer because Wal-Mart exercised minimal or no control over the day-to-day work of Plaintiffs in the suppliers’ foreign factories. Accordingly, we hold that Wal-Mart did not owe Plaintiffs a special duty to protect Plaintiffs from the suppliers’ alleged intentional misconduct.

Plaintiffs’ “negligent undertaking” theory relies on the assumption that Wal-Mart undertook to protect Plaintiffs, and therefore Wal-Mart had to exercise reasonable care in monitoring the suppliers. See Delgado v. Trax Bar & Grill, 36 Cal.4th 224, 30 Cal.Rptr.3d 145, 113 P.3d 1159, 1175 (2005) (stating that one who “undertakes to provide protective services to another” must exercise a duty of care). This theory fails because, as we have already concluded, Wal-Mart did not undertake any obligation to protect Plaintiffs. “[T]he scope of any duty assumed depends upon the nature of the undertaking,” id., and here Wal-Mart merely reserved the right to cancel its supply contracts if inspections revealed contractual breaches by the suppliers. Any inspections actually performed by Wal-Mart were therefore gratuitous, and do not independently impose a duty on Wal-Mart to protect Plaintiffs. Id.

Plaintiffs’ “common law negligence” claim provides no additional ground for finding a duty on the part of Wal-Mart. Wal-Mart had no duty to monitor the suppliers or to protect Plaintiffs from the intentional acts the suppliers allegedly committed. Thus, Plaintiffs’ theories sounding in negligence do not state a claim. See Paz, 93 Cal.Rptr.2d 703, 994 P.2d at 980-81.”

Lastly, the Court addressed Plaintiffs’ claim of unjust enrichment. “Plaintiffs allege that Wal-Mart was unjustly enriched at Plaintiffs’ expense by profiting from relationships with suppliers that Wal-Mart knew were engaged in substandard labor practices. Unjust enrichment is commonly understood as a theory upon which the remedy of restitution may be granted. See 1 George E. Palmer, Law of Restitution § 1.1 (1st ed. 1978 & Supp. 2009); Restatement of Restitution § 1 (1937) (“A person who has been unjustly enriched at the expense of another is required to make restitution to the other.”). California’s approach to unjust enrichment is consistent with this general understanding: “The fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust for the person to retain it.” First Nationwide Sav. v. Perry, 11 Cal.App.4th 1657, 15 Cal.Rptr.2d 173, 176 (1992) (emphasis in original).

The lack of any prior relationship between Plaintiffs and Wal-Mart precludes the application of an unjust enrichment theory here. See Smith v. Pac. Props. & Dev. Corp., 358 F.3d 1097, 1106 (9th Cir.2004) (noting that a party generally may not seek to disgorge another’s profits unless “a prior relationship between the parties subject to and benefiting from disgorgement originally resulted in unjust enrichment”). Plaintiffs essentially seek to disgorge profits allegedly earned by Wal-Mart at Plaintiffs’ expense; however, we have already determined that Wal-Mart is not Plaintiffs’ employer, and we see no other plausible basis upon which the employee of a manufacturer, without more, may obtain restitution from one who purchases goods from that manufacturer. That is, the connection between Plaintiffs and Wal-Mart here is simply too attenuated to support an unjust enrichment claim. See, e.g., Sperry v. Crompton Corp., 8 N.Y.3d 204, 831 N.Y.S.2d 760, 863 N.E.2d 1012, 1018 (2007) (holding that “the connection between the purchaser of tires and the producers of chemicals used in the rubbermaking process is simply too attenuated to support” the purchaser’s claim of unjust enrichment).

In sum, we conclude that Plaintiffs have not stated a claim against Wal-Mart. Wal-Mart had no legal duty under the Standards or common law negligence principles to monitor its suppliers or to protect Plaintiffs from the suppliers’ alleged substandard labor practices. Wal-Mart is not Plaintiffs’ employer, and the relationship between Wal-Mart and Plaintiffs is too attenuated to support restitution under an unjust enrichment theory.”