DWT Monthly CLE SeriesGreening the Supply Chain

January 11, 2012Haeryung Shin and Stephen Ellis

More traditional integrated manufacturing modelManufacturer is in control of most of the manufacturing process and is taking in mostly raw materials and components.

1Why are we here?2WHY ARE WE HERE?It probably hasn't escaped your notice that the use of terms such as "green" and "sustainable" have been proliferating in both manufacturing and retail products circles in recent years as concerns about the reality of climate change accelerate."You may be here because you represent clients or companies involved in the manufacture or sale of consumer products."You may be here because you work with a vendor of finished products or to an upstream supplier to such a vendor. "You may be here because you're wondering - on your own or on account of pressure from downstream customers -- what steps you can take to enhance the green-ness of your products or processes."You may be here because you seek "enlightenment" on what it means to be "green" in the first place."Maybe your goal is simply to get a little information on whether all the green and sustainable-speak has substance, or whether it's just the latest marketing trend.2REIDellAmazon

Exxon MobilWalmartProctor & GamblePop QuizREIDellAmazon

Exxon MobilWalmartProctor & GambleAt __________, we know that being an efficient and profitable business and being a good steward of the environment are goals that can work together. Our broad environmental goals are simple and straightforward:To be supplied 100 percent by renewable energy;To create zero waste;To sell products that sustain people and the environment.

3Question: The following statement appears on which companys sustainability Web page?

3Trends2004

Number of publicly tradedU.S. companies with achief sustainability officer

12011

Number of publicly tradedU.S. companies with achief sustainability officer

29[W]e estimate that half of all shareholder resolutions in 2011 will center on social and environmental issues.Ernst & Young42004: Number of publicly traded US companies with a Chief Sustainability Officer? Answer: 1 (Linda Fisher, DuPont)2011: Number of publicly traded US companies with a Chief Sustainability Officer? Answer: 292011: [W]e estimate that half of all shareholder resolutions in 2011 will center on social and environmental issues. (Ernst & Young)

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5Still is this for real?5

Hows Walmart Doing?To be supplied 100 percent by renewable energy65% improvement in truck fleet efficiencyPledge to remove 20 million metric tons of GHGs from supply chain by 2015Installed LED lighting in 350 store parking lots in Central America6To be supplied 100 percent by renewable energy:65% improvement in truck fleet efficiencyGlobal focus on GHGs, with a pledge to remove 20 million metric tons of GHGs from its supply chain by 2015Installation of LED lighting in parking lots and outdoor areas at 350 stores in Central America (anticipated to reduce energy consumption by 50% and 540 tons of carbon emissions)

6Walmart from 2005 to 2010:To create zero waste

Eliminated> 80% of landfill waste from operations in California

Reduced47.95 million pounds of plastic bag waste globally

7To create zero waste :Elimination of > 80% of landfill waste from operations in CaliforniaReduction of 47.95 million pounds of plastic bag waste from global operations

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Walmart from 2005 to 2010:8To sell products that sustain people and the environment:Pledge to sell $1 billion of food sourced from 1 million small- to medium-sized farms

To train 1 million farmers in sustainable techniquesTo sell products that sustain people and the environment:Pledge to sell $1 billion of food sourced from 1 million small to medium-sized farmers and to train 1 million farmers in sustainable farming techniquesHelping create a global Sustainability Index to evaluate the sustainability of the products we sell, providing customers with transparent information about the quality and history of those products

8Can I Ignore this?

99ANSWER:

10Steve and I are here because while we certainly see plenty of green window dressing, we believe the greening of the supply chain is very real and if it hasnt reached you yet, it is heading your way and will be knocking on your door soon.10Integrated Manufacturing Model11

11Supply Chain Management Model12

A more modern supply chain management model with scattered manufacturing prior to the final manufacturer securing finished goodsNote the complexityWalmart dealing with right side of slide.How does manufacturer deal with left side of slide?

12Common Fact Pattern

Acme makes Widgets

which it sells to Big Box retailer. WidgetBusterChen

Acme uses two principal suppliers:

Buster, a US companyand Chen, a Chinese OEM

Chen supplies 90% of the Widgets. Acme then assembles the Widgets in the U.S. by combining one or two critical components supplied by Buster with Chens output.13Hypothetical for discussionNote that this hypothetical is much simpler than the supply chain management slide

13Green Supply Chain Contracts:A Few Practical Legal Provisions14The question here is: Can Acme build practical provisions into its supply chain contracts to ensure its obligation to deliver a green product to Big Box?

Define Your TermsGoals of contract are to allocate risk and define obligations.Clearly define terms such as Sustainable, Green, and Recycled. For example:

To do otherwise is to ensure ambiguity.

15Sustainable or Sustainability shall mean, at any time, the parties then-current ability to create ideal relationships with their surrounding environment that do not detract from the futures ability to meet its own needs, while simultaneously focusing upon the creation, in the present, of balance and equilibrium between their respective actions and the environment.

15Rules of ConstructionThe default rule of contractual construction is that it is construed against the drafting party. Consider providing your own contract construction rule.

1616Technical Specifications and Performance StandardsOEMs are accustomed to meeting technical specifications.Use specifications to require finished goods to meet clients sustainability requirements. ExamplesRequire that lead is not be included anywhere within the product or its accessories (power cords, etc.)Require that finished products to contain stated percentages of recycled materialsRequire paperless orderingRequire suppliers to minimize packaging or to use recyclable packing materialsRequire supplier to recycle or compost excess or waste material1717Improving Sustainability1818Language for Sustainability Profile

1919Inspection and Audit Rights2020Relief for Breach Part 1The question of remedies is the most difficult legal issue. Contract termination is always a possiblity, but is it desirable?Specific performance may be possible in some jurisdictions. If a suppliers breach causes Acme to lose the Big Box contract, there are measurable damages but be careful with usual limitation of liability clauses customarily used in the US.2121Relief for Breach Part 22222Is This Far Fetched?23

Funny honey?California Transparency in Supply Chains Act of 2010

23Notes on the FTC Green GuidesGeneral environmental benefit claimsGreen certifications and seals of approvalDegradableRecyclableMade with renewable energy

24First issued in 1992, the Green Guides promote the goals of truth and substantiation of environmental marketing claims and provide guidance on avoiding making deceptive claims.Due to the proliferation of green marketing claims in recent years, the FTC proposed revisions to the Green Guides in late 2010When to be aware of the Green Guides.

General Environmental Benefit ClaimsNo unqualified benefit claims (e.g., This product is green or This product is eco-friendly.)Qualify all claims and only make them if you can substantiate them. A product isnt degradable if only its packaging is degradable.The packaging isnt degradable if it doesnt decompose within a year after customary disposal.

Green Certifications and Seals of ApprovalObtaining a green certification or seal of approval from a third party doesnt relieve you of the obligation to substantiate claims conveyed.Material connections between the certified and the certifying must be disclosed.

DegradableThe product must completely break down within one year after customary disposal.If the item is destined for a landfill, incinerator or recycling facility, a claim that its degradable should be qualified, since in fact decomposition wont occur within one year.

RecyclableAn unqualified claim should be made only if a substantial majority of consumers have access to recycling facilities.If less than a substantial majority of consumers have access to recycling facilities, the claim should be qualified. E.g., This packaging may not be recyclable in your area or This packaging is recyclable only in the few communities with recycling programs.

Made with renewable energyQualify the claim if power used to manufacture any part of the product is derived from fossil fuels.Specify the source of the renewable energy.Qualify the claim if power used to manufacture the product was from fossil fuels offset by RECs.

When you get back to the office 25Take an inventory of your companys current practices across factors like carbon emissionsGo to the website of your biggest customer or your dream customer and see whether theyve implemented any green requirements for their vendors. Consider how you would score on those requirements and how you could improve your score.Consider how incorporating green contracting provisions into your upstream supply chain contracts would improve your score.Consider whether its time to bring your green marketing materials into line with both the current and the anticipated revisions to the FTC Green Guides.

25Thank you!

Haeryung ShinOf CounselChair, Clean Technology Grouphaeryungshin@dwt.com206.757.8144 direct Stephen C. (Steve) EllisPartnerstephenellis@dwt.com206.757.8040 direct 2626