The risk of a natural or man-made disaster has always plagued supply chain managers in businesses that rely on goods or services from a variety of sources. However, actions taken by regulators in response to these disasters can also create risks for companies as they comply with new rules and regulations intended to prevent similar incidents in the future.
For example, in the wake of the chemical plant explosion in West, Texas, President Obama signed an executive order on August 1, 2013, that created a multi-agency taskforce to develop a plan to address potential safety issues at plants and other businesses that handle or store hazardous chemicals. This taskforce will guide particular government agencies in an effort to create more stringent safety measures and greater oversight of chemical manufacturing and handling. Non-compliance with these new rules and regulations will most certainly lead to fines and possibly other sanctions, yet compliance will also create unforeseen expenses for these companies. Most links in the supply chain are regulated industries; therefore, it is important for them to be aware of, and prepared to handle, changes in the rules and regulations that govern them.
Transportation Regulations
The transportation industry is often a target of new rules and regulations given the safety concerns associated with it. Several recent laws address transportation safety issues and impose new requirements on carriers. For example, as a result of the Moving Ahead for Progress in the 21st Century Act (MAP-21, P.L. 112-141), which President Obama signed into law on July 6, 2012, carriers have two years to install event-on-board-recorders (EOBRs) on all interstate commercial motor vehicles. Likewise, this new law requires all motor carriers, brokers and freight forwarders to register as part of a national, unified registration system. Those who fail to comply with these new requirements will face fines and possibly revoked registrations.
Moreover, under MAP-21, governmental agencies have been tasked with creating new safety standards to which companies must adhere. Similarly, on July 1, 2013, new Hours of Service regulations went into effect for commercial truck drivers. Trucking companies whose drivers drive three or more hours above the new hours limits could face fines of $11,000 per offense.
The transportation industry is also regulated because of the terrorist risks associated with it. The U.S. Department of Homeland Security's Bureau of Customs and Border Protection ("CBP") imposed requirements that importers and vessel operating carriers provide data for non-bulk cargo shipments to the U.S. by vessel through an Importer Security Filing (commonly referred to as an "ISF-10" or "10+2"). This filing must be made at least 24 hours prior to the vessel lading, and as of July 2013, CBP has begun levying fines of $5,000 per violation on those who submit inaccurate, incomplete or untimely filings.
California Takes Action
The federal government is not the only source of laws affecting the supply chain. State governments also pass laws that can be far-reaching. For example, on January 1, 2013, California's new laws regarding emissions from transport refrigeration units (commonly referred to as "TRUs" or "reefers") went into effect. This new regulation, the California Air Resources Board's (ARB) Transport Refrigeration Unit Airborne Toxic Control Measure, currently applies to brokers, freight forwarders, shippers, receivers, motor carriers and their drivers but has provisions that will effect TRU manufacturers who direct sales of TRUs in California, as well as TRU dealers and maintenance facilities. The penalties for violating this law are as wide-ranging as the law itself. Violators could face a fine of $1,000 per day in which an emissions violation occurs or misdemeanor charges that result in a jail sentence of up to six months. Those who knowingly violate these emissions regulations and do not take corrective measures in a reasonable period of time could face fines of up to $40,000 and up to a year of jail time.
Industry Imposed Rules
Even if a particular government agency does not take preventive actions in response to a disaster or other potential harm, actors in the supply chain could find themselves in a bind trying to decide whether to comply with their industry's self-imposed rules.
For example, in April 2013, a Bangladeshi garment factory building collapsed and killed more than 1,100 workers. The global outcry for stronger worker safety standards and safer working conditions in Bangladesh pressured many retailers in Europe and the United States to participate in direct efforts to improve the safety of manufacturing operations in Bangladesh. Companies choosing not to participate in either the European accord or the American plan, both of which address renovating factories and putting other safety measures into place, risk losing goodwill. However, by signing these or similar agreements, companies may also assume the risk of liability for something over which they have little control.
Companies faced with signing agreements related to supervising overseas suppliers in some way could find themselves in a no-win situation. Yet, members of the supply chain that do not comply with self-imposed safety standards risk being found negligent when accidents do occur. If others in the same industry have implemented safety measures and begin using safer equipment, it is possible that a jury could find that a company that did not meet the current standard acted negligently and, thus, could be found liable for an accident.
Things You Can Do
In order to avoid a last minute "crunch" to comply with new rules and regulations related to your particular piece of the supply chain puzzle, or to avoid incurring hefty fines for a failure to comply, stay abreast of legal developments and the actions of the agencies and other government entities that regulate your industry.
Furthermore, encourage your compliance department to keep an eye on safety developments related to the equipment used within your industry and safety measures used by your competitors so that you are following your industry's best practices.
If you are dealing with hazardous materials, try to create a cushion in your business budget to cover expenses related to improvements to your facilities or processes that may be mandated by the government. If you are not certain how your business could potentially be regulated, you may want to contact the local offices of those federal agencies and inquire about potential changes to rules and regulations. Many agencies also post proposed rules and regulations on their website for comment.
To avoid fines, sanctions and other budget surprises, it is important to educate yourself regarding newly promulgated regulations and the new safety standards created by both Washington lawmakers and your industry itself.
However, educating yourself and adhering to these new rules and regulations is only one step in dodging regulatory compliance risks. You will want to ensure that your employee handbooks address any new regulations with which you must comply and that you put policies and procedures in place to ensure compliance.
Likewise, you will want to review your insurance policies for coverage exclusions related to new regulations, as well as your contracts with other supply chain providers. You run the risk of incurring liability if you contract with businesses that are not adhering to these new rules and regulations. Therefore, it is important that you perform due diligence about the safety measures and compliance practices of those in the supply chain with whom you contract. An intermediary's deviation from the rules or common safety practices can lead to potential claims against you when an accident occurs that involves your products or services.
Enan Stillman is an attorney with the law firm of Graham & Penman LLP (www.grahamandpenman.com). He practices in the areas of transportation and logistics. Alexis Summers is an attorney with corporate and regulatory experience.
