Assessing The Feasibility Of Supply Chain Compliance For Brands And The Legal Reckoning For AI Companies Draws Closer

How viable is it for brands to actually comply with supply chain compliance requirements?

After trouble in its Italian supply chain, LVMH is now dealing with issues when it comes to its houses’ UK supply chains too.

According to Reuters, LVMH’s second-largest fashion brand, Dior, was lagging in compliance with the UK Modern Slavery Act (MSA) up until the 19th of July. The MSA mandates that companies doing business in the UK with an annual turnover of £36 million or more must annually publish statements on their websites, outlining the measures they are taking to prevent forced labour in their direct operations and throughout their global supply chains. And until last month, Dior’s UK website featured an outdated anti-slavery statement from 2020 – alongside a sustainability certification that had already expired.

Dior then released a 2023 modern slavery statement on the 18th of July – following Reuters’s inquiry about its compliance with UK regulations. The new document, approved by Christian Dior UK’s board that same day, outlines plans for a training course aimed at raising employee awareness of modern slavery and encouraging proactive measures if any wrongdoing is suspected. Dior has not yet published statements for 2021 and 2022 at the time of writing. Whether there will be any repercussions for this is unlikely, as although publishing the statements is compulsory by law, no company has been penalised for not complying as yet – despite promises from successive UK government that enforcement of the MSA would become punitive over time. 

There are multiple elements at play here. First, just how viable is it for brands to comply with extremely rigorous, multi-tier supply chain legislation like the MSA when many of them simply do not have any oversight of their extended supply chains? Does setting an extremely high bar galvanise action or lead to inertia as brands decide that the gap from their current state to compliance is too large to bridge?

Meeting the Act’s minimum requirements might seem relatively straightforward. For in-scope organisations they are as follows: updating their Modern Slavery Statement every year; publishing the Statement on the organisation’s UK website; board approval for the Statement; and; the statement’s sign-off by a director or equivalent.

The legislation only recommends reporting on the following six areas: organisation structure, its business and its supply chains; policies in relation to slavery and human trafficking; due diligence processes in relation to slavery and human trafficking; risk assessment and management; organisational effectiveness in ensuring that slavery and human trafficking is not taking place; training available to staff on modern slavery issues and capacity building.

But in 2022, research conducted by the Financial Reporting Council (FRC), in collaboration with the UK Anti-Slavery Commissioner and Lancaster University, highlighted significant deficiencies in the quality of modern slavery reporting by companies. The research examined a sample of 100 major companies’ modern slavery statements along with their strategic and governance reports, revealing that one in ten  companies failed to provide a modern slavery statement at all, despite it being a legal requirement. Among those that did comply, only a third of the statements were clear and easy to understand. Most statements reviewed were fragmented, lacked a cohesive focus, and often relied on generic language. Disclosures about key performance indicators (KPIs) that assess the effectiveness of actions to reduce modern slavery risks were especially lacking. Only 25% of companies disclosed KPI results, and a mere 12% confirmed they had made informed decisions based on these KPIs.

None of this should have been a surprise: generic language and absent data are the hallmarks of an industry that is either unwilling or – just as likely – unable to comply with the letter of a law, and instead chooses to communicate vaguely around its spirit. 

And the most recent findings focused on the fashion industry, compiled by the Walk Free and Wikirate Foundation, found that of 162 company statements assessed in the study, only 67% met all minimum requirements of the corresponding MSA legislation. How many of those would stand up to actual scrutiny if the brands’ books were opened and the data sources behind the commitments were analysed?

So, are the seemingly straightforward minimum requirements actually onerous? And does it matter?

Fashion companies may be finding it difficult to comply with the UK Modern Slavery Act for several reasons – all of which, to be clear, have solutions, but most of which would require fundamental overhauls of systems and practices to address. 

The first, the complexity of modern supply chains that make it challenging to trace and monitor every link. Identifying risks of modern slavery across multiple tiers of suppliers, especially in regions with less stringent labour laws, requires significant resources and effort. This is particularly tough for smaller companies that may not have the financial and human resources required to implement thorough due diligence, conduct audits, and report on modern slavery; and while these companies have sat outside the purview of the MSA, the intention with all sustainability legislation is for it to trickle down to the point of universal applicability. 

Secondly, the Act requires companies to report on their efforts to combat modern slavery, but it doesn’t provide specific guidelines on what constitutes adequate action. This vagueness could lead to inconsistencies in how companies approach and report on their efforts.

The last issue is layered: fashion businesses might fear uncovering and disclosing issues related to modern slavery within their supply chains, as this could lead to negative publicity and damage their brand image. This fear sometimes results in superficial compliance rather than genuine efforts to address the issue: the old adage that people dislike turning over rocks in fear of what might come crawling out applies. They may then resort to using generic statements and boilerplate language to fulfil the reporting requirement, without genuinely addressing the issue – resulting in poor-quality reports. There is safety in this too, as brand reputation is on the line. 

The low compliance rates become even more concerning considering that the current legislation does not address the quality of reporting under the current law, which mandates that companies report on their efforts but does not require them to take action. In practice, this means that a company in a high-risk industry for modern slavery could submit a statement claiming they have no reason to believe there is any modern slavery in their supply chains. As long as the statement meets the basic legal requirements, it would be deemed compliant, regardless of the actual risk and irrespective of what data might (or might not) sit beneath the outward commitment.

Admittedly not an easy task, fashion companies should still strive to go beyond mere technical compliance and actively pursue best practices. Doing so will not only enhance their reputation with consumers but also position them favourably as regulations on modern slavery and ethical supply chain operations continue to tighten. In May 2022, the UK government presented a Modern Slavery Bill that proposes to mandate the six areas of reporting in Modern Slavery Statements, to introduce a requirement to publish Modern Slavery Statements on a government-run registry, and to implement fines for non-compliance. The bill is expected to amend or replace the existing MSA. This is more in line with the soon-to-be-finalised EU Corporate Sustainability Due Diligence Directive (CSDDD) that will sanction companies that do not end or mitigate negative human or environmental impacts of their operations.

To bring us back to this week’s story, this is especially important for luxury brands, where customers expect top-tier craftsmanship and assurance that all workers involved in creating these high-end products are fairly compensated and treated well. Upholding these standards not only justifies the premium price tags and maintains brand reputation, but also ensures a lasting legacy of quality and integrity in every aspect.

Artists’ celebrate legal victory over AI companies, including Stability and Midjourney

In a short snippet of AI news this week, a California federal judge has ruled that visual artists can proceed with their claims against Stability AI, Midjourney, DeviantArt, and Runway AI, alleging that the AI-based image generation models used by these companies infringe on their copyrights either at the output level or, more likely, as part of the datasets used as inputs – to train the models.

Amid a wave of AI copyright lawsuits, this case is one of the most advanced and could pave the way for significant changes in the tech industry’s future. On the line: the very business model driving the generative AI boom, which relies heavily on the free, unauthorised use of various works from the internet to train advanced software that can create humanlike content. Licensing deals are now being forged to get around this issue, but the standing of those could also be challenged depending on the outcome of this case.

“Plaintiffs rely on some of those works to plausibly demonstrate that their works were used as training images and that their works or elements of their works can be recreated through the AI products. The identification of those works may not prove liability under the Copyright Act, but they do provide support for the plausibility of plaintiffs’ Copyright Act theories,” Judge William Orrick said in the ruling.

The main issue in this case is the use of copyrighted content to train AI models, specifically targeting Stability AI’s Stable Diffusion model. The artists argue that the model includes “compressed versions” of their original works – a fundamental part of any copyright claim, since, if proven, this is sufficient to evidence that a copy of a work was created. Judge Orrick highlighted that, although the extent of potential copyright infringement is not fully determined, there is a reasonable possibility that the Stable Diffusion model could enable users to infringe on copyrights – even if the mechanisms of that infringement are untested. 

Even with this early vindication, the plaintiffs don’t have an easy road ahead. It likely won’t suffice to merely claim that the AI was trained on their works, they’ll need to demonstrate that the AI is directly replicating or closely mimicking their specific creations.

If they can do that, the outcome of this case could set a precedent for other similar lawsuits for how copyright law is enforced in relation to AI-generated content. Two such cases are also currently being heard in the Northern District of California; one filed by Sarah Silverman against Meta and a class action against OpenAI.

For fashion, this could lead to a watershed of brand claims against big AI companies. So far no brand has yet gone after this angle, but it seems inevitable that if other sectors (media, books, photography, illustration etc.) succeed in their challenges, big brands will follow suit. And if we need a reminder of why, we only need to look at how easy it remains to get generative image models (including the recently-released and open-sourced Flux) to output recognisable logos and style elements to get a feel for the scale of the problem. 

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