Lawsuit Against Use of Export Controls to Respond to Forced Labor Demonstrates the Importance of this New Federal Agency Policy Tool

News & Insights
Sep 28, 2021

Federal government policy has transformed over the last decade in response to the continued presence (and proliferation) of forced labor in foreign supply chains for goods imported into the United States. Government approaches previously promoted transparency and the creation of incentives for companies to adopt voluntary measures to mitigate forced labor risks in supply chains. However, in light of the failure of these strategies to significantly counteract exploitation of child and slave labor, enforcement efforts have now taken precedence. The attempts by U.S. Customs and Border Protection (“CBP”) to give actual teeth to the statutory prohibition on the importation of goods produced through forced and/or child labor, 19 U.S.C. § 1307, have resulted in over $400 million in cargo being detained under a Withhold Release Order in fiscal year 2021 (through July 30th) and have led our trading partners to begin the process of adoption of similar prohibitions.

Beyond CBP, other federal agencies and Congress have continued to explore potential enforcement responses to address forced labor in foreign supply chains. The United States Trade Representative, for example, accounts for the prevalence of forced and child labor in a foreign nation’s economy as an important consideration in determining whether the country should be granted benefits under the Generalized System of Preferences program. More recently, other agencies have re-visited existing authority to assist in augmenting efforts to eliminate forced labor from supply chains. For instance, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has concluded that export controls should be employed to prevent American technology from being used by foreign enterprises profiting from forced labor practices.

As federal agencies have explored novel ways of attacking forced labor, private industry has challenged this new exercise of authority. The legality of BIS’s response to forced labor is currently being questioned in federal court. While the outcome of this lawsuit is, at present, unknown, the litigation itself appears to confirm the viability and effectiveness of BIS’s approach. It also demonstrates why the efforts of multiple agencies to address forced labor is likely to precipitate meaningful changes in U.S. supply chains, beyond what is possible under CBP’s enforcement of Section 1307 alone.

In July 2020, notice was published in the Federal Register regarding BIS’s decision to add eleven entities to the agency’s “Entity List” maintained under the Export Administration Regulations (85 Fed. Reg. 44,159 (Dep’t Commerce July 22, 2020)). BIS’s “Entity List” identifies entities that the agency reasonably believes “to be involved in, or to pose a significant risk of being or becoming involved in, activities contrary to the national security or foreign policy interests of the United States.” Inclusion on the “Entity List” means that additional license requirements are imposed on the export, re-exports, and transfers of certain products to the listed entity.

Each of the eleven entities added to the BIS’s “Entity List” in July 2020 were alleged to “have been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uyghurs, Kazakhs, and other members of Muslim minority groups in the Xinjiang Uyghur Autonomous Region (XUAR).” BIS further claimed that nine of the eleven entities added, including a company named Changji Esquel Textile Co. Ltd., were “engaging in activities contrary to the foreign policy interests of the United States through the practice of forced labor involving members of Muslim minority groups in XUAR.”

Esquel Apparel vociferously objected to BIS’s decision to list Changji Esquel. In July of this year, Changji Esquel Textile Co. Ltd., joined by affiliates Esquel Apparel Inc. and Esquel Enterprises Limited, filed a lawsuit challenging the company’s inclusion in the “Entity List” in federal court in Washington D.C. (Changji Esquel Textile Co. Ltd. v. United States, Court No. 1:21-cv-01798 (D.D.C.)). In its complaint, Esquel alleges that BIS’s action resulted in “immediate and drastic reputational damage” due to significant media coverage of the listing, a substantial loss in sales, the revocation of a previously approved loan facility from a major bank, the closure of two of the conglomerate’s factories in Mauritius, and a reduction of operations in Sri Lanka and China. Esquel argued that the stigma attached to the “Entity List” caused “American universities with which Esquel has a longstanding association” to scale back ties and that “a publisher pressured a professor to drop a chapter on Esquel in a book about best-of-kind companies, due to concerns over how the book would be perceived if Esquel were included in light of [Changji Esquel Textile’s] designation on the Entity List.”

Shortly after filing the lawsuit, Esquel also filed a motion seeking a preliminary injunction to remove Changji Esquel from the “Entity List” while the litigation was pending. In its motion, Esquel argued that it was experiencing substantial irreparable harm: “Esquel estimates that it has lost hundreds of millions of dollars – approximately one quarter of its annual revenue.” Esquel also argued that it was likely to succeed on the merits of its lawsuit because, according to the company, BIS was without statutory authority to include a party on the “Entity List” based on purported human rights violations. Esquel reads the relevant statutory provision, 50 U.S.C. § 4813(a)(2), as only allowing for the listing of entities that pose a threat to the national security and foreign policy of the United States for the five enumerated purposes set forth at 50 U.S.C. § 4811(2)(A), which does not encompass human rights concerns. 

The U.S. Department of Justice (“DOJ”) filed its response on September 9th, observing that Esquel had submitted a request for the removal of Changji Esquel from the entity list on September 25, 2020, that it had supplemented its request multiple times with additional information, and that it had responded to questions posed by the End-User Review Committee, the interagency committee responsible for adding or removing foreign persons from the Entity List (the “Committee”). The DOJ further noted that on July 5th, the day before Esquel initiated its lawsuit in federal court, “the Government notified Changji that it would inform it of the outcome of the Committee’s review no later than August 1, 2021.” The DOJ observed: “On July 31, 2021, the Committee completed its review of the request for removal and unanimously determined to conditionally approve the request.” In light of the pending removal request, the DOJ accused Esquel of attempting “to short-circuit the administrative process they started” and questioned the company’s motives: “rather than wait for the conclusion of the administrative process it initiated, Changji filed this lawsuit and moved for a preliminary injunction challenging the Committee’s July 2020 determination and addition of Changji to the Entity List.”

In light of the Committee’s recommendation of a conditional removal of Changji Esquel from the “Entity List,” the purpose of Esquel’s lawsuit is not obvious. Nevertheless, by filing prior to any removal, Esquel facilitated a wholesale attack on BIS’s ability to address forced labor, or any other human rights issue, through the “Entity List.” In response, the DOJ emphasized that the federal government had a strong interest in addressing forced labor in foreign supply chains, asserting that “[t]he public interest lies with the Government’s continued commitment to its human rights policy denouncing forced labor of minority workers, its ability to take action against foreign persons that support or facilitate such forced labor, and its efforts to ensure U.S. goods and technology are not used to perpetuate human rights abuses.” The DOJ explained that, pursuant to 50 U.S.C. § 4811(2), exports from the United States are to be controlled, among other purposes, “[t]o carry out the foreign policy of the United States, including the protection of human rights and the promotion of democracy.”

Esquel submitted its reply to the DOJ on September 13th, arguing that the structure and language of the statute reflects Congress’s intent that the “Entity List” be limited to address the issues specifically enumerated at 50 U.S.C. § 4811(2)(A) and not the additional interests spelled out at 50 U.S.C. § 4811(2)(B) through (G), including the protection of human rights (subsection (2)(D)). Esquel observed that the United States Innovation and Competition Act of 2021 (S. 1260), passed by the Senate earlier this year, would amend 50 U.S.C. § 4811(2)(A) to add a new subsection (vi) expressly including “serious human rights abuses,” a development that the company believes further demonstrates that the agency is currently without authority to address concerns regarding forced labor through its administration of the “Entity List.”

Accordingly, the BIS’s legal authority to address forced labor through listings on its “Entity List” is actively under review by a federal court. But as Esquel’s argument implies, even if it should succeed on the merits, Congress may soon remove any doubts as to whether BIS may address forced labor in its administration of the export control regime. Thus, outside of the issues being directly litigated in the appeal, Esquel’s court case exemplifies how BIS’s ability to include companies on the “Entity List” in response to profiting from forced labor activities represents an important tool in the federal government’s toolbox for eliminating slavery and child labor from supply chains.

The bulk of the damage that Esquel identifies as resulting from the listing of Changji Esquel is not directly related to BIS’s Export Administration Regulations. In its response to the company, the DOJ observed that Esquel’s “claimed harms stem almost entirely from independent decisions of third parties not before the Court . . . [b]ut Changji’s addition to the Entity List does not itself preclude suppliers or customers from dealing with the company.” Nevertheless, at the same time as the BIS had included Changji Esquel on its “Entity List,” another federal agency, CBP, was stopping imports of merchandise from Esquel at the border. Although Esquel is not named in any withhold release order (“WRO”) issued by CBP, in its September 13th reply to the DOJ, the company reports that its shipments to the United States are being excluded at the port of entry: “Making matters worse, the government is detaining a substantial portion of Esquel shipments to U.S. customers, citing the same unsubstantiated forced-labor rationale.” Three days later, on September 16th, with much less fanfare than the legal challenge launched against BIS and through different counsel, Esquel Apparel Inc. filed a lawsuit at the U.S. Court of International Trade challenging the exclusion of an import entry (# 799-2167756-2) based on the company’s claim “that said merchandise was not produced in whole or in part with the use of Forced Labor and should not have been denied entry” (Esquel Apparel Inc. v. United States, Court No. 1:21-cv-00518 (Ct. Int’l Tr.)).

Thus, although CBP is excluding merchandise from Esquel at the border based on the conclusion that merchandise shipped is made in whole or in part through the use of forced labor, the opaque nature of CBP’s enforcement of 19 U.S.C. § 1307 means that the public would have no knowledge of the agency’s actions but for Esquel’s public disclosure of that fact. CBP’s enforcement of the WRO on cotton and downstream products from XUAR leaves undisclosed whether a particular supplier operating in Xinjiang may be using cotton harvested through forced labor practices. Accordingly, a purchaser that makes no changes to its supply patterns can plead ignorance as to whether its suppliers may be running afoul of U.S. law. In contrast, as Esquel emphasizes throughout its filings to the federal district court in Washington D.C., BIS’s public listing of the company led to immediate changes in sourcing by a significant part of Esquel’s customer base. As such, while CBP’s enhanced enforcement of Section 1307 has appropriately received substantial attention for effectively keeping goods produced through forced labor out of the U.S. market, Esquel’s experience shows that BIS’s utilization of the “Entity List” triggered significant changes from market actors that did not want to be associated with allegations of forced labor.

According to its filings with the court, Esquel continues to operate in Xinjiang. In its public submissions, there has been no indication that the company intends to abandon operations within the XUAR. While the company claims that BIS will be unable to support its finding that Changji Esquel is engaging in “the practice of forced labor involving members of Muslim minority groups in the XUAR,” Esquel is ultimately arguing that even if such evidence existed, BIS is without authority, under current law, to include a company on the “Entity List” on that basis or on the basis of any other human rights violation. Esquel’s appeal requests that a federal judge intervene and order the removal of the listing of Changji Esquel because of the substantial impacts on the company’s operations – impacts that were not, apparently, similarly felt after CBP prohibited the importation of Esquel’s merchandise based on forced labor concerns. In consequence, Esquel’s lawsuit, regardless of the ultimate outcome, has provided strong evidence of the significant power that BIS may yield in countering forced labor in foreign supply chains going forward.

Tags: Labor