Doe I v. Wal-Mart Stores, Inc.

The appellants were among the plaintiffs in the district court and are employees of foreign companies that sell goods to WalMart Stores, Inc. (“Wal-Mart”). They brought claims against Wal-Mart based on the working conditions in each of their *680 employers’ factories. 1 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). We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I

Plaintiffs are employees of Wal-Mart’s foreign suppliers in countries including China, Bangladesh, Indonesia, Swaziland, and Nicaragua. Plaintiffs allege the following relevant facts, which we take as true for purposes of this appeal:

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 WalMart’s supply contracts force suppliers to violate the Standards in order to satisfy the terms of the contracts.

Plaintiffs filed a class action lawsuit in California Superior Court in 2005 and Wal-Mart removed the case to federal court based on diversity of citizenship. Plaintiffs then filed an amended complaint in federal court, which is the complaint relevant here. Wal-Mart filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. The district court granted the motion in a written order, and judgment was entered on March 27, 2008. 2 Plaintiffs timely appealed.

*681 II

We review a dismissal under Rule 12(b)(6) de novo. Witt v. Dep’t of the Air Force, 527 F.3d 806, 810 (9th Cir.2008). We take a plaintiffs allegations in the complaint as true, but we are “not required to indulge unwarranted inferences.” Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 (9th Cir.2008).

III

Plaintiffs present four distinct legal theories, all of which aim to establish that the Standards and California common law provide substantive obligations that can be enforced by the foreign workers against Wal-Mart: (1) Plaintiffs are third-party beneficiaries of the Standards contained in Wal-Mart’s supply contracts; 3 (2) WalMart is Plaintiffs’ joint employer; (3) WalMart negligently breached a duty to monitor the suppliers and protect Plaintiffs from the suppliers’ working conditions; (4) Wal-Mart was unjustly enriched by Plaintiffs’ mistreatment. Applying California law, we address each claim in turn.

A

We first address Plaintiffs’ third-party beneficiary theory. The common law in California and elsewhere establishes that, as recited in the applicable Restatement (Second) of Contracts: “A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.” Restatement (Second) of Contracts § 304 (1981). However, the Restatement also explains that a beneficiary is only “an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties.... ” Restatement (Second) of Contracts § 302(1). Contract interpretation is a question of law that we review de novo. See Milenbach v. Comm’r of Internal Revenue, 318 F.3d 924, 930 (9th Cir.2003).

Plaintiffs argue that Wal-Mart promised the suppliers that it would monitor the suppliers’ compliance with the Standards, and that Plaintiffs are third-party beneficiaries of that promise to monitor. Plaintiffs rely on this language in the Standards: “Wal-Mart will undertake affirmative measures, such as on-site inspection of production facilities, to implement and monitor said standards.” We agree with the district court that this language does not create a duty on the part of WalMart to monitor the suppliers, and does not provide Plaintiffs a right of action against Wal-Mart as third-party beneficiaries.

The language and structure of the agreement show that Wal-Mart reserved *682 the right to inspect the suppliers, but did not adopt a duty to inspect them. The language on which Plaintiffs rely is found in a paragraph entitled “Right of Inspection,” contained in a two-page section entitled “Standards for Suppliers.” And after stating Wal-Mart’s intention to enforce the Standards through monitoring, the paragraph elaborates the potential consequences of a supplier’s failure to comply with the Standards — Wal-Mart may cancel orders and cease doing business with that supplier — but contains no comparable adverse consequences for Wal-Mart if WalMart does not monitor that supplier. Because, as we view the supply contracts, Wal-Mart made no promise to monitor the suppliers, no such promise flows to Plaintiffs as third-party beneficiaries. See Marina Tenants Ass’n v. Deauville Marina Dev. Co., 181 Cal.App.3d 122, 226 Cal.Rptr. 321, 327 (1986) (“A third party beneficiary cannot assert greater rights than those of the promisee under the contract.”).

Plaintiffs alternatively argue that they are third-party beneficiaries of the suppliers’ promises to maintain certain working conditions, and that Plaintiffs may therefore sue Wal-Mart. This theory fails because Wal-Mart was the promisee vis-a-vis the suppliers’ promises to follow the Standards, and Plaintiffs have not plausibly alleged a contractual duty on the part of Wal-Mart that would extend to Plaintiffs. See Martinez v. Socoma Cos., 11 Cal.3d 394, 113 Cal.Rptr. 585, 521 P.2d 841, 844-45 (1974) (holding a “donee” third-party beneficiary may recover only against the party that undertook a promise under the contract for the benefit of the beneficiary). 4

Plaintiffs’ allegations are insufficient to support the conclusion that Wal-Mart and the suppliers intended for Plaintiffs to have a right of performance against WalMart under the supply contracts. See Restatement (Second) of Contracts § 302(1). We therefore conclude that Plaintiffs have not stated a claim against Wal-Mart as third-party beneficiaries of any contractual duty owed by Wal-Mart, and we affirm the district court’s dismissal of the third-party beneficiary contract claim.

B

We next address 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.” We conclude, to the contrary, that Wal-Mart cannot 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 Inti 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).

*683 Here, Plaintiffs’ allegations do not support the conclusion that Wal-Mart is Plaintiffs’ employer. Plaintiffs’ general statement that Wal-Mart exercised control over their day-to-day employment is a conclusion, not a factual allegation stated with any specificity. We need not accept Plaintiffs’ unwarranted conclusion in reviewing a motion to dismiss. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (stating that “a plaintiffs obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do”) (internal quotation marks and alterations omitted); Ashcroft v. Iqbal, — U.S. -, 129 S.Ct. 1937, 1953, 173 L.Ed.2d 868 (2009) (holding that the pleading requirements stated in Twombly apply in all civil cases); Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004) (stating that “conelusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss”). Plaintiffs allege specifically that Wal-Mart contracted with suppliers regarding deadlines, quality of products, materials used, prices, and other common buyer-seller contract terms. Such supply contract terms do not constitute an “immediate level of ‘day-to-day’ ” control over a supplier’s employees so as to create an employment relationship between a purchaser and a supplier’s employees. Vernon, 10 Cal. Rptr.3d at 132.

Plaintiffs also allege that Wal-Mart exercised control over their employment through Wal-Mart’s promise to monitor the suppliers and Wal-Mart’s system for monitoring. However, we have already concluded that Wal-Mart undertook no duty to monitor the suppliers and the monitoring and inspections by Wal-Mart were performed to determine whether suppliers were meeting their contractual obligations, not to direct the daily work activity of the suppliers’ employees.

Plaintiffs have provided no persuasive support for finding a common law employment relationship between a purchaser and its suppliers’ employees on the facts of this case. 5 We conclude that the joint employer theory should here be rejected, and we hold that Wal-Mart is not Plaintiffs’ employer.

C

We next address 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 WalMart 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 Paz v. State, 22 Cal.4th 550, 93 Cal.Rptr.2d 703, 994 *684 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.

D

We turn finally to 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).

*685 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 WalMart 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).

IV

In sum, we conclude that Plaintiffs have not stated a claim against Wal-Mart. 6 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.

AFFIRMED.