California Prop 65 Enforcement Amendment Summary re: Office of Environmental Health Hazard Assessment
The California Attorney General's Office recently proposed regulations intended to reform the private enforcement of Proposition 65. Specifically, the Attorney General intends to limit the settlement funds diverted away from the State's Office of Environmental Health Hazard Assessment ("OEHHA"), the agency that administers Proposition 65; increase the transparency of settlements in private party Proposition 65 cases; and reduce the financial incentives for private plaintiffs to bring and settle Proposition 65 cases that do not confer substantial public benefit.
In theory, private enforcement of Proposition 65 should result in a lowering of overall exposure to listed chemicals and, thus, a greater public benefit, than enforcement solely by public prosecutors. Proposition 65 expressly allows for recovery of civil penalties, but attorneys' fees are awarded to private plaintiffs under California's private attorney general statute and an additional form of payment, so called "payments in lieu of civil penalties" (PILP), is permitted under the Attorney General's Proposition 65 enforcement regulations. PILP are funds paid to plaintiffs or plaintiffs groups to fund environmental activities, public education programs, and/or funds to the plaintiff for additional enforcement of Proposition 65 or other laws.
Under the current private enforcement scheme, 75% of civil penalties are required to be paid to OEHHA, which are spent administering the statute. However, according the Attorney General's analysis, the vast majority of payments under the statute go toward attorneys' fees and PILP. These payments are not shared with OEHHA. For example, in 2013, of the total $17 million in settlements, 73% went to attorney's fees and costs; 11% went to PILP, and only 15% consisted of civil penalties.
The proposed regulations would limit the circumstances under which civil penalties could be diverted to plaintiffs and their attorneys, who would have to demonstrate a nexus between the way the funds would be spent and a public benefit. This would be accomplished by eliminating PILP and establishing payments called Additional Settlement Payments (ASP). ASP are defined as payments that are not civil penalties, attorneys' fees or costs. The proposed amendments deem ASP to "offset" civil penalties and require plaintiffs to demonstrate to a judge that the offset is in the public interest. In addition, ASP are prohibited for any settlement not subject to judicial review; that is, those settlements entered after plaintiff sends a 60-Day Notice of Violation, but before a complaint is filed with the court.
The proposed regulations list a number of factors that the Attorney General will consider in determining whether to object to a settlement including ASP. A notable requirement shows what the Attorney General considers to be unreasonable ASP. Under that proposal, ASP that exceed the amount due OEHHA (i.e., 75% of the civil penalty amount) will likely draw an objection from the Attorney General.
The proposed regulations also require Proposition 65 plaintiffs to provide pre-lawsuit settlements to the Attorney General. Although many of the settlements entered at this early stage are already reported to the Attorney General's Office, this proposed amendment would mandate that they be reported.
In addition, the proposed regulations no longer deem that product reformulation resulting in lower chemical exposure always results in a public benefit. The proposed regulations do presume such a benefit, but also require a showing that at least some of the products at issue are above the Proposition 65 warning threshold and that the products will be below the warning threshold once reformulated. If that showing is not made, "the mere fact of reformulation may not establish the existence of a significant public benefit." And without a showing of such public benefit, the court may not approve the settlement.
Ultimately, the Attorney General's proposed regulations will likely increase the costs to defendants in Proposition 65 actions. As is typically the case, whenever additional substantive and procedural requirements for prosecuting and settling Proposition 65 actions are imposed on private plaintiffs, they are passed through to defendants in some manner. For example, the showing required to demonstrate to a court that a reformulation standard confers a "significant public benefit" could be very expensive for plaintiffs. To prove that a settling defendant's product caused an exposure that was above the warning threshold before reformulation and under it thereafter, will require two exposure assessments and perhaps the consultation of experts. This cost will undoubtedly be passed along to defendants in the form of additional attorneys' fees and costs.
In addition, it may remove the option for some defendants to "buy their peace." Currently, defendants faced with a Proposition 65 suit may decide to settle and reformulate even when a listed chemical is likely present in a product at a level below which a warning would be required because meeting the plaintiff's demands is probably less costly than establishing the level that would trigger the warning requirement. Unfortunately, the Attorney General's proposed amendment may work to make this option less feasible.
The limitations on PILP and ASP will likely have a similar impact on the costs borne by defendants. Clearly, the Attorney General is concerned about OEHHA not receiving what she believes the agency is due from "appropriate" civil penalty awards. However, tying ASP to civil penalties in a way that will reduce payments to private plaintiffs, without limiting attorneys' fees, will cause them to seek additional attorneys' fees to cover the "shortfall" or to increase the amount of civil penalties demanded. Either way, plaintiffs will look to defendants to cover the difference.