California Proposition 65: More Unintended Consequences
Last month, the California Office of Environmental Health Hazard Assessment (“OEHHA”) adopted new Proposition 65 warning regulations. Much of the discussions regarding these new regulations have centered on the warning requirements that become effective, after an approximately two-year phase-in period, in August 2018.
There were, however, amendments to Prop 65 settlement terms, penalty amounts and attorney’s fees in civil actions filed by private persons that became effective on October 1, 2016. These amendments have “flown under the radar” but actually may be more problematic than the proposed new warnings.
Proposition 65 permits private citizens (known by the plaintiff’s bar as “citizen enforcers”) to initiate enforcement actions, and, when they do, they are entitled to 25% of any penalties assessed by the courts and attorney’s fees. An additional form of payment, called “payments in lieu of civil penalties” or “PILPS,” are also permitted under the Proposition 65 enforcement regulations. PILPS 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 payment scheme, the vast majority of payments under the statute go toward attorney’s fees and PILPS. These payments are not shared with the regulatory agency OEHHA. For example, in 2015, the settlements in Proposition 65 cases totaled $29.5 million. Of that amount, $21 million was paid in attorney’s fees and costs and $3.5 million was PILP payments. OEHHA collected a mere $5 million.
In September 2015, the California Attorney General’s Office proposed an amendment to Proposition 65 to ensure OEHHA received civil penalty funds as specified in Proposition 65 and to limit the ability of citizen enforcers to divert the statutory mandated penalty to themselves or to third parties, in the form of Additional Settlement Payments (“ASP”). The idea behind the amendment was to increase the transparency of settlements in private party Proposition 65 cases; to ensure that any monies allocated to ASP are spent on matters with a sufficient nexus to the litigation and to the State of California; and to reduce the financial incentives for private plaintiffs to bring and settle Proposition 65 cases that do not confer substantial public benefit, at the same time without discouraging cases that settle and do confer such benefit.
The new regulations, set forth in Title 11, Division 4 of the California Code of Regulations, limit the circumstances under which civil penalties can be diverted to plaintiffs and their attorneys by eliminating PILPS and establishing payments called ASPs. ASPs are defined as payments that are not civil penalties, attorney’s fees, or costs. The ASPs are meant to “offset civil penalties, and require plaintiffs to demonstrate to a judge that the offset is in the public interest.” Furthermore, the amount of ASPs in a settlement should not exceed the State’s 75% share of any non-contingent civil penalty, and the recipient is required to describe, with specificity, the uses to which the funds will be put.
So far, so good.
The new regulations also address the reformulation of a product in lieu of warnings.
Defendants, especially those who manufacture personal care products, when faced with a Proposition 65 suit may decide to settle the matter and reformulate the product to eliminate the listed chemical, even when a listed chemical is present in the product at a level below which a warning would be required. Part of this is Marketing 101, because a personal care product manufacturer does not want to place a warning on its product, e.g., a shampoo, that states: “Warning: Cancer – www.p65warnings.ca.gov/product.”
The new regulations specify that reformulation of a product to reduce or eliminate the exposure to a listed chemical, in lieu of providing the required warning, must confer a significant benefit on the public. Specifically, “where a settlement sets forth a standard or formula for reformulation, supporting evidence should show that at least some of the product in controversy in the action either or at some time relevant to the litigation were, above the agreed-upon reformulation standard or formula, or else the mere agreement to a reformulation standard or formula may not establish the existence of a significant public benefit.”
One may question the reasoning behind this requirement. If the idea is to make products that contain the listed chemicals safer, wouldn’t it be reasonable to assume that if a personal care product no longer has the listed chemical, it will be more safe than if the personal care product has a warning apprising the public that the product contains a chemical known to the State of California to cause cancer or reproductive toxicity?
Proposition 65 cases are settled for a myriad of reasons, but having product reformulation as part of the settlement be rejected because the listed chemical was not at the level that would trigger warnings makes little sense. Isn’t the significant public benefit the removal of the chemical, irrespective of whether at one time or not, it actually existed in the product at a certain level?
One may understand the intent of the amendment is to provide OEHHA with more money. What is difficult to understand is that the amendments are requiring companies to put warnings on products that could be reformulated and thus eliminate the problem in its entirety, if any such problem existed.
Once again, it appears that Proposition 65 is more form than substance.