Prop 65: PILPs and ASPs and Fees — Oh My!

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We previously blogged about Proposition 65 trends based on data about settlements and judgments collected and made public by the California Attorney General’s Office. One trend we noted was the downward shift in civil penalty offsets known as “payments in lieu of penalties” (PILPs) or “additional settlement payments” (ASPs), due to recent amendments to the Proposition 65 regulations to rein in such payments. We’ll refer to these offsets collectively as ASPs and look at how the amendments have affected the Proposition 65 “industry”.

By way of background, Proposition 65 generally allows claimants (termed private enforcers) to keep 25% of the civil penalties as well as recover their attorneys’ fees and costs in enforcement actions. The state’s regulating agency, the Office of Environmental Health Hazard Assessment (OEHHA) retains the other 75% of the civil penalties. While Proposition 65 authorizes penalties of up to $2,500 “per day for each violation,” the reality is that civil penalties make up a very small portion of an overall settlement or judgment: The vast majority of the payment is earmarked as attorneys’ fees and costs paid to the claimant’s lawyers.

In the past, Proposition 65 private enforcers have often demanded additional payments that were treated as offsets to civil penalties. In other words, whatever the appropriate amount of civil penalties, they would carve out a portion of it as ASPs, because the claimants could keep the ASP portion entirely or direct it to a related entity – in addition to retaining their 25% share of the civil penalties. OEHHA does not receive any part of an ASP.

The practice became concerning enough that the Attorney General’s Office amended the regulations, effective October 1, 2016, to impose additional requirements for ASPs. According to the Final Statement of Reasons for the rulemaking, the amendments were intended, among other things, to “ensure that [OEHHA] receives the civil penalty funds specified in Proposition 65, so that it has adequate resources for Proposition 65 implementation activities” and to “limit the ability of private plaintiffs to divert the statutorily mandated penalty to themselves or to third parties, in the form of [ASPs].”

The regulations as amended also reflect the Attorney General’s position that ASPs should not be included in any settlement that is not subject to judicial approval and ongoing judicial oversight. The effect has been that, since 2017, only one private settlement agreement has included ASPs. Several others were reported in 2017 and 2019, but a review of the settlement agreements showed that the private enforcer in those cases erroneously reported its 25% portion of the civil penalties as ASPs.

While this can be seen as a bright spot, it may have the unintended consequence of lowering the incentive for certain private enforcers to settle early and privately, increasing costs to businesses who receive a Proposition 65 “notice of violation” – the official precursor to legal action. Indeed, since the amendments, we have continued to see a high number of court judgments contain ASP provisions, since those are still allowed under the amended regulations but subject to additional scrutiny by the Attorney General. In 2017, 85 of the 345 court judgments called for payment of ASPs (totaling $1,421,660) and in 2018, 112 of the 369 court judgments included ASPs (totaling $1,930,583). While not all plaintiffs are as aggressive about collecting ASPs, some NGO plaintiffs (such as As You Sow, Center for Advanced Public Awareness, Center for Environmental Health, Consumer Advocacy Group, Ecological Rights Foundation and Environmental Research Center) still show a strong preference for ASPs in resolving their claims. It is possible that OEHHA’s move to restrict ASPs results in more lawsuits and fewer pre-litigation settlements, but may not ultimately reduce ASPs as much as anticipated.

More problematically, the amendments seem to have had the unintended effect of driving up the civil penalties and attorneys’ fees and costs. The amended regulations provide that ASPs should not exceed the 75% share of the civil penalty paid to OEHHA. Previously, ASPs in both private settlements and judgments often exceeded the total civil penalties. The regulations now effectively place a cap on the amount of ASPs: ASPs that exceed 75% of the civil penalties may cause the Attorney General to file an opposition. So to maximize their own recovery private enforcers are now settling for what seems to be high civil penalties and ASPs that are a hair below 75% of that amount. Legally, that is a very doubtful practice – since ASPs are an offset to civil penalties, a defendant should pay the same total amount based on statutory factors, regardless of whether any part of the payment is earmarked as an ASP or if all of it is treated as a civil penalty.

One of the most stunning observations of the trends in Proposition 65 recoveries is that the attorneys’ fee portion of Proposition 65 settlements has increased every year. As we will discuss further in a later blog post, in 2018 the total amount of attorneys’ fees and costs collected by Proposition 65 plaintiffs shattered all records. The shocking reality is that the attorneys’ fees made up 80% of all Proposition 65 recoveries in 2018 – skyrocketing from an astounding 68% in 2017. The claimants’ attorneys collected an astonishing $32,663,034 – an increase of more than $13 million over 2017. It is not a big leap to infer that there is a connection between this and the changed regulations reducing claimants’ ability to rely on ASPs – claimants may be increasing the attorneys’ fees portion of their recovery to make up for perceived “losses” in ASPs.

What do the amended regulations and the settlement trends mean for businesses defending against Proposition 65 claims? For one, settling early and privately in an out-of-court settlement is a recommended strategy. ASPs should not be part of such early agreements. This means anyone receiving a notice of violation should act promptly to obtain qualified legal counsel, because private enforcers can sue in court after giving 60 days’ notice. Certain defense strategies can be utilized to try to force an out-of-court settlement for a non-cooperating private enforcer, or at least make a court judgment less appealing to the claimant. Businesses should also take steps to minimize civil penalties and thereby ASPs by taking immediate corrective action as well as ensure that their legal counsel put together a defense that supports a minimal civil penalty recovery under the law.

Conkle, Kremer & Engel attorneys are experienced at helping clients defend against Proposition 65 claims, resolving them cost-effectively and efficiently, as well as implementing proactive strategies to avoid Proposition 65 and other regulatory issues.

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Prop 65 Settlements Predominantly Benefit Claimants’ Lawyers

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Over the last several years, the  California Attorney General’s Office has released annual reports of Proposition 65 settlements.  These reports make one thing clear – Proposition 65 continues to be a lucrative source for private Proposition 65 claimants and their lawyers, as the total settlement payments continues to rise through the years.

In the past, we noted that private Proposition 65 claimants and their lawyers collected at total of $17 million in settlement payments (comprised of civil penalties, “PILPs” or “Payments in Lieu of Penalties” [also known as “Additional Settlement Payments”] and attorneys’ fees and costs) in 2013, and $20 million in 2012. The trend since then has been upward on all fronts, with one notable recent qualification regarding PILPs.

Proposition 65 contemplates that private claimants will share any civil penalties collected, with 75 percent going to the California Office of Environmental Health Hazard Assessment (OEHHA) and 25% being kept by the private claimants.  However, Prop 65 claimants are allowed an alternative remedy of PILPs, in which the claimants can pocket 100% of the PILPs and share nothing with OEHHA. All private claimants needed to do is establish that the PILP payments will go to fund some kind of activities with a nexus to the basis for the litigation, and show how those funds would be spent.  Until recently, this was not a big obstacle for Prop 65 claimants. As can be seen from the OAG reports, many Prop 65 claimants are special-purpose entities that contend their own business of pursuing Prop 65 claims serves the environmental interests they are trying to protect through pursuit of more Prop 65 claims.  As a result, these entities could pocket the PILP money to self-fund their own activities to make more Prop 65 claims. Being able to keep all of the PILP money, rather than the alternative of having to give 75% of civil penalties to OEHHA, undoubtedly made PILPs very attractive to Prop 65 claimants. Perhaps the only bright spot in the chart below is the significant reduction (by more than 50%) in PILP recoveries, which followed an amended regulation that went into effect on October 1, 2016 to tighten requirements for PILP settlements. We’ll develop more on this amendment and its effects in a future blog post.

Finally, but clearly most significantly in terms of dollars spent on settlements of Prop 65 claims, private claimants’ lawyers are entitled to recover reasonable attorneys’ fees and costs. As seen in OAG reports, and displayed graphically below, this attorney fee recovery constitutes by far the largest portion of Prop 65 settlements.

Since 2012, total settlement payments have increased substantially, reaching their high-water mark in 2016 but not declining very much in 2017 (2018 figures have not yet been released). Between 2014 and 2017, Prop 65 settlement payments totaled well over $25 million per year.  Overall, the settlement payments are comprised of attorney fee recoveries to claimants’ lawyers, PILP recoveries to claimants, and a smaller number of civil penalties that are shared 25% with claimants and 75% with OEHHA. In sum, every dollar shown in the chart below, other than the OEHHA portion shown in red, has gone to either the Prop 65 claimants or the claimants’ lawyers:

When viewed graphically, it becomes all the more evident that the vast majority of Prop 65 settlements benefit claimants and their lawyers, not OEHHA or any other government agency charged with protecting the public. Questions must arise whether this was really the intent of Proposition 65, however beneficent was its purpose.

2016 was the biggest year for Prop 65 private claimants, according to data released by the California Attorney General’s Office.  In 2016, private claimants settled 760 cases, suing smaller businesses and larger entities like K-Mart, Michaels, Williams-Sonoma, and Twinings.  The settlements for that year totaled over $30 million.

Of the $30 million collected in settlement payments in 2016, attorneys’ fees made up more than $21.5 million, or 71.5% of all private settlements.  In addition, while civil penalties amounted to just over $5 million, or 18% of all private settlements, private claimants can take 25% of any civil penalty assessed as a “bounty.”  In 2016, the civil penalties retained by claimants represented a sum of $1,361,500, or 4.51% of all private settlements.  PILP money made up 10.42% of all private settlements.  That means approximately $3.1 million landed in the hands of private claimants and their attorneys, in addition to the attorneys’ fees and civil penalty bounties they received.

A few firms did particularly well that year.  In 2016, The Chanler Group brought in 242 settlements for over $7.4 million.  83% of this figure, or over $6 million, was paid out in the form of attorneys’ fees and costs.  Brodsky & Smith brought in 99 settlements for nearly $2.5 million.  90% of the nearly $2.5 million, or $2.2 million, in settlement payments went to the lawyers as attorneys fees and costs.

Some claimant representatives obtained settlements that were not quite as disproportionately in favor of attorneys’ fees and costs.  For example, the Center for Environmental Health brought in 93 settlements in 2016, for a total of $4 million, broken down as follows: 11% as non-contingent civil penalties, 16% as PILP payments, and 74% as attorneys’ fees and costs.  Similarly, the Consumer Advocacy Group brought in approximately $4 million across 71 settlements, recovering 11% as non-contingent civil penalties, 14% as PILP payments, and 75% as attorneys’ fees and costs.

The Environmental Research Center brought in 55 settlements for nearly $5 million, and the breakdown of payments was split more evenly: 36% as civil penalties, 31% as PILP payments, and 33% as attorneys’ fees and costs.

In 2017, private claimants continued to pursue Prop 65 claims, settling 688 cases.  The settlements totaled more than $25 million. As can be readily seen in the chart above, although the total claimants’ recoveries were somewhat lower, they were on par with 2015 recoveries. Further, attorneys fees were proportionately even higher in 2017 than in preceding years, and the reduction was primarily in the PILP recoveries. Attorneys’ fees made up more than $19.4 million, or 75.6% of all private settlements, and civil penalties retained by claimants represented an additional $1,210,786 or 4.7% of all private settlements.

If these trends continue, total Prop 65 settlement payouts will continue to rise, imposing the “unnecessary burdens for businesses” that “are cause for public concern,” as the OAG noted in 2014. Conkle, Kremer & Engel routinely represents businesses against Prop 65 claims and lawsuits brought by private claimants, and works with businesses to develop compliance strategies to minimize the risk that they will be future targets of Prop 65 claimants.

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California Expands Sexual Harassment Training Requirements to Most Employers

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As usual, a new year means new laws, especially in California.  For 2019, one law that all employers need to be aware of is SB1343, which amended Government Code Sections 12950 and 12950.1 to impose new sexual harassment training requirements on most employers.  Previously, only employers of at least 50 employees were required to train their supervisory employees.  Starting now, if you have 5 workers, including both employees and contract workers, you have to comply with several training requirements:

  • – Within the next year, all supervisory employees must complete two hours of sexual harassment training.

– The definition of “supervisor” is fairly broad and covers more than just your managers. Under California Government  Code 12926(t), “Supervisor” means “any individual having the authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or the responsibility to direct them, or to adjust their grievances, or effectively to recommend that action, if, in connection with the foregoing, the exercise of that authority is not of a merely routine or clerical nature, but requires the use of independent judgment.”

  • – Within the next year, all nonsupervisory employees must complete one hour of sexual harassment training.
  • – For all employees, the training must be provided within six months of the employee’s assumption of a position with the company.
  • – After January 1, 2020, each employee must receive sexual harassment training once every two years.
  • – Beginning January 1, 2020, seasonal and temporary employees, and any employees hired to work for less than six months, must receive sexual harassment training within 30 calendar days after the hire date or within 100 hours worked, whichever occurs first. If the temporary employee is employed by a temporary services employer (i.e., a temporary staffing agency), the temporary services employer is required to provide this training, not the client.

California’s Department of Fair Employment and Housing (DFEH) is required to develop online sexual harassment training courses.  DFEH has stated that it expects to have such training programs available on its website by late 2019.  If they are available on time, employers can direct their workers to those online courses, but otherwise employers must develop or provide their own training.

Employers should also take this as a reminder to check your work site and make sure you have prominently displayed the required posters.  For example, California law requires employers to display the DFEH poster regarding workplace discrimination and harassment in a prominent and accessible location in the workplace, and to distribute a sexual harassment prevention brochure to their employees.

Constant vigilance is required for employers to comply with rapidly changing requirements.  Employers should consult with experienced counsel particularly in regard to interpretation of new requirements such as these.  Conkle, Kremer & Engel attorneys are experienced with counseling employers in the face of the changing legal landscape in employment law.  CK&E attorneys help companies identify and reduce areas of exposure to liability for employment claims, including wage and hour, discrimination, harassment, and retaliation claims.

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What do Goop, Sexual Energy, Jade Eggs and CBD Have in Common?

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Answer: Unproven Health Claims

Goop, a life-style branding company founded by Gwyneth Paltrow, was recently fined $145,000 by a consortium of California Counties for making exaggerated and false advertising claims about its products.  The makers and distributors of everything from clothes to perfume, and face cream to condoms, Goop has a well-documented history of over-the-top marketing claims.  In the action brought by the County District Attorneys, the government took exception to the claim made by Goop regarding its Jade Egg product.  Goop claimed among other things that the egg product, when inserted into the vagina, prevented uterine prolapse and improved sex.  In the parlance of the regulators, this was an unsubstantiated or unapproved new drug claim.

In similar fashion, cannabidiol oil or “CBD” products are at the forefront of aggressive (sometimes overly aggressive) health and medical claims. Everyone knows about “medical” marijuana, and CBD is one of several “active” ingredients found in marijuana and hemp plants which is often associated with the beneficial effects of the plant: pain relief, stress or anxiety relief, anti-nausea, and anti-inflammatory.  This phenomenon has lead to a budding market in consumer products featuring CBD, accompanied by assertive health claims.  The CBD market already covers a wide range of products, including cosmetics (skin creams), food products  (edibles), and even CBD laced beer.  To add to the confusion, a compound found in marijuana was recently approved by the FDA for treatment of a rare seizure disorder.

And this highlights the problem, especially for marketers of cosmetics.  The only FDA-approved medical claim for marijuana compounds is directed to a rare seizure disorder, and this is a tiny market. To make a valid advertising claim that a  skin cream product treats, for example, eczema, psoriasis or a rash, the company or brand would need to have FDA approval of the active ingredient for that particular disease or condition at issue.  Absent such approval, the marketing claim would likely be regarded as an unapproved new drug and subject to regulatory fines and seizure.  Thus, for example, if you want to make a skin-protectant claim for your product, you would need to use one of the FDA approved ingredients for such claims, and limit the claim to the language approved in the FDA monograph for skin protectants.  To illustrate the point, witch hazel is one of the FDA approved skin protectant active ingredients. If you use witch hazel as an ingredient in your product, in the correct percentage, it would allow you to make the claim “[r]elieves minor skin irritations due to either i) insect bites, ii) minor cuts, and/or iii) minor scrapes”.

The point of all this is to make sure that your advertising claims are reviewed and approved by experienced legal counsel.  This is a common area for regulatory action, as well as private class actions.  The FDA routinely polices the internet looking for unsubstantiated and unapproved new drug claims. When the FDA finds a violation, it sends out a warning letter that will look something like this.  You do not want to be the first one on your block to own one of these.  Consult your CK&E attorney before you put a label on your product, make an advertising claim on your website, press send on an email blast promotion, or even drop a product catalog in the mail.  Yes, even old school mailers can get you in trouble.

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It’s Time: New Prop 65 Warnings are Required August 30, 2018

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In November 2017, we advised readers of Conkle, Kremer & Engel’s blog that products sold in California would become subject to new Proposition 65 warning requirements beginning August 30, 2018.  The new “Clear and Reasonable Warning Regulations” from California Office of Health Hazard Assessment (OEHHA) significantly changed warning requirements for affected products that are manufactured on or after August 30, 2018.  Among other changes, the new regulations affect the safe-harbor warning requirements that govern the language, text, and format of such warnings, and also impose downstream warning mandates through retail, online and catalog sales channels. Generally, some of the major changes that companies selling consumer products should be aware of include:

  • The “warning symbol” :  A graphic “warning symbol” is now required on consumer products, other than food products. The “warning symbol” must be printed in a size no smaller than the height of the bolded word “WARNING,” and should be in black and yellow, but can be in black and white if the sign, label, or shelf tag for the product is not printed using the color yellow. The entire warning must be in a type size no smaller than the largest type size used for other “consumer information” on the product, and in no case should be smaller than 6-point type.
  • Listing of a specific chemical:  Warnings must now specifically identify at least one listed ingredient chemical for each toxicological endpoint (cancer and reproductive toxicology) and include a link to OEHHA’s new website P65Warnings.ca.gov. Certain special categories of products, such as food and alcoholic beverages, have a specialized URL that must be used instead.
  • New warning language:  Warning language must now warn of an exposure to a chemical or chemicals from the product, rather than just warn that the product contains the chemical or chemical. For example, “ WARNING: This product can expose you to diethanolamine, which is known to the State of California to cause cancer. For more information go to www.P65Warnings.ca.gov.”
  • Internet and catalog requirements:  For internet sales, warnings must be provided with a clearly marked hyperlink on the product display page, or otherwise prominently displayed to the purchaser before completion of the transaction. It will not be sufficient if the product sold on the internet bears the required label, but the internet point of purchase listing does not. For catalog sales, a warning must be provided in a manner that clearly associates it with the item being purchased.
  • Short-form warnings:  The regulations allow the use of certain abbreviated “short-form” warnings, which may omit the identity of any specific chemical, only if the warning is printed on the immediate container, box or wrapper of the consumer product or is affixed to the product.  For example, “ WARNING: Cancer – www.P65Warnings.ca.gov.”  If a short-form warning is used on the product, the same short-form warning may be used for internet and catalog sales.

The regulations seek to minimize the burden on retail sellers of consumer products, but there are some obligations affecting resellers. Manufacturers, producers, distributors, and other upstream businesses comply with warning requirements if they affix a clear and reasonable warning to the product, or provide written notice and warning materials to an authorized agent of a retailer, among other requirements.  Retailers who receive products with a Proposition 65 warning on the label, or who receive proper notice that a warning is required, are responsible for placement and maintenance of internet warnings for those products before selling to consumers in California.  Retailers should only be liable for Proposition 65 violations under limited circumstances, such as if they cover, obscure, or alter a product’s warning label, or if they receive notice and warning materials but fail to display a warning, including catalog and internet warnings preceding consumer sales into California.

The particular requirements for each specific product can vary, so manufacturers and resellers are well-advised to seek qualified counsel to review their circumstances before committing to potentially costly label and website changes that may not comply with the new requirements.  Conkle, Kremer & Engel attorneys stay up to date on important regulatory developments affecting their clients in the manufacturing and resale industries, and are ready to help clients navigate the changing regulatory landscape in California and elsewhere.

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October 2018 Update

H. Kim Sim of CK&E was interviewed and quoted extensively in ChemicalWatch about the difficulties manufacturers face in implementing the “very confusing and very complex” requirements of the new warning label requirements of Prop 65.  For example, as Kim said, “The requirement that manufacturers name at least one substance for which they are providing warning has proven particularly challenging. Determining which one to include ‘can be tricky for companies to decide’, she said. ‘Is one more scary to the public than another?'”

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GDPR is Coming: If Your Business is Online, Beware the New EU Privacy Regulation

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If you sell or offer goods to EU residents, even from the U.S., it is now necessary to re-examine your data processing and privacy procedures. There is a new EU privacy law that will go into effect on May 25, 2018, with significant penalties for violations. The EU General Data Protection Regulation, or “GDPR,” covers any website, including a U.S.-based website, selling to EU residents and processing personal data of those EU residents.  Here are some basic questions and issues to address concerning your online presence:

Do you collect, store, or use Personal Data? You are subject to this regulation if your website collects, organizes, stores, disseminates, uses or otherwise processes personal data of EU residents, regardless of where your website keeps or uses such information.

“Personal Data” will likely be broadly interpreted. The GDPR defines “Personal Data” very broadly to include any information that can be used to identify an individual. This can include all sorts of data, like names, e-mail addresses, office addresses, and even IP addresses.

Can your users easily revoke consent? The GDPR takes consent seriously. The GDPR requires you to demonstrate consent was “freely given, specific, informed and unambiguous” by a “clear affirmative action” on the part of the user for the processing of personal data. When you ask for the user’s consent, you must articulate “specified, explicit, and legitimate purposes” for processing the data. Limit the data you collect to what is necessary to achieve these articulated purposes. Be extra careful if you are collecting sensitive personal data – the GDPR raises the bar for obtaining consent to process “special categories of personal data.” And make sure it is as easy for the user to withdraw consent as it is to give consent.

Can you respond quickly and effectively when the user exercises rights under the GDPR? The GDPR grants users, or “data subjects,” quite a few rights, including but not limited to knowing where and why you are taking the data and anything that happens to it, objecting to its collection or use, obtaining a copy of it, correcting or erasing it, or restricting its use. Make sure you have procedures in place to respond appropriately in the event a user exercises rights under the GDPR.

Penalties for failure to comply can be steep. Failure to comply with the GDPR can expose companies to administrative fines of up to 20 million Euros or 4% of the total worldwide annual turnover of an “undertaking” of the preceding financial year, whichever is greater. Even if you use vendors to process your data, you are still responsible for monitoring compliance. You are required to “implement appropriate technical and organizational measures to ensure and to be able to demonstrate that processing is performed in accordance with this Regulation.”

The EU GDPR is a minefield of regulatory requirements that require a close examination of your data processing and privacy procedures. Some companies, such as Microsoft, are implementing a single system worldwide to comply with the EU’s requirements, effectively granting greater-than-required  rights to non-EU residents.  There will likely be considerable uncertainty and confusion as the GDPR requirements are implemented and enforcement begins.  Contact Conkle, Kremer & Engel to help bring your data processing and privacy procedures into compliance.

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Common Legal Mistakes Made in Social Media Influencer/Brand Relationships

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With over 2.5 billion social media users worldwide, it is no surprise that social media marketing is booming and partnerships between brands and social media influencers (i.e. individuals with large followings on social media platforms) are becoming increasingly popular.  These partnerships can be great opportunities for both parties – on the one hand, the brand gets promoted to the influencer’s thousands or millions of followers by a person they admire and trust, while the influencer gets compensated for this promotion.  However, these brand/influencer relationships can also expose both parties to lawsuits and fines from the Federal Trade Commission (FTC).  Although social media may seem like an informal marketing platform, the FTC has determined that its Guides Concerning the Use of Endorsements and Testimonials in Advertising apply to social media marketing, just as they apply to other forms of marketing.  This article outlines how to avoid a few of the common legal issues that arise in the course of a brand/influencer relationship.

Disclose the relationship between the influencer and brand. Part of the appeal of hiring an influencer for a marketing campaign is the authentic feel of the endorsement.  However, the FTC’s the Guides Concerning the Use of Endorsements and Testimonials in Advertising require influencers to disclose “material connections” that they have with the brand they are endorsing.  A connection is deemed “material” when the relationship between the influencer and brand may materially affect the weight or credibility of the endorsement from the influencer. 16 C.F.R. § 255.5 (2009).  An obvious example of a material connection is one where the brand is paying the influencer to endorse or review a product, but even friendships or familial relationships between the influencer and brand are material, as the influencer may be more likely to give a product a positive review because of this relationship.  

The disclosure of the material connection must be clear and conspicuous.  For example, a disclosure that consumers can only see if they click to see more of a post, or ambiguous hashtags such as “#ambassador” or “#collab,” are insufficient to meet the FTC’s disclosure requirement.  On the other hand, the FTC has stated that “#ad” close to the beginning of a post is a sufficient disclosure.  Both the influencer and the brand may be liable for the influencer’s failure to disclose a material connection, so brands must be sure to inform influencers of the duty to disclose and monitor the influencers’ posts to ensure compliance with the FTC Guides.

The claims in the endorsement must be truthful.  Claims made by a social media influencer in an endorsement must be truthful and substantiated.  This means that advertising claims cannot be misleading to the average reasonable consumer, and any statements made about a product or service must be supported by evidence.  Even if the influencer makes a misleading or unsubstantiated claim about a product without consulting the brand, the brand will still be liable the influencer’s statements. Again, this highlights the importance of monitoring the influencer’s posts and providing the influencer with guidelines about what claims he or she can legally make about the product or service being advertised.

Determine who owns the intellectual property rights in the content.  In a typical company/influencer relationship, the influencer will post a photograph and accompanying text exhibiting the brand’s products or services on the influencer’s social media account.  If the influencer created this content, the influencer owns the copyrights to it, and the brand could be liable for copyright infringement if it reuses this content without the influencer’s permission.  To avoid this issue, the brand should ensure that there is an agreement in place between with the influencer assigning the copyright to the brand.

Obey the reposting rules from each social media platform.  It’s a common misconception that all of the social media platforms have the same rules regarding reposting content from another user.  The reality is that reposting user content on some platforms is perfectly acceptable, while on others it constitutes infringement.  For example, on Twitter you may freely repost Tweets from other Twitter users.  By becoming a Twitter user, you agree to Twitter’s Terms of Service, which permit you to “Retweet” the content of other Twitter users and allows other Twitter users to Retweet your content.  Instagram, on the other hand, does not include any such provision in its terms of service, and even requires users to “agree to pay for all royalties, fees, and any other monies owing any person by reason of Content you post on or through the Instagram Services.”

Make sure the content does not infringe a third party’s rights.  Even if the brand and influencer have reached an agreement regarding the ownership of the content in a social media endorsement post, the post may infringe the rights of a third party if it includes a third party’s image or artwork.  If someone’s image is used in the endorsement, this person may claim a violation of his or her publicity rights.  Similarly, the use of another’s artwork in the content of the endorsement may constitute copyright or trademark infringement, subject to the fair use defense (which is less likely to apply to a social media post that is clearly an advertisement).

To learn more about the formation of and legal pitfalls to be avoided during the course brand/influencer relationships, contact Heather Laird-Vanderpool or Aleen Tomassian.

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California’s New, Stricter Test for Independent Contractors and Employees

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Does Your Business Pass California’s New, Stricter Test for Independent Contractors Rather Than Employees?

On April 30, 2018, the California Supreme Court issued a decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County that will make it more difficult for employers to classify their workers as independent contractors.  Under the new Supreme Court test, workers are presumed to be employees, not independent contractors.  Incorrect classification can have serious consequences.

Previously, many California employers thought an agreement stating a worker was an independent contractor was enough.  No more.  The Supreme Court has adopted a strict “ABC” test to determine whether a worker is properly classified as an “employee” or as an “independent contractor.”  Under this test, the Court presumes a worker is an “employee” unless the hiring business can establish that the worker meets all three conditions of an independent contractor:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) apart from the independent contractor relationship, the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The presumption means that when in doubt employers should err on the side of classifying their workers as employees.  An employer that misclassifies a worker as an independent contractor can be liable for back wages and wage and hour penalties, including willful misclassification penalties that can range from $5,000 to $25,000 per violation.  These issues may be raised by the worker after the “independent contractor” relationship has ended.

If your workers do not meet this new 3-part test for independent contractors, make sure you re-classify them as employees and pay them all the wages and benefits given to your employees under the wage and hour laws, deduct payroll taxes, cover them under your worker’s compensation insurance, and generally treat them like your other employees.

If you have questions about how the new decision applies, or whether your workers meet the new strict ABC test for independent contractors, you should promptly consult with experienced employment counsel.  Conkle, Kremer & Engel attorneys have years of experience in employment matters, advising businesses and litigating and arbitrating disputes, including class actions.

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Do You Have to Pay Your Summer Interns?

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Do I Have to Pay My Interns?

Spring will soon draw to a close.  As you prepare for the arrival of your summer interns, make sure you have asked yourself this question: Do I need to pay my interns?

The easiest answer is generally, YES!  But the easiest answer is not the whole story, because you do not have to pay your interns in accordance with wage and hour laws if the company-intern relationship meets the federal (and state, as applicable) test.

The U.S. Department of Labor’s New Test

Earlier this year, the U.S. Department of Labor helped private businesses out.  It announced that it would be using a new (more employer-friendly) test to determine whether an intern is an “employee” that must be paid in compliance with wage and hour laws.  Whether an intern must be paid in compliance with federal wage and hour laws now depends on seven factors:

  • The extent to which the intern and the company clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa;
  • The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions;
  • The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
  • The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
  • The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
  • The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and
  • The extent to which the intern and the company understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

According to the DOL, “no single factor is determinative.”  Thus, companies need to conduct a case-by-case analysis of each internship position to determine whether that intern should be paid.

I’m Located in California.  Do I Need to Be Concerned About State Laws Controlling Wage and Hour Requirements?

Here, the clear answer is YES!  For many years, the California Department of Labor Industrial Relations, Division of Labor Standards Enforcement (“DLSE”) has relied on the DOL’s old six-factor test.  For now, California businesses should also look to the DOL’s old six-factor test to determine whether they need to pay their interns.

The DOL’s adoption of this new seven-factor test this year followed a decision in the Ninth Circuit (which covers California).  In 2017, the federal Ninth Circuit Court of Appeals made a predictive statement, that the California Supreme Court would no longer use the old DOL test, and would instead apply a test more similar to the one set forth above.  Benjamin v. B & H Educ., Inc., 877 F.3d 1139 (9th Cir. 2017).  However, this statement is only predictive of what the federal court thinks the California courts would do, so it is not actually controlling law in California.

Thus, until the California state agencies and courts take a position on whether they will follow the Ninth Circuit and the DOL, companies should also check that they have considered the DLSE’s interns test to make their decision to pay (or not pay) interns.  That requires an analysis under the DOL’s old six-factor test:

  • The internship, even though it includes actual operation of the facilities of the company, is similar to training which would be given in an educational environment;
  • The internship experience is for the benefit of the intern;
  • The intern does not displace regular employees, but works under close supervision of existing staff;
  • The company that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  • The intern is not necessarily entitled to a job at the conclusion of the internship; and
  • The company and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If you have not examined your internship programs with these federal and state legal considerations in mind, you should do so immediately, before your summer interns arrive.  Review your internship materials, including your recruitment postings, company policies, and any other documents you anticipate having the intern sign before starting the summer program.

Conkle, Kremer & Engel attorneys are experienced with counseling employers in the face of a constantly changing legal landscape in employment law, and with helping companies identify and reduce areas of exposure to liability for employment claims, including wage and hour, discrimination, harassment, and retaliation claims.

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Consumers are Exposed to Extreme Risks from Counterfeit Products

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Some consumers may view offers of brand name goods from sellers not within the manufacturer’s regular distribution chain as just a way to “get a good deal.”  But those offers can result in purchasers receiving counterfeit products, which are no bargain and can expose unknowing consumers to some of the worst risks imaginable.

At the very least, counterfeit products are frauds – they are not from the manufacturer whose trademark appears on the product, so the consumer is cheated out of the quality that the brand represents.  But in reality, the consumer has absolutely no idea what the contents and construction of a counterfeit product may be – it is a product of unknown origin, regardless of whether the consumer purchased from a known reseller.  Because virtually any product a consumer can purchase can be counterfeited, consumers can be placed in great danger from unknowingly purchasing substandard products.  A couple of recent events in the news highlight the extreme risks of counterfeit products.

In April 2018, the Los Angeles Police Department announced that it had raided sellers of supposedly discount brand name cosmetics, and seized $700,000 of counterfeits.  Consumers had complained to the brand manufacturers that makeup products they purchased were causing rashes and bumps on their skin.  The products were determined to be counterfeits that tested positive for high levels of bacteria and animal waste.  This is undoubtedly because the counterfeits are not manufactured with any quality controls or regulatory oversight – they are the result of a black market, pirate operation.  LAPD Detective Rick Ishitani was quoted in the press as saying, “Those feces will just basically somehow get mixed into the product they’re manufacturing in their garage or in their bathroom — wherever they’re manufacturing this stuff.”  One of the brands asserted to be counterfeit was Kylie Cosmetics. Kylie Jenner’s sister, Kim Kardashian West, tweeted:  “Counterfeit Kylie lip kits seized in LAPD raid test positive for feces. SO GROSS! Never buy counterfeit products!”

The risks to consumers of counterfeits unfortunately do not stop even there.  An even more extreme case of product counterfeiting hit the press a few days later.  Tragically, famed rock artist Prince died in April 2016.  It was soon determined that he had died from an overdose of fentanyl, an extremely powerful and dangerous synthetic opioid.  But in April 2018, local prosecutors announced that Prince had consumed the fentanyl by taking tainted counterfeit Vicodin, a brand name medication of AbbVie, Inc.  There was no determination as to how Prince obtained the counterfeit Vicodin pharmaceuticals.  “In all likelihood, Prince had no idea he was taking a counterfeit pill that could kill him.  Others around Prince also likely did not know that the pills were counterfeit containing fentanyl,”  Carver County, Minnesota Attorney Mark Metz was quoted as saying at a news conference.

Some believe that counterfeits can be identified by the price alone, and warn against buying brand name products at steep discounts.  While an inexplicably low price is certainly a red flag of a potential counterfeit, in fact counterfeit products are often sold to consumers at prices very close to those of the brand name product.  This is often because many intermediaries have handled the product, taking a profit with each transaction, in the course of a murky gray market distribution process.

The popularity of online sales make the risks even worse for consumers, as it is nearly impossible for the consumer to inspect the product before purchase and delivery, and it is often very difficult for consumers to determine who is actually selling the product online.  For example, many popular online sellers act as marketplaces for innumerable third party sellers, and a purchaser cannot always determine which seller will actually deliver the product purchased.

If you are a consumer, you really need to exercise great caution when considering purchases of brand name products from sellers who are not in that manufacturer’s authorized distribution channels.  It generally matters little whether the seller is known to the consumer – it only matters where the seller obtained the product.

If you are a brand name manufacturer or trademark holder who suspects that unauthorized parallel market sellers may be offering counterfeit products, you are well advised to promptly contact counsel well-versed in the issues and methods of enforcement of your intellectual property rights.

 

 

 

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