Conkle, Kremer & Engel attorneys Eric S. Engel and Zachary Page presented to beauty industry professionals on hot and developing legal issues in brand protection, grey market and product counterfeiting at the Personal Care Products Council’s November 20, 2019 Emerging Issues Conference. The Conference was held on the 10th Floor of the Marina del Rey Marriott, with a spectacular view over the nearby marina and beach.
Among the topics covered by Zach were issues of registering U.S. trademarks for CBD products, and other previously unregisterable brands. The 2019 U.S. Supreme Court decision in Fourth Estate Public Benefit Corp. v. Wall-Street.com put new importance on registering important copyrights well in advance of their need for infringement claims, and Zach discussed the close relationship with the Digital Millennium Copyright Act’s “DMCA Clock” to takedown infringing online publications. Trends toward false advertising claims based on “natural” and “organic” labeling were also discussed, as were the dramatic increase in medical claim class action and other lawsuits. Zach also briefed the gathered industry experts on the various issues that affect uses of models and others without adequate documentation of consent, which can raise serious right of publicity as well as copyright concerns.
Eric addressed grey market and counterfeiting case development, including the importance of creating “materially different” packaging for U.S. and foreign products. Simple and low-cost ways to help DHS/CBP protect brands against importation of foreign-labeled versions of their own products, as well as counterfeits, was outlined. Also outlined were cost-effective techniques such as recording trademarks online with CBP’s IPR e-Recordation system, Lever Rule Protection, providing CBP with effective Product Identification Training Guides (PITG), conducting IPR Webinars for CBP distribution, and posting e-Allegations online. On combating counterfeiting, Eric addressed Amazon.com specifically because it now accounts for more than half of U.S. online consumer sales, and more than half of Amazon’s online sales are on behalf of third parties in its “marketplace.” Amazon acknowledges no responsibility for sales in its marketplace, beyond closing seller accounts and refunding its customers’ money when they can show that they were sold counterfeit and defective products. Eric discussed the developments in Amazon’s selling and fulfillment practices and in the law of counterfeiting and products liability that suggest that Amazon’s currently-strong denials of responsibility for third party’s products and sales practices may be less compelling in coming years.
CK&E attorneys regularly give presentations to personal care product industry professionals to help them understand and proactively address the latest legal concerns that affect and can inhibit growth of their businesses.
The first day for CK&E at Cosmoprof Asia was largely devoted to catching up with old friends of the firm and meeting new ones. Many of the attendees have been CK&E clients or employees of clients for years. One such person is Greg Starkman who, as an executive of Joico in the early 90’s, worked with CK&E on numerous matters. Greg and his wife Joanne now head up Innersense Organic Beauty, which manufactures and sells a line of natural and organic hair care products “dedicated to purity, peace of mind, and the practice of self-care.”
We also viewed outstanding and innovative products that are finalists for the annual Cosmoprof Asia Awards. Several caught our attention, including two products selected due to their packaging. One uses a container made of recycled coffee grounds and polylactic acid (aka polylactide or PLA), which is a thermoplastic aliphatic polyester derived from renewable resources that gives the package a small carbon footprint. The other notable package is manufactured from industrial waste. Other innovative products of interest include a hair dryer weighing only .6 lbs, and a patented plastic makeup container that features a magnetic closure.
So far, attendance at this year’s Cosmoprof Asia appears to be reduced from last year. Many of the attendees believe that the reduced attendance may be affected by the citizen protests that have taken place in Hong Kong over the past few months. Some attribute the attendance drop-off more specifically to the reluctance of Chinese citizens from the “Mainland” to come to Hong Kong during the protests. But there’s a bright side to the smaller crowds – CK&E attorneys have more time available to meet with clients and prospective clients, and to learn about the new products and trends in the beauty industry.
The Federal Trade Commission (FTC) announced today that it had sent warning letters to three companies over their advertising of products containing cannabidiol or CBD, one of the many active compounds of the cannabis plant. The letters reinforce the FTC’s position that advertisers may not make health-related representations for CBD products without satisfying FTC substantiation standards.
According to the FTC’s press release, the companies – which have not been identified publicly – advertised oils, tinctures, capsules, “gummies” and creams containing CBD as treating or curing serious diseases and health conditions. Disease claims require scientific proof, making it illegal for companies to advertise that a product can prevent, treat or cure human disease without competent and reliable scientific evidence to support such claims.
The FTC took issue with the following: • A claim that CBD “works like magic” to relieve “even the most agonizing pain” better than prescription opioid painkillers • A claim that the company has participated in “thousands of hours of research” with Harvard researchers, to bolster its claims that CBD has been “clinically proven” to treat cancer, Alzheimer’s disease, multiple sclerosis (MS), fibromyalgia, cigarette addiction, and colitis • A claim that CBD products are proven to treat autism, anorexia, bipolar disorder, post-traumatic stress disorder, schizophrenia, anxiety, depression, Alzheimer’s disease, Lou Gehrig’s Disease (ALS), stroke, Parkinson’s disease, epilepsy, traumatic brain injuries, diabetes, Crohn’s disease, psoriasis, MS, fibromyalgia, cancer, and AIDS • A claim that CBD is a “miracle pain remedy” for both acute and chronic pain, including pain from cancer treatment and arthritis • A claim that CBD gummies are highly effective at treating “the root cause of most major degenerative diseases, including arthritis, heart disease, fibromyalgia, cancer, asthma, and a wide spectrum of autoimmune disorders” • A claim that CBD cream relieves arthritis pain • A claim that CBD oil may effectively treat depression, PTSD, epilepsy, heart disease, arthritis, fibromyalgia, and asthma
According to the FTC, the letters urge the recipient companies to review all claims made for their products, including consumer testimonials, to ensure they are supported by competent and reliable scientific evidence, and also include a warning that selling CBD products without such substantiation could violate the FTC Act and may result in legal action that could result in an injunction and an order to return money to consumers.
As the market for CBD goods – including cosmetics and supplements – continues to explode, companies vying for market position must be aware of action taken by the FTC and FDA and stay away from making health or drug claims that could subject them to enforcement by these agencies. Conkle, Kremer & Engel attorneys stay current on the latest developments to help those how manufacture, distribute and sell products containing CBD avoid regulatory trouble.
However, under the Proposition 65 regulations as amended last August, retailers are now legally responsible for compliance only under certain prescribed circumstances. In addition to having to provide Internet warnings for products sold online, a retailer is responsible for providing a warning if:
• the retailer is selling the product under its brand or trademark;
• the retailer knowingly introduced a listed chemical into the product or knowingly caused a listed chemical to be created in the product;
• the retailer covered, obscured or altered a warning label that was affixed to the product;
• the retailer received a notice and warning materials for the exposure but sold the product without posting or displaying the warning; or
• the retailer has actual knowledge of the potential exposure requiring the warning and there is no upstream entity that can be held liable for the violation. Actual knowledge means specific knowledge of the exposure received from any reliable source. If the source of this knowledge is a Prop 65 notice of violation, the retail seller is deemed to have actual knowledge five business days after receipt.
Despite the new regulations, retailers are continuing to be served with notices of violation. For example, while Amazon has received 1,027 notices of violation since the California Attorney General’s Office began keeping track in 2000, most of those notices were served in recent years: 255 in 2016, 404 in 2017, 180 in 2018 and 57 so far this year. Private enforcers often include retailers in their notices to apply settlement pressure on manufacturers, distributors and other entities upstream in the supply chain, who are often required to enter into indemnity agreements with their retailers. Retailers should continue to be vigilant about having adequate indemnity agreements in place, ensuring that the products they sell have been tested for compliance with Proposition 65 and if warnings are required, to provide the appropriate warnings.
Conkle, Kremer & Engel attorneys routinely assist clients in ensuring compliance with Proposition 65 and other regulations, and defend businesses against Proposition 65 when a notice of violation is received.
2019 is starting to look like the year Congress may make good on its efforts to pass federal cosmetics reform legislation, with legislation in the works in both the U.S. Senate and the U.S. House of Representatives that would increase federal regulatory oversight for cosmetics. In addition, Senate and House committees have been active in demanding more information and action from the Food and Drug Administration (FDA) to ensure cosmetics safety.
Feinstein/Collins Personal Care Products Safety Act Bill
• Requiring annual registration of cosmetic facilities with the FDA and impose tiered registration fees;
• Requiring cosmetic ingredient statements for all cosmetics, including fragrances, flavors and colors, as well as a range of possible amounts of each ingredient;
• Providing the FDA the authority to suspend registration of a facility (and any import, export or distribution of cosmetics from the facility) or a cosmetic ingredient statement (and all cosmetics that are the subject of the statement) if there is a reasonable probability of serious adverse health consequences or death to humans;
• Directing the FDA to review ingredients and non-functional constituents, including coal tar chemicals) for safety at a rate of at least five ingredients per year;
• Directing the FDA to issue regulations to establish Good Manufacturing Practices for cosmetics;
• Requiring timely reporting of serious adverse events and annual reporting of adverse events;
• Allowing the FDA wide authority to inspect records;
• Providing mandatory recall authority to the FDA;
• Requiring labeling of cosmetics that are not appropriate for use in the entire population, including warnings that vulnerable populations, such as children or pregnant women, should limit or avoid using the product;
• Requiring ingredients, warnings and statements on professional products;
• Requiring complete label information to be placed online for online sales of cosmetics; and
• Requiring a telephone number or electronic contact information on the label.
In the first year, the FDA would evaluate the safety and appropriate use of the following five chemicals, which could be banned from cosmetics or limited in their allowed use:
• Diazolidinyl urea, which is used as a preservative in a wide range of products including deodorant, shampoo, conditioner, bubble bath and lotion. • Diethyl phthalate, which is used as a binding agent in some fragrances and cosmetics. • Methylene glycol/formaldehyde, which is used in hair treatments. Propyl paraben, which is used as a preservative in a wide range of products including shampoo, conditioner and lotion. • Quaternium-15, which is used as a preservative in a wide range of products including shampoo, shaving cream, skin creams and cleansers.
Pallone/Shimkus Discussion Draft
Meanwhile, House Energy & Commerce (E&C) Committee Chairman Frank Pallone Jr. (D-NJ) and Rep. John Shimkus (R-Ill.) in March released a bipartisan discussion draft of legislation that is very similar to the Personal Care Products Safety Act, which is expected to be introduced in the House soon.
Action by Congressional Committees
Congressional committees have also been flexing their investigative and oversight muscles by demanding additional information from and calling for more action by the FDA, separately from the status of any reform legislation.
After the FDA announced in March that its testing (almost two years after the fact) confirmed the presence of asbestos in cosmetics, including eye shadows, compact powders and contour palettes, sold in 2017 at children and teen stores Claire’s and Justice stores, Sen. Patty Murray (D-Wash.), ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, called for further investigation by the FDA into whether cosmetic products that contain talc “may be contaminated with asbestos.” Sen. Murray is also urging the FDA to conduct additional testing to ensure the safety of cosmetic products containing talc, and in particular cosmetics that are marketed to children and teenagers. Separately, Sen. Murray demanded that Claire’s provide more information about the possible sources of asbestos contamination and the process and procedures Claire’s takes to assess the safety of its products before they reach customers.
There have been further regulatory and legislative developments on these subjects in June 2019. Additional cosmetics, including a JoJo Siwa makeup set sold by Claire’s, were found to be contaminated with asbestos and were recalled in June 2019. Rep. Pallone then sent a letter to the FDA requesting updated information about the agency’s inspections of imported cosmetic products. Specifically, Rep. Pallone sought FDA foreign inspections data from Fiscal Year (FY) 2017-2019, including the number and kinds of personal care products imported each year, the number of imported products subjected to inspections each year, and the number of contaminated products intercepted each year. According to Rep. Pallone, the FDA has not conducted any foreign cosmetic inspections in FY 2019 and intends to conduct no foreign cosmetic inspections in FY 2020.
This was not the first such request to the FDA, as Rep. Pallone previously sent a letter to the FDA requesting similar information in 2016. In response, the FDA stated that in FY 2016, less than one percent of cosmetic products that arrived in U.S. ports were physically examined by FDA inspectors; of those inspected, inspectors reported adverse findings such as illegal color additives and microbial contamination in 15 percent of the imports.
The push toward federal cosmetics reform has been many years in the making, and now gathers industry support from such heavyweights as The Estee Lauder Companies, Johnson & Johnson, L’Oreal and Procter & Gamble. While the industry by and large appears to agree that updates are needed to the current regulatory system and would increase consumer confidence, there are concerns about the extent of the reform and the scope and breadth of the power to be vested in the FDA. Key stakeholders are involved in the process and engaging with the House, Senate and FDA.
While it remains to be seen whether 2019 will be the year of significant cosmetic legislation reform, one thing is certain – increased regulation for the personal care products industry is inevitable, and the question is just one of how much regulation and the extent to which the FDA will preempt state and local regulations.
Cosmetics manufacturers should take heed as they plan their product formulations, manufacturing and labeling of existing and planned product lines, whether made in the U.S. or abroad. Conkle, Kremer & Engel attorneys stand ready to help clients plan their responses to current and developing regulatory changes affecting the beauty industry.
On April 3, 2019, Conkle, Kremer & Engel attorneys John Conkle and Raef Cogan joined the Personal Care Products Council (“PCPC”) in Sacramento, California to lobby members and staff of the California Legislature on pending legislation important to members of the personal care products industry, including Senate Bill 574 and Assembly Bill 495.
SB 574, also known as the “Toxic Fragrance Chemicals Right to Know Act of 2019,” would require cosmetic manufacturers to disclose fragrance of flavor ingredients that appear on any one of 27 “designated lists.” CK&E attorneys explained during the meetings that a viable version of this bill may be presented in the future, but that as written SB 574 threatens cosmetic companies’ confidential business information, results in duplicative regulation and relies on faulty, unscientific “lists” to determine what information manufacturers must disclose.
AB 495, is entitled the “Toxic Free Cosmetics Act,” and would dramatically increase the number of cosmetics listed as “adulterated,” without justification. CK&E attorneys explained that under AB 495 as proposed, any cosmetic that contained even trace amounts of identified ingredients would be labeled “adulterated” and would be banned outright. Some ingredients sound scary, like lead, but are in fact naturally occurring and cannot be completely eliminated from cosmetic (or many other) products. Others are preservatives that have been deemed completely safe for use in cosmetics by the FDA and other regulatory bodies.
Both SB 574 and AB 495 are coming up for committee vote soon. Conkle, Kremer & Engel will stay apprised of the results and will provide updates on this legislation that is important to the cosmetics industry.
PCPC California Lobby Day also featured presentations from Allen Hirsch, Chief Director of the California Office of Environmental Health Hazard Assessment (“OEHHA”), Karl Palmer from the Department of Toxic Substances Control (“DTSC”), Joseph Calavita from the Air Resources Board, and Senator Bill Quirk, Chair of the Environmental Safety and Toxic Materials Committee. The regulators spoke about important upcoming actions by their agencies. Senator Quick focused on the importance of protecting our environment from toxins, primarily greenhouse gasses. Each of these presenters stressed a need for more information sharing between the industry and the respective regulatory and legislative bodies.
SB 574, the “Toxic Fragrance Chemicals Right to Know Act of 2019”
SB 574, the “Toxic Fragrance Chemicals Right to Know Act of 2019,” was introduced last month. It would require cosmetic manufacturers, starting July 1, 2020, to disclose whether any of their cosmetic products contains a toxic fragrance or flavor ingredient.
Fragrance or flavor ingredients that appear on any one of 27 “designated lists” would be subject to public disclosure. The designated lists include chemicals listed as known to cause cancer or reproductive toxicity pursuant to California’s Proposition 65; chemicals classified by the European Union as carcinogens, mutagens or reproductive toxins; chemicals included in the European Union Candidate List of Substances of Very High Concern; and Group 1, 2A or 2B carcinogens identified by the International Agency for Research on Cancer (IARC) among many others.
Existing law – the California Safe Cosmetics Act of 2005 (“Safe Cosmetics Act”) – requires cosmetic manufacturers to disclose to the California Department of Public Health (CDPH) Safe Cosmetics Program whether any of their cosmetic products contain chemicals known or suspected to cause cancer or reproductive toxicity. The Safe Cosmetics Act’s list of reportable ingredients is compiled from a more far limited set of five designated lists. This self-reported information, in turn, is publicly available through the CDPH’s Safe Cosmetics Database.
While the Safe Cosmetics Act does not exempt fragrances and flavorings from being reported, the reportable chemicals in those cases are often identified simply as “trade secrets.” The proposed legislation would require the disclosure of the identities of the reportable chemicals or ingredients, but for trade secret purposes, would not require the weight or amount of a fragrance or flavor ingredient to be disclosed or any disclosure of how the fragrance or flavor is formulated. In addition, a manufacturer would not have to disclose any fragrance or flavor ingredients that are not found on any of the 27 designated lists. It is important to note that SB 574 as proposed would not ban or otherwise regulate the use of any fragrance or flavor ingredients.
AB 495, the “Toxic Free Cosmetics Act”
AB 495, also introduced in February 2019, would amend both California’s Sherman Food, Drug and Cosmetic Law and the Safe Cosmetics Act.
California’s Sherman Food, Drug and Cosmetic Law prohibits the manufacture, sale, delivery, holding or offer for sale of adulterated cosmetics. AB 495 would greatly expand the definition of an “adulterated cosmetic” to include cosmetics that contain specific ingredients. Any cosmetic that contains lead or asbestos or any of the following 13 intentionally added ingredients – without regard to the amount or exposure levels – would be banned from sale in California:
Mercury and related compounds
Per- and Polyfluoroalkyl substances (PFAS)
The bill would also amend the Safe Cosmetics Act by requiring referrals to be made to the Department of Justice for any sale of adulterated cosmetics, as well as any violation of the Safe Cosmetics Act.
It has become clear that California’s leadership position on cosmetic regulation has effectively driven changes in cosmetic products and labeling throughout the United States. Conkle, Kremer & Engel will continue to follow and update these important developments affecting the cosmetics industry.
Update on AB 495 as of April 9, 2019
Efforts to pass AB 495 have temporarily stalled. On April 9, 2019, the Assembly’s Environmental Safety and Toxic Materials Committee postponed a scheduled vote to move the bill to the Assembly Health Committee due to lack of support. The bill is not expected to be brought back again until next year. It is anticipated that the bill will be in a revised form when reintroduced. Conkle, Kremer & Engel will continue to monitor the developments of AB 495.
2018 turned out to be the most lucrative year ever for Proposition 65 attorneys and their clients, according to settlement data collected by the California Office of Attorney General (OAG). The famous “right-to-know” law has been on the books for more than 30 years, and requires businesses to provide warnings for exposures to any one of the more than 900 chemicals on the Proposition 65 list that are known to cause cancer, reproductive harm or birth defects – or face hefty civil penalty and attorneys’ fees demands from the OAG, a district attorney or, far more commonly, private enforcers who initiate their claims by sending Notices of Violation.
Reviewing the recent trends, the indications are that the private enforcer claimants are becoming more efficient at extracting as much as possible from the unfortunate businesses who receive Notices of Violation. Even though California’s Office of Environmental Health Hazard Assessment (OEHHA) is supposed to benefit from Proposition 65 recoveries, the chart below shows graphically that the vast majority of the money obtained by the claimants stays with the claimants – and most of it stays with the claimants’ attorneys. In 2018, less than 12% of the money obtained by private enforcers went to OEHHA, and more than 79% went to the claimants’ attorneys.
The claimants’ increasing efficiency is shown clearly by the fact that, even though the number of Notices of Violation sent to businesses dropped by approximately 13% (2,710 in 2017 and just 2,364 in 2018), the number of settlements and judgments increased from 693 in 2017 to 834 in 2018. The average settlement shot up by 13%, from $38,395 in 2017 to $44,097 in 2018. This was buoyed in large part by a huge increase in the attorneys’ fees and costs collected by plaintiffs’ attorneys. In 2017, plaintiffs’ attorneys took in $20.2 million in attorneys’ fees and costs. In 2018, plaintiffs’ attorneys recovered $29.1 million in attorneys’ fees and costs.
The small circle of private enforcers making these claims remains an exclusive club. The claimants active in 2018 included: Alicia Chin; Amy Chamberlin; Anthony E. Held, Ph.D., P.E.; Anthony Ferreiro; APS&EE, LLC; As You Sow; CA Citizen Protection Group, LLC; Center for Advanced Public Awareness, Inc.; Center for Environmental Health; Consumer Advocacy Group, Inc.; Dennis Johnson; Donny Macias; Ecological Alliance, LLC; Ecological Rights Foundation; Ema Bell; Environmental Law Foundation; Environmental Research Center, Inc.; EnviroProtect, LLC; Erika McCartney; Evelyn Wimberley; Gabriel Espinosa; Hector Velarde; John Moore; Estate of Karen Charlene Calacin; Kim Embry; Kingpun Cheng; Laurence Vinocur; Maureen Parker; Michael DiPirro; Paul Wozniak; Peter Englander; Precila Balabbo; Russell Brimer; Safe Products for Californians, LLC; Sara Hammond; Shefa LMV Inc.; Susan Davia; The Chemical Toxin Working Group, Inc.; and Whitney R. Leeman, Ph.D.
Questions still remain as to the effects on the Proposition 65 industry of the OAG’s amended settlement guidelines that went into effect October 1, 2016, and the new clear and reasonable warning requirements that went into effect August 30, 2018. We posited some theories in our previous blog post on the issue, but it’s too early to tell the collective effects of these changes on the net Proposition 65 costs for businesses. One thing is for certain: The risks to businesses are increasing as Proposition 65 claimants are demanding more money than ever to resolve their claims. Absent any meaningful Proposition 65 reform, that trend will only continue. Unfortunately, Proposition 65 is notoriously difficult to reform because it requires a two-thirds majority approval of each house in the Legislature and any amendment must further the purposes of Proposition 65.
The best approach for businesses is to be proactive to try to meet the Proposition 65 challenges before they become very costly burdens. Aside from carefully reviewing your compliance, the most important factor in reducing costs of resolution is to act promptly when you receive a Notice of Violation to contact qualified counsel experienced in Proposition 65 issues. Conkle, Kremer & Engel keeps up to date on developments in Proposition 65 and provides expert guidance to clients to ensure compliance with Proposition 65 and other regulations.
2018 by the Numbers
2,364: Notices of Violation Served
834: Number of Settlements/Consent Judgments
39: Number of Active Prop 65 Plaintiffs
$36.7 Million: Paid by Businesses to Resolve Claims
$29.1 Million: Attorneys’ Fees & Costs Collected by Plaintiffs’ Attorneys
$3.3 Million: Payments Collected by Plaintiffs
$4.3 Million: Payments to State Agency
$44,097: Average Settlement/Judgment Amount
2017 by the Numbers
2,710: Notices of Violation Served
693: Number of Settlements/Consent Judgments
38: Number of Active Prop 65 Plaintiffs
$26.6 Million: Paid by Businesses to Resolve Claims
$20.2 Million: Attorneys’ Fees & Costs Collected by Plaintiffs’ Attorneys
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, 90 of the 345 court judgments called for payment of ASPs (totaling $1,421,660) and in 2018, 109 of the 366 court judgments included ASPs (totaling $1,915,083). 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. Attorneys’ fees made up 79% of all Proposition 65 recoveries in 2018 – up from 76% in 2017. The claimants’ attorneys collected an astonishing $29,117,784 – an increase of nearly $9 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.
Over the last several years, the California Attorney General’s Office (OAG) has released annual reports of Proposition 65 settlements through 2017. 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 fully released by OAG). 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 or obtaining judgments in 693 cases. The recoveries totaled more than $26 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 $20 million, or 76% of all private settlements, and civil penalties retained by claimants represented an additional $1,431,496 or 5.4% of all Prop 65 recoveries.
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.