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, 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.

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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 (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.

2014-2017 Summary of Proposition 65 Resolutions (Updated from OAG Data as of 3/25/2019)
2014-2017 Summary of Proposition 65 Resolutions
(Updated from OAG Data as of 3/25/2019)

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.

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