American Coatings Association

ACA Signs on to CalChamber Letter in Support of DOJ’s Amended Proposal to Curb Prop 65 Lawsuits

ACA signed on to a Feb. 26 comment letter written by the California Chamber of Commerce (CalChamber) and submitted to the State of California Department of Justice, Office of the Attorney General (DOJ). The comments responded to the DOJ’s proposed amendments to laws regulating California’s Proposition 65 (Prop 65) enforcement actions brought by private parties.

Prop 65 prohibits a person in the course of doing business from knowingly or intentionally exposing any individual to a chemical known to the state of California to cause cancer or reproductive toxicity without first giving “clear and reasonable” warning to the individual. Although the law should be primarily enforced by the California Attorney General’s office, many businesses have faced a flood of lawsuits initiated by private parties under the law’s “bounty hunter” provision.

The CalChamber coalition consists of nearly 200 California-based and national organizations and businesses that represent nearly every major business sector that would be directly impacted by the DOJ’s modified amendments. Many ACA members are impacted by Prop 65 regulations.

ACA also signed on to CalChamber’s comment letter in response to the DOJ’s initial proposal when it was released in the fall of last year. After receiving public comments last fall, DOJ made revisions to its initial proposal and released a revised draft on Feb. 8, and accepted comments on this draft by Feb. 26.

The proposed amendments would affect settlement terms, penalty amounts, and attorney’s fees in civil actions filed by private persons “in the public interest” pursuant to Prop 65. The proposed amendments are intended to reduce the number of private enforcement actions brought under Prop 65, and divert more settlement money to the Office of Environmental Health Hazard Assessment (OEHHA) which is responsible for Prop 65 implementation, rather than for attorneys’ fees.

Proposed Changes to Prop 65 Litigation Requirements  

According to DOJ, the proposed regulation has three main parts:

  1. In the Settlement Guidelines, it proposes a cap on the fraction of settlement payments that can be paid “in lieu of” civil penalties, in the form of Additional Settlement Payments (ASPs). This is intended to effectuate Prop 65’s purpose of directing penalty funds primarily to OEHHA to be used for Prop 65-related activities.
  2. The regulation amends the Settlement Guidelines to require both that projects with an ASP component be subject to ongoing judicial supervision, and that such payments fund only projects with a clear nexus to specific violations giving rise to the settlement. This includes a requirement that the funded activity be designed primarily to produce public health benefits within California. The revised proposed Settlement Guidelines also require greater specificity and public transparency as to the intended uses, and expenditures, of ASPs.
  3. The Settlement Guidelines aim to discourage the initiation of cases that confer very little (i.e., trivial) public benefit, by raising the bar for determining when a settlement confers the “significant” public benefit prerequisite to obtaining attorney’s fees. The proposed regulations would state that reformulation “is presumed to confer a significant public benefit,” but would make this presumption rebuttable. The Settlement Guidelines also add a requirement that for fee award purposes, all investigation costs must be justified through contemporaneous records of time/costs incurred.

Cal Chamber Comments

The coalition supported DOJ’s position that increased scrutiny of the merits of private parties’ claims is also necessary to reduce frivolous litigation. However, the letter stated that many of the coalition’s recommendations and concerns from the first draft were not addressed, and that the initial proposal was “substantially untouched.” The coalition reiterated several areas in the proposal that would benefit from clarification so that the proposed changes do not contradict DOJ’s goals of reducing the burdens of Prop 65 private enforcement lawsuits.

Rebuttable Presumption of Significant Public Benefit for Reformulation
In the initial draft, DOJ had proposed to create a rebuttable presumption that changes in a settling defendant’s practices which reduce or eliminate the exposure to a listed chemical are presumed to confer a significant public benefit justifying an award of fees to a settling plaintiff. In its Nov. 5 comments, CalChamber expressed concern that this amendment could increase the cost of or disrupt the settlement process when both parties are “equally invested in ensuring that the settlement is finalized.” According to CalChamber, the modified proposal revises the initial proposal by striking the requirement that at least some of the products at issue are or at some times were “above the warning level,” and, as reformulated, such products will be below the warning level. The modified proposal now requires that at least some of the products at issue are, or at some time relevant to the litigation were, above the “agreed-upon reformulation standard or formula.”

CalChamber argues that the modified proposal still contains ambiguities that would render it ineffective. CalChamber believes that the modified proposal remains problematic because it may still be interpreted to suggest that “before-and-after” exposure assessments may be required to prove that the products at issue either are, or at some time relevant to the litigation were, above the “agreed-upon reformulation standard or formula.” The coalition offered suggested changes to the proposed regulatory text. CalChamber also reiterated its initial position that DOJ’s goal of curbing private enforcement suits would be better served by applying additional scrutiny before the parties begin settlement discussions, and require plaintiffs at the 60-day notice stage to provide some degree of evidence that use of a product presents a level of exposure likely to exceed the relevant warning level. CalChamber states that, this “up-front” approach “would be more likely to deter private enforcers from pursuing unnecessary actions in the first place, since they would have no opportunity to later shift the burden of generating the necessary evidence to the settling company in the context of settlement negotiations. That timing also would encourage a substantially more robust engagement by the alleged violator, who has yet to become invested in ensuring that a settlement is finalized.”

Also, CalChamber reiterated its concerns raised in its Nov. 5 comment letter but which the DOJ did not address, including ASPs, civil penalties, and lack of an economic impact analysis examining the economic effect of the modified proposal on the regulated community.

Additional Settlement Payments
DOJ’s proposal would have required that payments-in-lieu of penalties, also referred to as “Additional Settlement Payments” (ASPs), should not be a component of any out-of-court settlement, and in court-approved settlements should not exceed the amount of any non-contingent civil penalty. Because DOJ did not modify this section, CalChamber reiterated its concerns with this approach already provided in its Nov. 5 comments. Specifically, CalChamber argues that capping ASPs so as to not exceed non-contingent civil penalties may cause plaintiff attorneys to seek additional attorneys’ fees to cover the “shortfall” or to simply increase the amount demanded for civil penalties: “Regardless of whether plaintiffs increase their attorney fee demands or civil penalty demands, they will look to defendants to cover the difference.” The coalition believes that DOJ should prohibit ASPs in any Prop 65 settlement, whether court-approved or out-of-court. Alternatively, if DOJ elects to continue to allow ASPs in Prop 65 settlements, the proposal should be revised to require private enforcers receiving ASPs to demonstrate, as a threshold matter, why they are necessary and in the public interest given the availability of statutory penalties.

Reasonable Civil Penalty
In the initial proposal, DOJ proposed to: (1) clarify that the appropriateness of low- or no-civil penalties in a settlement is a fact-dependent question, and (2) require that any waiver of civil penalty payment be supported by a verifiable mechanism. CalChamber reiterated its argument that, as drafted, the proposal could be interpreted to say that settlements with low-or no-civil penalties might not “serve the purpose of Prop 65.” The coalition recommended editing the language to clarify that in certain circumstances, a settlement with little or no civil penalty may also serve the purpose and intent of Prop 65. Also, DOJ proposed to impose certain requirements on contingent civil penalties. Among the proposed requirements is that the company’s conduct — supporting the waiver of the contingent civil penalty — provide a “clear mechanism for verification.” CalChamber urged DOJ to consider the significant burdens that may be imposed on settling companies due to the requirement of a “clear mechanism of verification,” absent further guidance on what this term means.

Economic Impact Analysis
Finally, CalChamber argued that DOJ’s Economic Impact Statement focuses solely on the economic impacts of the private enforcement community but not the regulated community. CalChamber recommended that DOJ also assess the proposed regulation’s potential economic impact on businesses regulated under Prop 65.

While most of CalChamber’s recommendations are technical in order to reduce unintended consequences, overall, the coalition is encouraged by DOJ’s effort to reduce the burdens and costs of Prop 65 lawsuits, which, if passed, will hopefully reduce the flood of frivolous litigation and encourage transparency and fairness in the process. ACA will continue to update its membership on the developments of Prop 65 reform from both OEHHA and DOJ, and work with the CalChamber Coalition to respond appropriately.