There are two types of businesses in California: those that have faced lawsuits brought by bounty-hunting private plaintiffs under the state’s Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65); and those that will.
As cannabis businesses enter California’s commercial mainstream, they face the same fate. Prop 65 lawsuits are easy to bring, difficult to defend and threaten enormous liability. Proactive compliance and a well-planned defense are essential.
Bug or feature?
Direct democracy, environmental stewardship and private entrepreneurship were all lauded as California legalized recreational cannabis by ballot initiative in 2016. Those very same hallmarks stamped another successful voter initiative in 1986 when, distrusting the government to protect drinking water from polluters, 66% of California voters passed Prop 65.
Prop 65 mandated the state create a list of chemicals known to “cause cancer or birth defects or other reproductive harm.” The Office of Environmental Health Hazard Assessment (OEHHA) maintains the list, which today includes more than 800 chemicals. Prop 65 also prohibits (a) discharging any listed chemical into drinking water and (b) knowingly and intentionally exposing anyone to a listed chemical without a warning.
And with a classic Western fondness for rugged individualism, Prop 65 provides for enforcement by private plaintiffs. Anyone can sue for violations of Prop 65 with 60 days notice to the defendant and government enforcers (who may intervene, but rarely do).
Violators face astronomical penalties — $2,500 per day, per violation (each individual exposure), over a one-year statute of limitations. The plaintiff keeps 25% of any penalty recovered. Attorneys’ fees are often separately awarded. Accordingly — again, in true Western style — a new class of bounty hunters arose.
Prop 65’s proponents envisioned it as a model for other states’ environmental laws. It was not. Today, more than 30 years after its enactment, Prop 65 remains unique to California.
But the law proved that incentives work. California businesses and products are now festooned with the familiar warning: “This product contains a chemical known to the State of California to cause cancer, birth defects or other reproductive harm.” Its ubiquity renders it meaningless and unnoticed by all but the most recent arrivals to the state.
A legal cottage industry thrives on Prop 65 lawsuits. Armed with the OEHHA list, “bounty hunters” scour the state for products that contain listed chemicals but lack warning labels. Upon locating the quarry, a 60-day letter is fired off. The warning shot is typically enough to force settlement: a payment to the plaintiff and an agreement to reformulate, relabel or withdraw products from sale. The process is then repeated against other manufacturers, distributors or retailers doing business in California (even if located elsewhere).
Today, about 46 “active enforcers” regularly bring Prop 65 claims. In 2016, 760 settlements were reached with an average cash payment of around $40,000, with 72% of the payouts going to the plaintiffs’ attorneys. Additionally, since enactment, businesses have spent an estimated $378 million to defend Prop 65 lawsuits and another $1 billion in compliance costs.
As the cannabis industry grows in California, it finds itself firmly in the crosshairs. Marijuana smoke has appeared on the OEHHA list since 2009 and been the subject of more than 100 60-day letters since 2014. But in August 2017, a prolific new plaintiff launched a salvo of 600-plus 60-day letters to cannabis businesses throughout the United States, alleging the presence of carbaryl, malathion and myclobutanil, Prop 65 chemicals that are commonly used as insecticides and a fungicide in cannabis cultivation.
Red letter day
Unlucky recipients of 60-day letters must take prompt action. Doing so can — at least — stop the penalty meter from running. Step one should be notifying counsel. Not only can an attorney guide the response, but their involvement can shield internal communications from discovery by the plaintiff. The attorney’s first act should then be to review supplier contracts and determine whether defense of the claim can be tendered to a partner upstream in the supply chain.
A defensive response must then be planned. The easiest is for businesses with fewer than 10 employees — they are exempt. But temporary and part-time employees count and small upstream suppliers may still receive indemnity requests from their customers.
Next, determine whether exposure occurred. Laboratory tests can confirm the presence of the chemical in the product referenced. The plaintiff should also be challenged to produce the basis for the 60-day letter.
If exposure took place, was there a warning? Providing a “clear and reasonable” warning by label or signage means no violation occurred. Determine when the warning was first posted, what it said and how prominently it was placed. Defined legal standards govern warning adequacy and may, nonetheless, be issues for litigation.
If exposure without warning has occurred, then the 60-day letter likely states a prima facie claim. Consequently, defense becomes much more difficult because under Prop 65, unlike conventional lawsuits, the burden of proof now shifts to the defendant.
A defense is available by proving the exposure level falls beneath a certain threshold (posing “no significant risk” of cancer or “significantly below” the levels to pose reproductive harm). This requires showing (a) the normal use of the product; (b) exposure during normal use; and (c) that such normal exposure does not exceed the applicable threshold.
None of these factors are easy to prove and there is little scientific or legal precedent to rely on — especially for cannabis products. All would require testing, surveys, consultants and expert witnesses. All are very expensive and all will be challenged by the other side.
Faced with such costs, a quick settlement is often the least bad option. Business concerns and legal strategy inform the decision — for example, whether the defendant is willing to remove products from sale, relabel or reformulate them. Ultimately, the definitive calculation will be the amount of cash worth paying for peace, as opposed to worth gambling on litigation. Again, prompt action and a strong grasp on the merits of the case are essential to negotiate a favorable settlement.
The best medicine
For those whose 60-day letters have yet to arrive, proactive compliance is the best policy. An effective compliance audit includes reviewing product information submitted by suppliers; cross-checking the OEHHA list; and researching products similar to yours that plaintiffs have targeted. Lab testing can help decision-making and also establish a “no knowledge” defense if the results show no risk of exposure.
Common knowledge goes a long way. Since marijuana smoke is a listed chemical, a Prop 65 warning is essential for all smokable products. Whether the same goes for vaping products is a yet unresolved question.
Agreements with suppliers should also be reviewed to see whether suppliers warrant that their products contain no Prop 65 chemicals and if they will defend or indemnify Prop 65 lawsuits. Consider negotiating such provisions in future agreements and whether to do likewise for downstream distributors and retailers.
Prop 65 looms over every manufacturer, distributor and retailer doing business in California. As cannabis businesses join their ranks, they too must account for the risks and plan accordingly.
Anthony Phillips is a founding member of the cannabis law practice at Archer Norris, which provides transactional and litigation services and legal advice to businesses in California’s legal cannabis industry. Archer Norris has more than 75 attorneys and four offices throughout California. He can be reach via email at aphillips@archernorris.com.
Peter McGaw represents defendants in Proposition 65 cases and can be reached at pmcgaw@archernorris.com.
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