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CA Prop 65 Regulations Amended to Allow Vendors and Retailers to Shift Liability (But Beware)

Posted By RCVF Admin, Tuesday, October 13, 2020

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CA Prop 65 Regulations Amended to Allow Vendors and Retailers to Shift Liability (But Beware)

By Bao M. Vu, of Counsel, Stoel Rives LLP. 

 

Quick Takeaway

New Prop 65 regulations that became effective on April 1, 2020, could help better allocate liability among upstream entities and retailers.  Upstream entities and retailers should implement necessary procedures now to shift liability when appropriate, and take steps to protect themselves if and when liability is shifted to them. 

Upstream Entities should:  Provide notices to downstream entities and retailers under the new regulations to help reduce or eliminate liability for products that might be sold in California without their knowledge.  Upstream retailers should also confirm their contractual obligations, if any, that might impact their ability to rely on the new regulations.

Retailers should:  Implement procedures to appoint agents to streamline and expedite receipt and processing of Prop 65-related notices.  This will ensure that retailers are not the subject of liability they did not intend to accept, and position retailers to take advantage of new regulations that could eliminate retailer liability if retailers remove a product within five (5) business days of receipt of a Prop 65 notice of violation from a plaintiff. 

Background

California’s Proposition 65 (Prop 65) was passed by California voters in 1986. It requires that products sold to consumers in California carry a specific warning if a product contains any one of nearly 900 chemicals at certain levels. The “chemicals” on the Prop 65 list range from plasticizers such as phthalates (for example, DEHP, DINP, DBP) which are found in many consumer products, to naturally-occurring heavy metals such as lead and cadmium that are found in soils and the ocean. These heavy metals are absorbed by plants and ultimately end up in many all-natural, plant-based food, supplements, and cosmetic ingredients.

Despite the challenges presented by Prop 65’s laundry list of chemicals, Prop 65 applies to essentially every product sold to a consumer in California, including online sales.  And, violations for failure to provide a warning can be steep, amounting to penalties of up to $2,500 per violation, per day.  In addition to the penalties, a plaintiff’s lawyer is entitled to recover his or her lawyer’s fees and costs for prosecuting a Prop 65 violation.  In fact, the plaintiff’s lawyer’s attorneys’ fees and costs are often the largest component of any Prop 65 resolution, creating a cottage industry of so-called “Prop 65 bounty hunters.”  To make matters worse, under Prop 65, everyone in the distribution chain (from the manufacturer and distributor(s) to the retailer) can be liable for a Prop 65 violation, even if they had no idea the product at issue would ever be sold to a consumer in California.

Recognizing the challenge that Prop 65 can create, the California Office of Environmental Health Hazard Assessment (OEHHA), which oversees Prop 65, recently amended Prop 65’s regulations to make it easier to allocate liability between, on the one hand, manufacturers, packagers, and distributors (i.e., upstream entities) and, on the other hand, retailers.  These changes are especially important in today’s global marketplace and ecommerce channels that make it difficult for manufacturers and distributors to know whether a product will ever be sold in California. 

In amending the Prop 65 regulations, OEHHA also was cognizant of the practical reality that retailers are not in the best position to test each and every product they sell and may not have access to the same important information that a manufacturer and retailer do.  OEHHA’s complete Statement of Reasons can be found here. 

OEEHA’s changes to Prop 65 regulations took effect on April 1, 2020.  The key changes to those regulations are as follows:

Takeaway for Upstream Entities

Upstream entities can satisfy their obligation under Prop 65 by providing a written notice and warning materials to those immediately downstream.  In the past, it could be argued that the warning obligation was on the manufacturer.  Now, a manufacturer  can provide “written notice directly to the authorized agent for the business to which they are selling or transferring the product or to the authorized agent for the retail seller” of the need to provide Prop 65 warnings.  Though there are numerous requirements for such a “written notice,” if those requirements are met, the manufacturer can eliminate its liability under Prop 65. See 27 Cal. Code Regs. § 25600.2(b)-(c). 

A caveat that upstream entities should consider, however, is whether there are independent contractual indemnity obligations they owe to those downstream that could render the upstream entity nevertheless liable as a matter of contract.  That obligation would be contractual, and might be in addition to Prop 65’s requirements.  In other words, in addition to strictly complying with the downstream notice provisions in the new regulations, the upstream entity should ensure it is complying with its contractual obligations that might require, for example, that all products they distribute carry all necessary warnings prior to distribution.

Takeaway for Retailers

In a nutshell, retailers should ensure they have policies and people in place to streamline and expedite any Prop 65-related notices.  There are two main reasons for this.

First, the new regulations state that upon receipt and confirmation of notice from an upstream entity, “[t]he retailer seller is responsible for the placement and maintenance of warning materials, including warnings for products sold over the internet[.]”  27 Cal. Code Regs § 25600.2(d).  This means that the retailer needs to have specific procedures and designated agents to receive Prop 65-related notices from upstream entities.  This is very important because, if the retailer does not take those steps, the new regulations allow for notices to be provided to “the legal agent for service of process” for the retailer.  Of course, the legal agent for services is often a third-party company and it will take significant time for that information to get to the right people at the retailer, if ever. 

Second, the new regulations effectively provide that a retailer can eliminate Prop 65 liability if it has no “actual knowledge” of a Prop 65 violation.  The biggest takeaway here is that “[w]here the source of a retailer’s knowledge [of a Prop 65 violation] is a [notice of violation issued by a plaintiff], the retail seller shall not be deemed to have actual knowledge of any consumer product exposure alleged in the notice until five business days after the retail seller receives the notice.  27 Cal. Code Regs. § 25600.2(f)(2) (emphasis added).   This means that pulling a product from shelves within five (5) business days after receiving a notice of violation could immune the retailer from liability under Prop 65. 

A caveat for the retailer is that the new regulations also state that “actual knowledge” may be imputed to the retailer if “the retail seller receives information form any reliable source that allows it to identify the specific product or product that cause the consumer product exposure.  Such knowledge must be received by the retail seller, its authorized agent or such a person whose knowledge can be imputed to the retail seller.  27 Cal. Code Regs. § 25600.2(f)(1) (emphasis added).  Though this language is not precise, OEHHA insists it is meant to confirm that “[t]hese modifications reflect OEHHA’s intent that the primary responsibility for providing warnings is not on the retailer who likely will have no knowledge at all that a warning is required for a given exposure[].”  OEEHA, Final Statement of Reasons, at p. 13.  Despite OEHHA’s apparent view, the language of the regulation could invite controversy for retailers. 

About the Author:

For more information about Prop 65 or this new regulatory development, contact the RVCF’s outside Prop 65 counsel Bao M. Vu of the law firm Stoel Rives LLP, at 415-500-6572 or bao.vu@stoel.com.  Bao is an experienced Prop 65 and green marketing/environmental claims lawyer who also has significant experience defending clients in state and federal courts throughout the U.S.  Bao’s clients include manufacturers, packagers, distributors, and retailers.  He has a successful track record of aggressively defending clients in Prop 65, antitrust, false and deceptive advertising and labeling, toxic tort, and trade secret misappropriation lawsuits, as well as favorably resolving government investigations.

 

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