Proposition 65 and Its Effect on California Businesses

In November 1986, California voters overwhelmingly approved an initiative to address growing concerns about exposure to toxic chemicals. That initiative became The Safe Drinking Water and Toxic Enforcement Act of 1986 (the Act), better known by its original name – Proposition 65. This California state law requires the Governor to publish and annually update a list of chemicals known to the State of California to cause cancer, birth defects, or other reproductive harm. The law is designed to protect California drinking water sources from contamination by the listed chemicals and to allow consumers to make informed choices about the products they purchase. Under the Act, no person in the course of doing business shall knowingly and intentionally expose any individual to a chemical known to the state to cause cancer or reproductive toxicity without first giving "clear and reasonable" warning about the presence of listed chemicals. The law also prohibits any person from knowingly discharging or releasing those same chemicals into any source of drinking water. Certain exemptions apply where the discharge or exposure would pose no significant risk of cancer or, for chemicals that cause reproductive toxicity, would have no observable effect at 1,000 times the level in question. Only businesses with 10 or more employees are required to post the required warning signs. The official list of affected chemicals has grown to include close to 750 chemicals, including swimming pool products, carpet cleaners, second-hand smoke and car exhaust fumes.

Proposition 65 provides for aggressive enforcement due largely to the fact that the legislation allows anyone to bring a so-called "bounty suit" in the "public interest" 60 days after proper intent-to-sue notices are served upon the alleged violator and the Attorney General. Many law firms, advocacy groups, and even certain tenants and local residents seek out possible violators because plaintiffs can receive 25 percent of all penalties collected or, in the case of a settlement, of the settlement amount. Plaintiffs are also usually entitled to reimbursement of their costs of bringing Proposition 65 suits, including attorneys’ fees, which is often the real reason behind actions brought by private parties. Fines for violations under the Act can reach $2,500 per violation per day. The penalty provision has been commonly interpreted as allowing penalties for each occurrence of exposure to each person on each day, which can quickly add up for many businesses, such as hotels and apartment buildings, some of which have thousands of employees and customers on premises every day. The rules governing Proposition 65 are also unusual because of how these rules allocate the burden of proof of harm or lack thereof, which can often fall in the defendant’s lap.

Owners of apartment buildings and their management companies are reportedly the latest group subject to lawsuits by various "bounty-hunter" organizations. The effect on the hospitality and multifamily industry in California is quite considerable and translates into substantial costs for the defendants in Proposition 65 lawsuits whether or not they are ever found in violation. A number of large property management companies, which are responsible for tens of thousands of apartment units each, were served with Proposition 65 intent-to-sue notices in recent years, and many of them chose to settle their suits out of court because the cost of defending them would be far more. Thus, a few active bounty hunter groups have been able to force large "global" settlements with several major industry organizations, such as the California Apartment Association, Rental Housing Industry Defendants and the California Hotel and Lodging Association, acting on behalf of their members. Once the defendants, such as management companies, reach settlement, they make sure another suit is not on the way by posting signs in prominent locations and including warning language in their rental agreements. When tenants are first shown the disclosures, they are usually given the option to terminate their leases, and some of them do. Needless to say, property owners are not happy with this situation, and management companies are finding themselves in a predicament where they have to tell their clients that they could avoid Proposition 65 hassles if they hired a managing firm with fewer than 10 employees. Besides property owners and management companies, real estate agents and brokers also have the potential to be exposed to liability and are being advised to include Proposition 65 compliance in their due diligence checklist.

Some critics of the current enforcement scheme claim that many of the intent-to-sue notices are being sent out without any substantial investigation being conducted as to the actual state of compliance. Senate Bill 471 (Sher), which took effect on January 1, 2002, amended Proposition 65 in pursuit of discouraging frivolous lawsuits by requiring any private party enforcer to attach a "Certificate of Merit" to the intent-to-sue notice being served upon the Attorney General. The certificate must state "that the person executing the certificate has consulted with one or more persons with relevant and appropriate experience or expertise who has reviewed facts, studies, or other data regarding the exposure to the listed chemical that is the subject of the action, and that, based on that information, the person executing the certificate believes there is a reasonable and meritorious case for the private action."

Nevertheless, even after the new amendment took effect requiring the Certificate of Merit, many arguably deficient notices were still being served on California businesses. One of the reasons for this is that the Certificate of Merit is only served upon the Attorney General and not on the alleged violator, and the information contained in the certificate is off-limits to the special discovery provisions of the Health and Safety Code. Therefore, although the defendant can potentially get an award of reasonable expenses, including attorneys’ fees, if it shows that there was no credible factual basis for the suit, the information necessary to make that showing is contained in the certificate itself and can only be discovered by the time-consuming and often costly traditional discovery process.

Therefore, the vast majority of Proposition 65 cases settle out of court. In fact, not more than half a dozen Proposition 65 cases have ever reached trial. A rare Proposition 65 case that actually made it to trial in November of 2004 in Contra Costa Superior Court in Northern California, finally settled after the judge severely criticized the plaintiff’s attorney for alleged misconduct and the plaintiff admitted in a settlement statement that the case was brought without substantial justification. The plaintiff, Consumer Defense Group, accused the defendant apartment complex owner of allowing residents, workers and visitors to be exposed to second-hand tobacco smoke and other chemicals without giving the requisite warnings. The case turned on the plaintiff’s investigation tactics, which involved an attorney working for the plaintiff visiting the property posing as a potential tenant, speaking to managers and taking pictures, all after the plaintiff was informed that the defendant was represented by counsel – and therefore an apparent violation of the professional ethics rules. The stealth investigation drew harsh criticism from the judge, and after she ruled to suppress much of the evidence gathered by the plaintiff, the plaintiff settled the next day. Although the settlement terms waived the defendant’s right to bring affirmative cases of action against the plaintiff, the defendant has claimed it is entitled to more than $1.2 million in fees, costs and sanctions from the plaintiff and its law firm – a first in Proposition 65 cases. On February 22, 2005, however, the defendant’s motion for costs and attorneys’ fees was denied as the judge ordered that each party should bear their own litigation costs.

To address the growing concern over frivolous lawsuits, the State Attorney General has previously negotiated temporary "standstill agreements" with several most active Proposition 65 bounty-hunter plaintiff groups to address the deficiencies of their notices. As a result, hundreds of intent-to-sue notices were withdrawn due to their shortcomings and faulty information. Since that time, however, the stand still agreements have expired and, in reality, the Certificate of Merit requirement provides little deterrent to frivolous Proposition 65 claims.

Another provision of SB 471 requires that all Proposition 65 settlements must be approved by a court of proper jurisdiction, and that the court may only approve if it makes certain specific findings. This provision added new concerns for defendants desiring to reach quick and straightforward settlements. While prior to this, the court was allowed to approve stipulated settlements by a simple order, current requirements mandate that a court first find that all warnings per the settlement actually comply with Proposition 65 and that any penalty amount and attorneys’ fees awards are reasonable under California law. Additionally, SB 471 allows the Attorney General to appear at and participate in any proceeding on the merits of the settlement without intervening in the case. While meant as a safeguard against frivolous lawsuits, these new requirements added concern for defendants that the agreed upon settlement may not be approved by the court or Attorney General.

Proposition 65 was designed to limit Californians’ exposure to possibly hazardous chemicals that might cause cancer or reproductive toxicity and prevent the release of such chemicals into the drinking water supply. In its core, the law is a "right-to-know" law that seeks to provide consumers with information. However, when a warning is posted by a business, it could mean one of two things: (1) the business has investigated the level of exposure and has concluded that it exceeds the "no significant risk" level, or (2) the business chose to provide a warning based on its knowledge or suspicion that a listed chemical may be present, without attempting to evaluate the level of exposure. The ubiquitous warnings essentially cause "the boy that cried wolf" effect, and when considered together with the enforcement concerns discussed above, raise serious issues about the ultimate effectiveness of the legislation. Additionally, many critics of the current private enforcement mechanism voice concerns that settlements resulting from threatened litigation are not at all protective of the public interest.

Certain attempts to modify the Proposition 65 enforcement scheme was undertaken in recent years. While two bills, SB 1572 and AB 1756, were passed and took effect in 2003 by making revisions to Proposition 65, neither measure made any substantial changes. The measures mostly addressed technical clean-up issues remaining from SB 471, corrected certain erroneous references and made clarifying changes necessary to ensure that the provisions of SB 471 are properly interpreted and enforced. In 2004, there were several pieces of proposed legislation (AB 1776, AB 1447 and AB 1380) under consideration that all had the potential to make substantial revisions to Proposition 65 enforcement scheme, but all these efforts ultimately failed.

Although the enforcement scheme is the most criticized aspect of Proposition 65, many of its opponents also disagree with the way exposure levels and thresholds for dangerous exposure are determined under the legislation. The American Council on Science and Health, which promotes science as the basis for public policy, challenged the legislation by bringing a purposefully ridiculous suit against Whole Foods Markets, known for providing the ultimate in "natural," healthful foods that contain no synthetic materials. The suit cited Whole Foods Market for failure to warn the public about the presence of acrylamide present in miniscule amounts in the organic whole-wheat bread sold in their stores. The Council message is that public policy should be based on sound science and not driven by unfounded, ideologically driven fears.

One would hope that future amendments to Proposition 65 will improve its enforcement mechanism and effectively thwart frivolous shakedown lawsuits presently plaguing it. Realistically, private party enforcement is likely to continue with as much momentum as ever, and there were even recent proposals to increase civil penalties for Proposition 65 violations and introduce criminal penalties. Such a measure would certainly give bounty hunters additional leverage when threatening litigation. The best strategy for dealing with Proposition 65 issues remains to be advanced compliance. And although a conspicuous "clear and reasonable" warning sign displayed on premises may put off some people, these signs are an inexpensive way to ward off potentially costly litigation or settlements that may be looming ahead.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.