November 12, 2015

　　ACA signed onto a Nov. 5 letter written by the California Chamber of Commerce (CalChamber) and submitted to the U.S. Department of Justice’s (DOJ) in response to the agency’s proposed amendments to laws regulating California’s Proposition 65 (Prop 65) enforcement actions brought by private parties. 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 proposed amendments.

　　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. These private citizens have the right to bring suits “in the public interest” against businesses that do not comply with Prop 65 and keep a portion of settlement awards.

　　California’s Office of Environment and Health Hazard Assessment (OEHHA) proposed a series of reforms in 2014 and 2015 that are intended to focus on the regulatory objectives of California Gov. Jerry Brown to reduce frivolous lawsuits and to improve how the public is informed about chemicals. ACA has been actively participating throughout OEHHA’s rulemaking process to reform Prop 65 regulations.

　　While OEHHA is the regulatory body responsible for implementing Prop 65, DOJ is given authority under the law to monitor and supervise the private enforcement actions taken under Prop 65. DOJ also reviews private parties’ motions for settlement approval and have the right to participate in any settlement proceedings without intervening in the underlying case. This is one of the first proposed reforms to the Prop 65 regulations from the agency, and one of the first proposed reforms that directly addresses many of the problems with the current Prop 65 mechanism for private litigation.

　　According to DOJ’s Initial Statement of Reasons, the amendments are intended to: 1) ensure that the OEHHA receives the civil penalty funds specified in Prop 65; (2) limit the ability of private plaintiffs to divert the statutorily mandated penalty to themselves or to third parties, in the in the form of “Additional Settlement Payments” (ASPs) ; (3) increase the transparency of settlements in private party Prop 65 cases, to ensure that any monies allocated to ASPs are spent on matters with a sufficient nexus to the litigation and to the State of California; and (4) reduce the financial incentives for private plaintiffs to bring and settle Prop 65 cases that do not confer substantial public benefit, while in no way discouraging cases and settlements that do confer such benefit.

　　DOJ believes that these regulatory changes will help restore public confidence that Prop 65 is used for its proper health protective purposes and not abused for private gain. In the letter, ACA as part of the CalChamber Coalition expressed strong support for these goals.

　　Proposed Changes to Prop 65 Litigation Requirements

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

　　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 ASPs. This is intended to effectuate Prop 65’s purpose of directing penalty funds primarily to the Office of Environmental Health Hazard Assessment (OEHHA) to be used for Prop 65-related activities.

　　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.

　　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.

　　CalChamber Comments

　　In its letter, the Coalition expressed support for DOJ’s objective to constrain private parties’ use of payments in lieu of penalties, increase transparency and accountability in private settlements, and reduce excessive attorney’s fees. 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 highlighted 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.

　　For example, under the section on attorney’s fees, the proposed rule now makes rebuttable the presumption that reformulation (or other changes in settling company’s practices to reduce or eliminate exposure) constitutes a sufficient showing of significant public benefit for attorney’s fees purposes. Under current law, changes in companies’ practices that are mandated by a settlement is sufficient to demonstrate a significant public benefit. The CalChamber recommended that the DOJ should evaluate more strictly whether private enforcement suit will confer a public benefit earlier in the process than the proposed rule proposes, as in before the parties do settlement discussions, at the onset of the dispute.

　　Otherwise, the proposed amendment can increase the costs of and disrupt the settlement process at the end of the private enforcement proceeding since it is late in the process so neither party will be inclined to rebut any presumption of a significant public benefit; or, private enforcers could require settling companies to generate or pay for evidence to support the settlement’s reformulation, which would create additional costs trying to rebut the presumption. The letter recommended that DOJ clarify that a full exposure assessment is not necessarily required to support a finding of significant public benefit, and that other forms of evidence may establish it.

　　Secondly, the amendments would require that payments-in-lieu of penalties, also referred to as ASPs, should not exceed the amount of any non-contingent civil penalty. A “non-contingent” civil penalty is one that must be paid by the business irrespective of what additional actions that entity may take; a “contingent” civil penalty is one that may be waived if the business undertakes additional, specified actions under the settlement. These payments are not subject to the statutory allocation of 25 percent to the named plaintiff and 75 percent to OEHHA, since they are not civil penalties subject to that allocation. Accordingly, a fairly significant amount of settlement payments are not allocated to OEHHA to support its Proposition 65 implementation duties. The revisions proposed in this section are an attempt to enhance transparency and accountability in ASPs and ensure that those payments further the intent of the law.

　　However, the coalition letter expressed concern that some of the proposed revisions will inadvertently result in increased settlement costs because 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. The coalition believes that the best and most effective course of action for DOJ to take at this time would be to prohibit ASPs in any Prop 65 settlement, whether court-approved or out-of-court. If the State Attorney General elects not to prohibit ASPs altogether, the proposal could be revised to instead encourage private enforcers receiving ASPs to allocate a percentage to OEHHA.

　　Finally, the proposed revisions to the “reasonable civil penalty” provisions state that recovery of civil penalties “serves the purpose and intent of Proposition 65.” However, the coalition letter stated that the proposed revision could be interpreted to imply that settlements with low or no civil penalties might not serve the purpose and intent of Prop 65. The coalition recommended that Subsection (a) clarify that asettlement with little or no civil penalty, in the appropriate circumstances, also “serves the purpose and intent of Proposition 65.”

　　While most of the 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.

　　Contact ACA’s Javaneh Nekoomaram for more information.