By Thomas H. Clarke Jr.
Summary: The following article is modified from its publication last fall in “The Environmental Report,” a newsletter of San Francisco law firm Ropers, Majeski, Kohn & Bentley. It’s the first in a two-part series looking at the affect of a clause in California’s Proposition 65, which regulates contaminants in drinking water, that allows citizen enforcers to sue on behalf of the state. This first part is from the view that a form of “legalized extortion” has emerged as a result. The second, by representatives of the Center for Environmental Health, is from the perspective “regulation by litigation” offers a legitimate way to ease the burden on overtaxed government oversight agencies. You see them everywhere in California.
From signs tacked onto shelves of hardware stores to quarterly advertisements in newspapers, businesses warn their products may contain chemicals “known to the State of California” to cause cancer or be a reproductive toxin.
These warnings are posted because of a 1986 public initiative measure called “Proposition 65.” Its terminology is vague, and the state’s courts are only now defining the breadth of its reach. Many “out-of-state” businesses have had to face its potential liability if they want to sell into California’s large market.
This overview describes how Prop. 65 is used to harass business and seek “green-mail.” Also described is the game plan used by most plaintiffs and steps necessary to support a meaningful defense to often baseless allegations.
Summary of the law
Added to California’s Health and Safety Code, Proposition 65 appears to be a simple warning statute. Nevertheless, it has created anger and confusion on the part of business which, already complying with existing federal hazard communications statutes, must add still another warning to an already over-crowded label if they plan to sell in, or if their product might reach California.
Despite the law’s vagueness and a risk-assessment methodology unrelated to those used in other federal and state environmental programs, business has been able to cope with the law due, in large part, to the common sense enforcement practices of the California Attorney General’s Office.
However, an unintended result of the law has been the rise of so-called public interest entities and their covey of so-called public interest law firms whose goal is “green-mail.” Their entry into the litigation process is permitted by California Health and Safety Code §25249.7; this law provides that if the attorney general or specified district or city attorneys fail to act against an alleged violator of Prop. 65, any citizen may commence an action.
Thus, to start “the process,” the green-mailer sends the requisite 60-day “notice of intent” to the alleged violator, to the California attorney general and to district or city attorneys of counties within which the violation(s) are alleged to have occurred. Since none of the public agencies involved have resources to respond to every notice received, most notices are ignored. The green-mailers can then launch their lawsuit, thriving on the low rate of response by state and local authorities.
“Private attorneys general” (as they are sometimes called), a.k.a. “bounty hunters” (a phrase coined by a member of the Prop. 65 enforcement team of the State Attorney General’s Office) are not new. Citizen-suit provisions exist in many federal environmental laws, and were the model for part of Prop. 65. The federal provisions were initially enacted to provide a means to force supposedly moribund and uncaring government agencies into long overdue action; they reflected a power struggle between the Congressional and executive branches of government, each often dominated by different political parties. The federal provisions have since been expanded to allow private actions involving allegedly contaminated environmental conditions at specific sites or to specified environmental media (e.g., surface waters, air).
However, a key difference between federal provisions and Prop. 65 is the issue of “standing.” In federal court, a plaintiff has to have a constitutionally defined “vested interest” in the litigation; the plaintiff must have suffered what’s called a cognizable harm. Not so with Prop. 65. No “harm” to any plaintiff needs to have occurred. The plaintiff need not have suffered actual harm because California’s courts don’t require “standing” in Prop. 65 matters. Thus, bounty hunters are free to roam, looking for green-mail targets.
Some bounty hunter groups act in concert with their attorney to try and extort enormous payments and fees from businesses while courts, legislators and bureaucrats look the other way. Recent litigation between so-called public interest groups and their former attorneys has exposed the incestuous interrelationship; often the public interest group is nothing more than a crude front or “beard” for the attorney.
It also appears that plaintiffs in Prop. 65 cases appear to work from the same business model of litigation; the cookie-cutter similarity in tactics used by these bounty hunters highlights their standard strategy. The following scenario is illustrative of a typical citizen suit under Prop. 65. First, most businesses the bounty hunter targets already comply with existing federal “right to know” laws and regulations; bounty hunters are very good at combing federal and state data bases to identify potential targets. Second, most targets are also aware of Prop. 65 and its prohibition against “knowingly and intentionally” exposing users of their “products” without a “clear and reasonable warning.”
Few are ever told, however, unless they make a habit of reading the California Code of Regulations and keeping up-to-date through its arcane regulatory notice provisions, that a chemical deemed benign yesterday is deemed a carcinogen or reproductive toxin today. Many wonder how small, highly transient theoretical exposures can rise to the level of risk set by the law. Few appreciate that Prop. 65 assumes the worse and hypothesizes a continuous 70-year exposure at the level of the worst instantaneous exposure rate.
From this grave distortion of reality, the law then quantifies whether a threshold risk, often referred to as the “one in one hundred thousand” or “ten to the minus five” level, has been surpassed for specified categories of harm (e.g., cancer).
Litigation process—the demand
In the typical situation, the group’s attorney responds to the target’s inquiry into the meaning of the 60-day notice with a carrot-stick approach. First, the target is informed it hasn’t been compliant for at least the last three years, meaning the potential penalty for such a violation is nearly “three million dollars” per product. All the group wants, goes the patter, is a calculation of the sales figures of the targeted business. This is “needed” so the bounty hunter can fix the amount of “penalties, fines, and restitution.” The group’s attorney warns the target not to withhold anything, since his group “already has access to the information” and wants simply to verify it.
If the target provides the information sought, it’s told for the first time the bounty hunter has devoted “many hours” of investigation and research so that $[fill in the blank], “a significant discount from the potential penalty,” will fund the monetary aspect of a settlement agreement. The second prong of the settlement demand will be that the target has to either feature a “Prop. 65 warning” on its labels or change the nature of its product to conform to the bounty hunter’s subjective opinion of what’s marketable under the law without a warning.
Citizen group initiates lawsuit
The typical pattern in response to any negotiating effort short of outright surrender is to file a lawsuit, usually venued in one of the more stereotypical liberal counties of the state such as San Francisco or Marin. However, plaintiffs are beginning to be surprised by the hostile reception they receive from many of these judges, who recognize abuses to which the law is being put. The complaint will contain required pleading elements, including an allegation of the target’s “ongoing failure” to post the “required warning.” The relief sought will be injunctive and monetary (e.g., penalty provisions of Prop. 65).
Because of a recent California Supreme Court ruling on the Unfair Business Practices provisions of state law, the complaint puts an additional twist in the mix. The target is also sued for “unfair competition” in violation of Business and Professions Code section 17200. The theory is simple: By violating Prop. 65, the target is taking unfair advantage of its competitors (The complaint against the competitors, who are typically being sued simultaneously, also claims they’re taking advantage of everyone else).
Discovery of target’s customers
Promptly upon the target filing of its defensive pleadings, the bounty hunter launches into “discovery,” the process by which one party seeks documents, asks written questions and conducts depositions (formal questioning before a court reporter) of the other party. The central focus of all “discovery” is the target’s customer list. In the majority of cases, bounty hunter targets are small-to-medium-sized businesses because they often have fewer resources to apply to litigation defense. Its customers and their satisfaction are the target’s lifeblood; the list is, or should be, a trade secret.
The typical bounty hunter response to a trade secret objection is to offer a “solution” in the form of a confidentiality stipulation to be ultimately signed by a judge. The objective, the target is told, is for the citizen suit group to make sure that the target’s customers, typically retailers, are themselves obeying the law. It goes on to promise to keep the list away from the target’s competitors.
Keep in mind the target’s “failure to warn” is merely the bounty hunter’s subjective opinion, nothing more. Unless the target is prepared to hit the ground running and use discovery tools quickly to ascertain the substance, if any, of the plaintiff’s case, the target is at a significant disadvantage. It’s negotiating blind.
Bounty hunters can allege all types of information and knowledge without fear of contradiction. They try no cases. Trials are, after all, risky and expensive. Their objective is to settle. What better way to settle than to threaten to go to the people on the customer list and allege the customers themselves are in violation of Prop. 65 for retailing the target’s improperly labeled product? Because of this type of sequencing, it’s important for targets to examine the plaintiff’s case thoroughly as soon as possible; understanding the technical and legal weaknesses of most green-mailer’s cases provides a meaningful negotiating tool that can counter-balance the explicit and implicit threats made.
The settlement demand
As noted, most cases currently settle. Often, there remains a question about the amount of the settlement which the bounty hunter is willing to accept, and how that payment is to be divided between a) “attorney’s fees and costs,” b) fines and penalties and c) contributions to environmental entities. Under the law governing citizen suit actions, environmental recoveries are supposed to be divided three ways. Half goes to the state as penalties and restitution, a quarter to environmental agencies, and a quarter to the bounty hunter for their expenses for acting “in the public interest.”
It’s at this stage bounty hunters suddenly become reasonable to avoid limitation on its portion of the recovery. It offers to lower its demand by waiving all penalties, fines and restitution and agreeing to “accept” under the monetary portion of the settlement agreement an amount equal to the plaintiff citizen group’s expenses and attorney’s fees and costs. With potential penalties of $2,500 per day, such settlement offers can appear attractive. Changes in product composition are often agreed to also.
The irony of the system is that the citizen suit groups often end-up with some play money for their favorite projects and for chasing more targets, and their attorneys receive significant fees. The public treasury gets nothing. A modified product may end up being marketed, but public health statistics tell us that such changes, even when summed together, are mostly insignificant static in any causation analysis examining the causes of death and morbidity in today’s society.
Good offense is best defense
If immediate surrender isn’t an option a target wants to adopt, then three actions need to be undertaken once first contact is made, whether it’s a pre-notice-of-intent phone call or letter, or the notice-of-intent itself. First, an analysis of the means and methods by which exposure to a listed substance might occur needs to be identified. Using the various risk assessment methods noted in the regulations, an evaluation needs to be made regarding whether an actionable threshold might have been crossed. This evaluation will also help in the third step, noted below.
Second, once a complaint has been filed, removal needs to be considered. Some bounty hunters are filing cases serially, rather than naming all defendants in one large lawsuit; they may hope to avoid concerted defense actions and joint defense agreements. Since removal belongs to the defendants in a lawsuit as a group, single company filings allow the consideration of removal. Federal courts have more rigorous standing requirements that are applicable to all actions. Also, federal summary judgment rules permit meaningful attacks on plaintiff’s often flimsy case. Removal can be a meaningful aspect of an overall litigation defense strategy, but is highly dependent on the nature of the plaintiff’s pleadings.
Finally, once a complaint is filed, discovery needs to be initiated immediately. Having already examined the significant factors determining exposure, the plaintiff’s case can be examined with a most critical eye. Often there’s little actual analytical work undertaken. Some plaintiffs do naught more than read staff reports filed with state agencies as part of the Prop. 65 regulatory process (reports which often identify industries in which a substance may be used), and thereafter search computerized databases for companies with appropriate SIC codes. Breach of the thresholds, thus triggering labeling requirements, is often supported by little more than hypothetical smoke-and-mirrors. Understanding the flimsy nature of the plaintiff’s case provides an excellent defense and helps even the litigation playing field.
For more information
The author’s website on environmental data and information can be found at http://www.ropers.com/tools.htm
About the author
Thomas H. Clarke Jr. is chair of Ropers, Majeski, Kohn & Bentley’s Environmental Practice Group. His law degree is from the Boalt Hall School of Law, University of California and he holds a master’s degree in environmental science from George Washington University. He has over 20 years of experience in the field of environmental law. Clarke can be reached at (650) 364-8200, (650) 367-0997 (fax) or email: [email protected]