Understanding Prop 65 for CPG Products
What, Why and How?
The e-commerce landscape is vast, constantly evolving, and full of regulations that sellers must navigate. There are so many pitfalls and things that can slip through the cracks, it’s difficult to keep up. The old phrase “you don’t know what you don’t know” certainly applies here. Even thriving e-commerce businesses fulfilling thousands of orders each month can overlook critical compliance issues if they aren’t proactive.
One regulation e-commerce merchants selling Consumer Packaged Goods (CPG) products need to prioritize is California’s Proposition 65, known as Prop 65. A byproduct of this legislation, and how common it is for a company to miss this requirement, has created a goldmine for some opportunistic players to capitalize on oversights by filing lawsuits. Ignoring Prop 65 requirements can be an expensive mistake, so brands must be proactive in figuring out if their products need specialized labeling or reformulation to meet California’s strict chemical regulations. Risk management in commerce comes in many forms, and complying and labeling for Prop 65 is a significant way to reduce your exposure to expensive lawsuits. While compliance may seem tedious, it’s a necessary part of running a successful e-commerce business.
In the world of commerce, Consumer Packaged Goods (CPG), also known as Fast-Moving Consumer Goods (FMCG), occupy a unique position. CPGs refer to products like food, beverages, and household items that are purchased and used up quickly, requiring frequent restocking. Unlike durable goods designed for long-term use, CPGs have a short shelf life, either due to high consumer demand or because they are perishable.
The CPG industry operates on razor-thin profit margins, relying on high-volume sales to turn a profit. Companies vigorously compete for consumer dollars, investing heavily in branding, marketing and promotions to make their products stand out. With such tight margins, effective supply chain management and inventory control are imperative for CPG companies. Getting products quickly and efficiently from manufacturing to store shelves is critical.
What is Prop 65?
Prop 65, formally known as The Safe Drinking Water and Toxic Enforcement Act of 1986, is a California regulation that requires businesses to disclose exposures to harmful chemicals. Specifically, it mandates that companies warn consumers about significant exposures to chemicals linked to cancer, birth defects, or other reproductive harm.
These concerning chemicals can be found in many consumer products, residential and work environments, and sources of environmental pollution in California. Prop 65 forces companies doing business in the state to be transparent about chemical exposures above certain thresholds, providing warnings to allow consumers to make informed choices.
The law has had a major impact since taking effect over 30 years ago, with Prop 65 warnings ubiquitous today on everything from food packaging to parking garages. Any company selling products in California must understand how their items could fall under Prop 65 regulations..
Who does Prop 65 benefit?
Prop 65 is intended to benefit the health and safety of California residents by requiring warnings about exposures to harmful chemicals. The goal is to protect and empower consumers from harmful chemicals, by mandating clear warnings on products they purchase. It also benefits workers in California, who are exposed to chemicals in the workplace. The unintentional side effect of any regulation like this, is litigation. Prop 65 allows for private citizens to sue companies for alleged violations. This creates an incentive for law firms to identify and litigate lack of warnings, and for opportunistic players who exploit regulatory gaps for financial gain. These individuals or entities are often referred to as “bounty hunters”. Their pattern is straightforward yet effective: they identify companies, particularly e-commerce businesses, that are not in compliance with specific regulations. Once they spot a violation, they file a lawsuit, capitalizing on the legal penalties and settlements that can ensue.
Why Prop 65 Matters to CPG Products
This isn’t just for companies in California. CPG brands operating in California or selling to consumers within the state, either through traditional channels or e-commerce, are directly impacted by Prop 65. Understanding and complying with Prop 65 is essential. It’s designed to protect consumers from harmful chemicals. So as a brand, you need to prove that you aren’t selling something harmful, and if you do have some chemicals present, that they’re below the standard level for concern.
Without Prop 65 compliance, you can also find yourself unable to sell in California, which is a huge market. California’s consumer market is larger than the GDP (gross domestic product) of some entire countries. In 2022, California and its 40 million residents had over $3 trillion GDP. That makes it the largest state economy in the US and the fifth largest economy globally. Noncompliance or a loss from a lawsuit for not having done Prop 65 testing and labeling can bar you from participating in this huge market, making a massive dent in your bottom line. The stakes here are high and ignorance isn’t an excuse.
One caveat – small businesses with fewer than 10 employees are exempt from Proposition 65’s warning requirements. However, this will not stop someone from filing a lawsuit against you. If you’re selling to a B2B retailer, the responsibility shifts to them. However, if your agreement with them has an indemnity clause, then the responsibility shifts back to you. Sometimes, the presence of an indemnity clause can lead to negotiation or mediation to resolve who pays what proportion of the costs associated with the lawsuit, especially if there are ambiguities about responsibilities for compliance.
The only true way to have them bypass you in their search for a noncompliant product is to have clear labeling showing that you’ve done your homework.
What if you receive notice of a potential (or filed) lawsuit over Prop 65?
The financial ramifications for non-compliance can be severe. Under Prop 65, penalties can range up to $2,500 per violation per day. When you consider the scale at which e-commerce businesses operate, the numbers can quickly become staggering.
One major Prop 65 settlement last year involved Starbuck’s and other coffee roasters paying $1.2 million in penalties and legal fees for not warning customers about acrylamide in roasted coffee beans. A smaller brand may discard that news as not applicable, but considering that the average out-of-court settlement for an alleged Prop 65 violation was approximately $85,000 in 2021, it’s something every brand needs to be concerned and proactive about.
When faced with a Prop 65 lawsuit, it’s imperative to act swiftly to protect your business interests.
Engage Legal Counsel Immediately
- Retain an attorney or law firm with experience in Prop 65 cases. Their specialized knowledge will be invaluable in navigating the nuances of the law and keeping your company from further impact.
- Before a lawsuit is officially filed, California law requires that businesses receive a “Notice of Violation.” Your attorney will assess the legitimacy and specifics of this notice. Often a notice is all you need to set you on the path of the testing checklist (see below) to solve the problem.
- Ensure you have all relevant documents pertaining to the product in question, including its manufacturing, distribution, and any prior testing results.
- Collect evidence that can demonstrate compliance or help in building your defense. This could include contracts with suppliers, past communications, and product safety tests.
- There is also a procedure for requesting a Safe Use Determination. A Safe Use Determination is a written statement issued by OEHHA that interprets whether specific sets of exposures require warnings.
- If the lawsuit alleges that your product contains chemicals above the permissible limits, consider re-testing the product through an accredited lab. This will either provide evidence for your defense or give clarity on the extent of the violation.
Have your Attorney Engage with the Claimant
- It’s best if you don’t engage personally, your attorney may contact the individual or entity that served the notice. This could lead to a quicker resolution without progressing to a full-blown lawsuit. Often the Violation Notice is served by someone that does this often, as a way to get companies to settle and make some quick cash without ever having to go to court.
Consider Reformulation or Relabeling
- If there’s evidence that the product violates Prop 65, you might need to reformulate it to eliminate or reduce the offending chemical. Alternatively, if the product cannot be reformulated, consider adding a clear Prop 65 warning label (and tell your attorney to settle quickly and quietly to keep this from blowing up into something bigger).
- Another option is to stop selling that particular product in California and restricting your e-commerce site so that IP addresses from there cannot see or purchase the product. Also restrict “ship to” addresses for California. This, however, eliminates a very large market of customers so be cautious in exploring the cost of compliance vs losing that customer base.
Settlement or Litigation
- Many Prop 65 cases are resolved through settlements. This often involves paying a fine, covering the claimant’s legal fees, and agreeing to reformulate or label the product. While settling might be less expensive and faster than litigation, it’s essential to weigh the potential brand impact.
- If you are selling to a retailer and you have an indemnity clause in your contract, the retailer can also require you to pay for a settlement in a lawsuit that was caused by your product.
- Litigation: If you believe the lawsuit lacks merit or that you have a strong defense, you may choose to defend the case in court. This path can be time-consuming and costly but may be the best option in certain scenarios.
Review Internal Processes
- Review: It’s a good practice to review and bolster your compliance procedures for the future. This could mean more rigorous product testing, vetting suppliers more thoroughly, or training staff on Prop 65 requirements. Labeling your packaging is going to ward off a lot of potential claims.
- Insurance Coverage: If your business has liability insurance, your policy may cover some of the legal costs or settlements associated with a Proposition 65 lawsuit. It’s important to review your insurance policy to understand what is covered.
Facing a Prop 65 lawsuit can feel overwhelming, but with meticulous documentation, expert legal guidance, and proactive measures, businesses can navigate this challenge. Moreover, by prioritizing compliance and continually updating processes, businesses can mitigate the risk of future violations and lawsuits.
Checklist to Ensure Prop 65 Compliance:
Getting your products tested and certified for Prop 65 compliance may seem daunting, but like anything else, you just need a checklist and some experience. After your first time, then you have the experience, so you just need the checklist.
- Identify High-Risk Products: Figure out which of your products might contain chemicals listed under Prop 65. This involves a deep dive into your supply chain, materials, and product components. Look at every detail, your product, components, ingredients, packaging and where they are sourced. You may have a product you don’t think has any risk but it’s manufactured or sourced somewhere it could have been contaminated.
- Select a Reliable Testing Lab: Once you’ve identified high-risk products, engage with a credible testing laboratory that specializes in Prop 65 chemical testing. Another pro tip is to ensure they’re well-versed with Electronic Data Interchange (EDI) for seamless data transmission to your suppliers as well.
- Start by visiting the official OEHHA website. While it may not provide a direct list of labs, it often gives guidance on testing procedures and requirements.
- Check with California’s Department of Public Health. They may have a list of accredited labs.
- Network with industry associations and groups. Get referrals from industry peers.
- Vet the potential labs.
- Check their accreditations. Make sure they have ISO/IEC 17025 which shows they meet international standards for testing and calibration.
- Ask for references to understand their experience, reliability and timelines for completion of testing.
Note: While there are several competent labs across the U.S., choosing a lab within California might be helpful as they’re likely to be more familiar with the nuances of Prop 65 and may offer faster turnaround times.
- Conduct Testing: Submit your products for testing. This will determine if they contain any of the listed chemicals and in what concentration. Pull samples of your products from multiple lot numbers and multiple expiration dates. Making sure there is a broad range of samples across all your SKUs tested is another way to prove proactive compliance.
- Review Results and Take Action: Once you receive the testing results:
- If your products are free from Prop 65 chemicals: Great! Prop 65 labeling requirements are generally not applicable. However, consider printing this on your product packaging and website to build consumer trust. If you have already produced packaging, consider having a small sticker created that your warehouse can put on each unit prior to shipping. For future products being produced, work with your packaging supplier to have the information pre-printed on the package. Getting this on your packaging will also head off anyone looking at your product and considering calling an attorney.
Some labeling options include:
- “No Prop 65 Warnings Required” or “Compliant with California Prop 65” on your label. This communicates to consumers and attorneys that you have evaluated your product and deemed a warning unnecessary.
- Prop 65 Compliant Icon – Using a symbol or icon signaling Prop 65 compliance provides clear visual evidence. Some companies opt for icons with a green check mark or 0/65 to affirm products meet requirements.
- If your products contain chemicals but below the warning threshold: No action is needed. However, continue monitoring and testing regularly. You may want to consider putting something on the label to ward off any potential lawsuits.
- If your products exceed the warning threshold: You must provide clear and reasonable warnings on your product, or reformulate the product to reduce or eliminate the chemical. Best practice is to work with your suppliers on changing the formulation. If this isn’t possible, you’ll have to put a warning label on your product which will hurt sales.
- Documentation: Ensure all test results, certifications, and related documents are systematically stored. Have your attorney craft a response to any inquiries that come in so that your response has been approved and less likely to result in an action against your company.
- Your website: For Internet purchases of a consumer product, in addition to labeling on the product itself, warnings can be provided by including a clearly marked hyperlink using the word WARNING on the product display page. For more information, see Questions and Answers for Businesses: Internet and Catalog Warnings.
Prop 65’s list of chemicals is continually evolving. Ensure you have mechanisms in place to stay informed about these updates.
The OEHHA, part of the California Environmental Protection Agency, is the primary entity responsible for Prop 65 implementation. Their website offers detailed information on Prop 65, including the current list of chemicals, FAQs, and recent amendments. You can also sign up for email notifications from the OEHHA to receive real-time updates on any changes to Prop 65.
Make sure to join associations related to your specific industry or networking groups from others in ecommerce so you have resources to ask questions of. After all, someone who has already been there can give you the checklist above as well as a name of an attorney or testing lab that they used.
While Proposition 65 is specific to California, its implications have a much bigger impact, especially given the state’s significant market size. By integrating regular checks into your supply chain and operational routines, you can ensure that your business remains compliant. In the realm of compliance as well as business in general, staying on top of these things is essential. Remember, being proactive rather than reactive can save time, money, and your brand’s reputation.