Companies that sell products, foods or beverages in California or that manufacture, supply or distribute products sold in California should review important new Proposition 65 regulations carefully and be sure to examine their compliance plans well before the operative date. Prudent companies will also take a close look at their contracts with others in the supply chain.

California's Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) is a right-to-know/warnings statute requiring that Californians receive a "clear and reasonable" warning before exposure to an ever-growing list of chemicals (over 900 currently) in consumer products, foods and beverages, workplaces and public places.

New regulations under Proposition 65 passed on August 30, 2016 after years of substantial input from stakeholders (see our earlier coverage of the new regulations here and here). The regulations are operative on August 30, 2018, though companies may use the new safe harbor warning language before that date.

In July 2017, California's Office of Environmental Health Hazard Assessment (OEHHA), which implements Prop 65, once again proposed new "corrections" to the new Article 6 regulations, but these changes, if passed, should not impact the August 2018 effective date.

Not just new warning requirements – allocation of liability is changing

Much of the commentary on the new regulations has focused on the new safe harbor warning language, including new short-form warnings and name-the-chemical warnings (see our alert). But there are arguably more important changes for some supply chain actors in new Article 6, Section 25600.2, governing the "Responsibility to Provide Consumer Product Exposure Warnings." That section allocates liability for Proposition 65 violations and, in the process, creates some uncertainties and potential pitfalls.

The change is intended to minimize retailer burdens, per section 25600.2(a). All retailers can benefit from the change, although small retailers will benefit most since, as a practical matter, most major retailers already shift obligations for Prop 65 compliance onto suppliers and manufacturers through indemnity agreements. Section 25600.2 clarifies the obligations of supply chain parties and puts the primary burden of Prop 65 warnings on the manufacturer, producer, packager, importer, supplier or distributor ("upstream entities"), and defines the only instances in which a retailer will be liable for a failure to provide a Prop 65 warning under the Act.

Allocating liability

The new section gives companies the option to shift liability by providing proper and compliant notice and warning materials, which, importantly, must include notice that the product requires an Internet warning if it will be or may be sold online, to the authorized agents of retailers, as described in 25600.2(b) and (c). In this situation, upstream entities would have an affirmative defense against liability to a Prop 65 plaintiff if the retailer then fails to provide the warnings.

In all other instances, however, the retailer would not be liable for a failure to provide the warning to consumers unless one of the circumstances outlined in Section 25600.2(e) exists. Among these:

• if the retailer fails to pass on the warning or obscures the warning given to it by the upstream entity
• if the product is a house brand or the retailer knowingly caused the listed chemical to be added to the product or
• if the retailer had "actual knowledge" of the potential exposure to a listed chemical and there is no better party to hold liable – ie, all upstream entities are exempt from Prop 65 or there is no jurisdiction against any of the upstream entities in California.

"Actual knowledge"

What will constitute a retailer's "actual knowledge" of potential exposure for purposes of asserting retailer liability under Section 25600.2 (e)(5) is likely to be litigated in the future. But the regulations define "actual knowledge" as "specific knowledge of the consumer product exposure received by the retail seller from any reliable source." 27 CCR 25600.2(f). OEHHA provides some additional guidance in the Final Statement of Reasons when it states: "a retail seller may acquire knowledge of an exposure that requires a warning through news media, its customers, or a trade association."

Bolstered indemnity power for retailers against upstream entities

New Section 25600.2(i) gives retailers and upstream entities the opportunity to allocate legal (meaning more than just contractual) responsibility for providing warnings, with statutory effect. In other words, agreements between retailers and upstream entities that provide for compliant warnings to consumers do not just provide contractual recourse against the indemnitor for the costs of statutory liability – these agreements may absolve one party of that liability. With proof of a valid agreement established, a court could actually dismiss a claim against the protected party.

This provision allows entities to allocate warning obligations differently than does the statute. The agreed-to obligations would replace the notice requirements in Section 25600.2. Importantly, however, this section only covers agreements between retailers and upstream entities, not between two non-retailers.

Many retailers have already drafted and sent to suppliers and distributors specific Prop 65 indemnification agreements, usually coupled with notices of compliance obligations. Typically, these demand notification of any products requiring warnings under the statute and/or allocate responsibility to provide warnings between the parties. But, although these may be binding contracts now, the statutory effect of such agreements under 25600.2(i) does not begin until the new regulations are operative, or August 30, 2018.

The importance of Internet warning notifications

When a product is sold online or through a catalog, the regulations and OEHHA's statements make clear that manufacturers and upstream entities cannot comply by just placing a warning label on the product. The upstream entities must provide a notice to the retailer regarding the need for an Internet warning (and must provide the language to use) should the product be sold online. In other words, retailers are only liable for the failure to provide an online warning for a product if they receive proper notice from an upstream entity that an online warning is required, along with the warning language to be used, and then fail to place the warning online. 27 CCR Section 25600.2(d) and (e)(4).

Some stakeholders have complained that this places an unfair burden on manufacturers or other upstream entities to pass along notice that an Internet warning is needed if the product is sold online, since upstream entities sometimes do not know where their goods will be ultimately sold, or whether they will be sold online. OEHHA has not responded to comments raising this issue.

Thus, a company selling to and providing notice to a supplier or distributor, not a retailer, should clearly indicate that the supplier/distributor must provide the same notice and materials to the retailer. Should the supplier/distributor fail to do so, the upstream entity that sold it the product would remain liable under Prop 65 based on failure to warn. Upstream entities should take a close look at their indemnity agreements with direct customers and seek to clarify the specific obligations relative to Prop 65 in such contracts.

Conclusion

The new regulations give tools that proactive companies can use to reduce their Prop 65 exposure. But potential pitfalls under the new regulations require companies to pay close attention to how the new rules work.

For more information, please contact either of the authors.