Wake Forest Law Review
14Feb

Supersize My Liability, Please: Prop 65’s Effect on the Average Consumer and Its Future in the Fast Food Industry

Categories: Current Issues Blog
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Hannah Shirar

California’s Proposition 65, commonly known as “Prop 65,” may be unrecognizable by name by U.S. consumers, but it nonetheless pervades U.S. markets and overall society. Prop 65 is the source of those pesky, off-putting warnings that state that the product you just purchased may expose you to “chemicals known to the State of California to cause cancer, birth defects or other reproductive harm.”[1] Despite its apocalyptic message, the warning appears on virtually all types of products—ultimately inundating consumers with this draconian memo.[2] For example, and perhaps ironically, such a warning against potential birth defects and reproductive harm has recently been spotted on baby mattresses and cradle cushions.[3]

The prevalence of Prop 65 labels can be traced back to its impetus for enactment. Following a series of oil spills which were minimally punished, California was left with severely contaminated land and water.[4] As a result of this contamination, Californians understandably developed distrust in their products and water sources,[5] but the EPA simply was not doing enough. Instead, Californians fought for some of that responsibility to fall to the companies contributing to that pollution.[6] This led to the adoption of the Safe Drinking Water and Toxic Enforcement Act (“Prop 65”) by public vote in 1986.[7]

Prop 65 “bars ‘any person in the course of doing business’ . . . from ‘knowingly and intentionally expos[ing] any individual to a chemical known to the state to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such  individual.’”[8] Interestingly, Prop 65 entitles private citizens “to sue alleged violators to enjoin future violations and obtain civil penalties for past violations.”[9]

The idea behind this scheme was to “coerce companies into replacing toxic chemicals with safe ones rather than bear the burden of a Scarlet Letter stamped on their products.”[10] However, despite this admirable goal, very different practical consequences have resulted.

Companies have largely made the decision to simply include the labels rather than testing and reformulating their products.[11] In short, businesses “fear citizen-enforcer lawsuits more than they fear freaking out customers.”[12] This has culminated in the flood of Prop 65 warnings we now see on nearly every product in the market—and, unfortunately,  this new norm is far from harmless to both businesses and consumers.

In addition to the exorbitant costs of defending against these cases,[13] many businesses are faced with frivolous lawsuits by opportunistic enforcers “preying on companies that can ill afford to defend themselves.”[14]

Moreover, the average consumer—often individuals who cannot even afford to act as citizen enforcers—likely pay the price for these large settlements and suits. On one hand, if the company decides to settle with a citizen enforcer, which is most often the case,[15] that company then does not have to take further accountability for the initial violation. In essence, if there is a deleterious chemical in its product, the company avoids disclosing it to most consumers—by and large, the average consumers—by paying out a settlement to the one enforcer.[16] On the other hand, if the company is unable to settle, the worst outcome for that business is legal damages to that enforcer, and adding a ubiquitous[17] Prop 65 label to its product. This added label is like a drop in the ocean of an oversaturated warning market. As a result, the average consumer is overwhelmed with warnings, contributing to significant fatigue[18] and the overall dilution of efficacy of these warnings.[19] Specifically, when consumers are constantly surrounded by warnings, these purchasers “become less attentive to labels as a whole, including some important aspects of labeling such as directions for proper use.”[20] This dilution is only exacerbated by the sheer volume of Prop 65 covered substances, which now recognizes over 1,000 chemicals,[21] with each offending product requiring its own label.

The ugly consequences that have flowed from Prop 65’s private enforcement model have been hotly debated in the context of fast food—and the California courts seem to be recognizing and attempting to backtrack some of the scheme’s problems.

Most recently, defendants[22] in California Chamber of Commerce v. Becerra[23]and California Chamber of Commerce v. Council for Education and Research on Toxics,[24] have petitioned the Supreme Court to grant certiorari to overturn a preliminary injunction which operates to prospectively bar other enforcers from suing fast food providers, such as McDonald’s and Burger King, over the presence of acrylamide[25] in their food and beverage products.[26] Notably, while the appellate court did not go so far as to define the temporal scope of the injunction, it did affirm that the injunction, at least applied to this particular case, as completely reasonable.[27]

This would seem to suggest that the problematic effects of Prop 65 have caught the attention of the courts and may be restricted as applied to fast food providers in the near future by judicial intervention. It is possible that this potential judicial intervention limiting Prop 65 may prompt legislation by the state of California to align with this narrowing attitude. Alternatively, these Prop 65 debates could induce the federal Congress to act, which would potentially preempt Prop 65 entirely through the application of the Dormant Commerce Clause. Time—and perhaps the Supreme Court—will only tell the future of Prop 65 in the fast-food industry.

[1] Geoffery Mohan, You See the Warnings Everywhere. But does Prop. 65 Really Protect You?, Los Angeles Times (July 23, 2020, 6 AM), https://www.latimes.com/business/story/2020-07-23/prop-65-product-warnings.

[2] See, e.g., id. (explaining that Prop 65 warnings are provided to Disneyland guests, parking garage patrons, hotel visitors, and notably, fast-food restaurant customers). See also @ryocoon, Twitter (Feb. 26, 2018, 3:37 PM), https://twitter.com/ryocoon/status/960975698390216705 (explaining that Prop 65 is “a running joke in California,” and that “everything requires a Prop 65 label, even the water we drink and the air we breathe”).

[3] See California Proposition 65, Nursery Works (2023), https://nurseryworks.net/pages/california-proposition-65; see also PB&Jammies, Cloth Diapers: Prop 65 Warning?, babycenter (July 17, 2014), https://community.babycenter.com/post/a51131158/cloth_diapers_prop_65_warning (explaining that parents spotted Prop 65 warnings on cloth diapers).

[4] Michael Waters, Prop 65 Was Meant To Protect Residents from Toxic Water. How did Warning Stickers End Up On Everything?, Vox (Oct. 31, 2019, 11:14 AM), https://www.vox.com/the-highlight/2019/10/24/20918131/california-prop-65-toxic-water.

[5] Id. (explaining that “in a 1986 LA Times poll, about 40 percent of Californians said they avoided tap water, many ‘out of concern for their health’”).

[6] Id.

[7] Id.

[8] Tobias J. Gillett, Lessons from Nutritional Labeling on the 20th Anniversary of the NLEA: Applying the History of Food Labeling to the Future of Household Chemical Labeling, 37 Wash. U. J.L. & Pol’y 267, 307 (2011).

[9] Chris McDonald, California Proposition 65 Litigation Update: Food and Beverage Warnings Cases Lead the Way, ABA Envtl. Litig. & Toxic Torts Committee Newsl., September 2006, at 5.

[10] Mohan, supra note 1.

[11] Id.

[12] Id.

[13] Id. (explaining that litigating Prop 65 enforcement has cost businesses more than $370 million in settlements since 2000).

[14] Id.

[15] Trenton H. Norris, Consumer Litigation and FDA-Regulated Products: The Unique State of California, 61 Food & Drug L.J. 547, 550 (2006) (explaining that “almost all Proposition 65 claims are settled before trial, many without substantial litigation”).

[16] See, e.g., id. (explaining that settlements do not necessarily result in a printed warning to other consumers, but instead just “a payment to the enforcer and her counsel in exchange for the agreement not to sue”).

[17] The warning label placed on these products have also been criticized as failing to actually apprise consumers of the risk. See David B. Fischer, Proposition 65 Warnings at 30—Time for A Different Approach, 11 J. Bus. & Tech. L. 131, 145 (2016) (explaining that “[t]he warnings lack the specificity necessary to ensure that the public receives useful information about potential exposures and encourage businesses to provide a warning even when none is required,” and “[t]hey ‘focus more on the identification of potential hazards than on helping consumers develop an understanding of the magnitude and probability of a potential hazard than can be used for informed decision making’”).

[18] Baylen J. Linnekin, The “California Effect” & the Future of American Food: How California’s Growing Crackdown on Food & Agriculture Harms the State & the Nation, 13 Chap. L. Rev. 357, 385 (2010).

[19] See Lars Noah, The Imperative to Warn: Disentangling the “Right to Know” from the “Need to Know” About Consumer Product Hazards, 11 Yale J. on Reg. 293, 297 (1994).

[20] Id.

[21] See Office of Envtl. Health Hazard Assessment, Chemicals Known to the State to Cause Cancer or Reproductive Toxicity, Jan. 27, 2023, https://oehha.ca.gov/proposition-65  (last visited Feb. 8, 2023).

[22] Notably, the Council for Education and Research on Toxics, or CERT, joined the state as Defendant in the following cases. Thus, the following two cases involve the same conflict and parties despite their differing names. See California Chamber of Com. v. Becerra, 529 F. Supp. 3d 1099, 1103 (E.D. Cal. 2021).

[23] 529 F. Supp.3d 1099 (E.D. Cal. 2021).

[24] 29 F.4th 468 (9th Cir. 2022).

[25] Acrylamide is one of the chemicals covered by Prop 65 and is prevalent in fried foods. Office of Envtl. Health Hazard Assessment, supra note 21.

[26] Becerra, 529 F. Supp.3d at 1123 (“While this action is pending and until a further order of this court, no person may file or prosecute a new lawsuit to enforce the Proposition 65 warning requirement for cancer as applied to acrylamide in food and beverage products . . .  [and] [i]t applies to the Attorney General and his officers, employees, or agents, and all those in privity or acting in concert with those entities or individuals, including private enforcers.”)

[27] Council for Education and Research on Toxics, 29 F.4th at 483.

Photo by Rajesh TP via Pexels

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18Apr

Fourth Circuit Holds Maryland Anti-Price Gouging Statute Violates Dormant Commerce Clause

Categories: 4th Cir. Blog Weekly Roundup
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By: Adam McCoy & Shawn Namet

On April 13, 2018, the United States Court of Appeals for the Fourth Circuit published an opinion in Association for Accessible Medicines v. Frosh.  The Court reversed the district court’s dismissal of the dormant commerce clause challenge brought by the Association for Accessible Medicines (“AAM”) to a Maryland statute intended to prohibit price gouging in the sale of prescription drugs. The Court held that the statute violates the dormant commerce clause because it directly regulates transactions that took place outside of Maryland.

Facts and Procedural History

During the 2017 legislative session Maryland’s legislature passed HB 631, “An Act concerning Public Health – Essential Off-Patent or Generic Drugs – Price Gouging – Prohibition” (“The Act”).  Maryland’s governor refused to sign the bill, but the bill was enacted over his refusal. The Act prohibits manufacturers or wholesale distributers from “engag[ing] in price gouging in the sale or an essential off-patent or generic drug.”  Md. Code Ann., Health-General § 2-802(a).  The Act prohibited the “unconscionable increase” in the price of drugs, defined as price increases that are “excessive and not justified by the cost of producing the drug or the cost of appropriate expansion of access to the drug to promote public health” such that consumers are left with “no meaningful choice about whether to purchase the drug at an excessive price” due to the drug’s “importance . . . to their health” and “[i]nsufficient competition in the market.”  Id. § 2-801(f).  “Essential” drugs are those “made available for sale in [Maryland]” included “on the Model List of Essential Medicines most recently adopted by the World Health Organization” or are “designated . . . as an essential medicine due to [their] efficacy in treating a life-threatening health condition or a chronic health condition that substantially impairs an individual’s ability to engage in activities of daily living.”  Id. § 2-801(b)(1).

Violations of the Act could carry a penalty of $10,000 per violation.  The Act also authorized actions to enjoin the sale of a given medication at the increased price.  To assist with enforcement, the Act permitted the Maryland Medical Assistance Program to bring potential violations to the attention of the Maryland Attorney General.  The Medical Assistance Program was authorized to notify the Attorney General in the event prices rose above thresholds provided by the Act.

AAM, an organization of pharmaceutical companies including drug manufacturers and distributors, challenged the statute in the United States District Court for the District of Maryland.  Only one of the manufacturers in AAM covered by the statute was based in Maryland.  These manufacturers sold their products to wholesale distributors, none of which are based in Maryland, and the majority of these sales took place in states other than Maryland.  AAM challenged the statute on the grounds that it violated the dormant commerce clause and that it was unconstitutionally vague.  The district court granted Maryland’s motion to dismiss the dormant commerce clause claim but denied the motion as to the vagueness claim. 

The Act Violates the Dormant Commerce Clause

AAM asks the Fourth Circuit to overrule the district court decision dismissing AAM’s claim that the Act violated the dormant commerce clause by directly regulating wholly out-of-state commerce.  The Fourth Circuit outlines the Supreme Court precedent that governs the existence and application of the dormant commerce clause.  Implicit in the power given to Congress through the textual commerce clause is a corollary power to constrain states from enacting legislation that interferes with or burdens interstate commerce.  This doctrine is known as the dormant commerce clause and is designed to prevent state economic protectionism and to prevent states from enacting “regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.” Brown v. Hovatter, 561 F.3d 357, 362 (4th Cir. 2009).

Within the dormant commerce clause is the principle against extraterritoriality that “a State may not regulate commerce occurring wholly outside of its borders.” Star Sci., Inc. v. Beales, 278 F.3d 339, 355 (4th Cir. 2002).  The Fourth Circuit walks through several Supreme Court cases that established the elements of the principal against extraterritoriality, but there are essentially three restrictions from the principal against extraterritoriality.  (1) State statutes may not regulate commerce that takes place wholly outside the state’s borders, whether or not the commerce has effects within the state; (2) State statutes that directly control commerce occurring wholly outside the legislating state’s boundaries are invalid; (3) Courts may invalidate a state statute if the statute may interact with legitimate regulatory schemes of other states to cause inconsistent legislation arising from projection of one state regulatory regime into the jurisdiction of another state.

The Fourth Circuit first rejects a reading of Supreme Court precedent offered by Maryland that the principle against extraterritoriality is limited to the context of price affirmation statutes.  The Fourth Circuit rejects Maryland’s interpretation, which was shared by two other circuits, and holds the principle against extraterritoriality is violated if the state law “regulates the price of any out-of-state transaction, either by its express terms or by its invariable effect.” Pharmaceutical Research & Manufacturers of America v. Walsh, 538 U.S. 644, 669 (2003).

Next, the Fourth Circuit agrees with AAM’s argument that the district court was wrong in upholding the Act and agrees that the Act violates the dormant commerce clause by directly regulating prices for prescription drugs in out-of-state transactions, even though the provisions are not triggered until the drugs are offered for sale in Maryland.  The Fourth Circuit holds the Act violates the dormant commerce clause because the Act is not triggered by any conduct that takes place in Maryland and the price controls apply outside of the state.  Additionally, the Act has the potential to create a significant burden on the interstate commerce of prescription drugs.

The Fourth Circuit focuses on the plain language of the statute to find it regulates conduct that takes place outside of Maryland and does not even require that conduct actually occur within Maryland.   The Act applies to price gouging of “essential off-patent or generic drug[s]” but only requires they be made available for sale in Maryland, not that any sale actually occur.  The Act specifically targets the gouging of prices that occur outside of Maryland.

The impact on transactions outside of Maryland also causes the Act to violate the dormant commerce clause.  The Act is not concerned with the price Maryland consumers pay for the drugs, but instead focuses on the price the manufacturer or wholesalers charge at the initial sale of the drug.  It then measures that price against the price increase to determine if it is an “unconscionable” increase because it is not justified by the cost of product the drug or expanding access to the drug.  The Fourth Circuit found this compelled manufacturers and wholesalers to comply with Maryland law outside of Maryland since the majority of the initial sales of the drug take place outside of Maryland.  It violates the dormant commerce clause for the Act to attempt to penalize a manufacturer or wholesaler based on what they charge for a drug outside of Maryland.

The Fourth Circuit was also concerned by the burden this type of legislation would create on interstate commerce if it was enacted by other states.  The Fourth Circuit relies on Healy v. Beer Inst., 491 U.S. 324, 335–36 (1989) to support that it must consider how the statute would interact with legitimate regulatory schemes of other states and what effect would arise if other states implemented similar statutes.  Particularly concerning is the possibility that similar restrictions imposed by other states could cause drug manufacturers and wholesalers to be subject to conflicting price requirements.  The pricing of the drug in one state could be illegal based on laws, such as the Act in Maryland, of another state.  The Fourth Circuit found this was precisely the type of conflict the dormant commerce clause exists to prevent.

Conclusion

The Fourth Circuit reversed the district court’s decision and found the Act is an unconstitutional violation of the dormant commerce clause.  The Fourth Circuit remanded the case to the district court to enter judgment for AAM.

 

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26Jan

Fourth Circuit Upholds “Certificate of Need” Health Care Program

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By Kayleigh Butterfield

On January 21, 2016, in the published civil case Colon Health Centers v. Hazel, the Fourth Circuit affirmed the Eastern District of Virginia’s decision upholding the constitutionality of the state’s certificate of need (“CON”) program. Colon Health Centers of America and Progressive Radiology (“Appellants”) argued that Virginia’s CON law violates the dormant Commerce Clause of the United States Constitution. However, the Fourth Circuit held that the CON program does not discriminate against out-of-state companies and does not create excessive burdens on interstate commerce in relation to its local benefits.

A Contested Approach to Health Care

Similar to 35 other states, Virginia has adopted a “certificate of public need” requirement for medical service providers who seek to establish or expand operations within the state. The CON program requires, for various public policy and health reasons, that applicants show a sufficient public need for its establishment in any given area. The application process involves a “batching” system whereby health-planning agencies conduct initial investigations into a batch of various company applications before making a recommendation to the Department of Health (“Department”). The Department is then responsible for determining whether a public need for the given program has been demonstrated and, if it has, issuing a certificate to the applicant.

Appellants are out-of-state medical providers who initially brought suit against the Commonwealth under the dormant Commerce Clause and the Fourteenth Amendment’s Equal Protection, Due Process, and Privileges and Immunities Clauses. The district court dismissed the entire suit for failure to state a claim. The Fourth Circuit reversed the dismissal of the dormant Commerce Clause claim and remanded the case for discovery. After extensive discovery, the district court granted summary judgment for the Commonwealth.

No Interstate Discrimination

The Fourth Circuit noted that a state law could discriminate against interstate commerce facially, in effect, or in purpose. Here, Appellants did not allege facial discrimination. Similarly, the Fourth Circuit quickly disposed of any discriminatory purpose, noting that the CON program is primarily designed to improve the overall function of Virginia’s health care system.

Appellants also alleged that the effect of the CON program systematically advantages in-state companies as opposed to those out-of-state. Pointing to the State’s expert testimony at trial, the Fourth Circuit noted that statistics do not show any unfair advantage against out-of-state providers. The Fourth Circuit further distinguished Appellant’s expert testimony by observing that this evidence only established that the program favored incumbents over new providers. The Fourth Circuit explained that advantages for or against incumbents are not relevant to the dormant Commerce Clause analysis involving in-state and out-of-state entities.

Burdens on Interstate Commerce Not Excessive

The Fourth Circuit went on to examine whether Virginia’s CON program might still excessively burden interstate commerce in relation to its proposed benefits. To carry out this analysis, the Fourth Circuit employed the balancing test from Pike v. Bruce Church, Inc. under a rational basis standard of review. While the Fourth Circuit acknowledged that Appellants made fair arguments regarding potential burdens, the court ultimately held that the burdens did not outweigh the program’s significant interests in bettering the state health care system. The Fourth Circuit also noted that this balancing of interests is better handled by the legislative branch, which is representative of the Commonwealth itself.

Affirmed

The Fourth Circuit determined that Virginia’s CON law neither discriminated against out-of-state health care providers, nor created excessive burdens on interstate commerce that would warrant judicial intervention. The district court’s grant of summary judgment for the Commonwealth was therefore affirmed.

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