1. arnoldporter.com Arnold & Porter LLP, All Rights Reserved. California Proposition 65 and Consumer Protection Developments Sarah Esmaili Rocky Mountain Dietary Supplement Forum September 15, 2016 1

2.  Proposition 65 – A refresher – The Beech-Nut decision – The Beech-Nut backlash Lawsuit challenging the lead safe harbor Agency’s “pre-regulatory” proposal to reduce lead safe harbor – Safe harbor warning overhaul – Other Developments  Slack Fill  “Made in USA” labeling claims 2 Agenda

3.  Requires warnings for exposures to any of over 800 listed chemicals, unless exemptions apply – Exposures do not exceed warning threshold levels (safe harbor levels) – Does not apply to businesses with less than 10 employees – Naturally occurring chemicals in foods are exempt – Preemption  Applies to any business in the chain of distribution (manufacturers, distributors, retailers, etc.) 3 Proposition 65 Refresher

4.  California AG/DAs can sue, as can private plaintiffs who first issue a valid 60-day notice letter  Plaintiff’s burden to bring a case is minimal: – Any detectable amount + no warning given – No need to show injury/actual harm  Burden then shifts to a business to prove a defense – Exposures fall below warning thresholds; preemption; naturally occurring chemicals in food; etc.  Plaintiff can seek injunctive relief, civil penalties (up to $2,500 per violation), and attorneys’ fees 4 Proposition 65 Refresher

5. Beech-Nut 5

6.  Lawsuit filed by Environmental Law Foundation  Lead in baby foods, fruit juices, packaged fruit, and vegetables  Plaintiff claimed products exceed the lead safe harbor of 0.5 mcg/day  Defendants won on the safe harbor defense at trial; defense victory upheld on appeal 6 Beech-Nut

7.  Three defenses raised — only one needed for defendants to win case: 1.Exposures to lead do not exceed 0.5 mcg/day safe harbor based on the “reasonably anticipated rate of intake or exposure by average users” *Defendants win on this defense only* 2.Lead is naturally occurring and exempt from Prop. 65 3.Lawsuit is preempted by a conflict with federal law 7 Beech-Nut

8. Beech-Nut: Safe Harbor Defense Average amount of lead in a particular product X Amount of that type of product consumed by average consumer when they eat it X Average consumption period of time over which a consumer eats the product type 8 0.5 mcg/day <

9. The Beech-Nut Backlash: The Litigation Front 9

10.  Mateel Environmental Law Foundation files lawsuit against OEHHA in January 2015  Seeks to invalidate lead safe harbor of 0.5 mcg/day as illegally adopted in 1989  California Chamber of Commerce and California Farm Bureau Federation joined litigation as Intervenors 10 Lawsuit Against OEHHA

11.  Warning thresholds described in the statute in narrative: – Listed Reproductive Toxicants: The exposure level that causes no observable reproductive effect, divided by 1,000 – Listed Carcinogens: Level causing no more than a 1 in 100,000 risk of cancer over a lifetime of exposure  Safe harbor levels for some chemicals published in regulations and quantified: – Presumptively valid – All expressed as micrograms of exposure per day 11 Prop. 65 Safe Harbors: The 10,000 feet view

12.  Safe harbors are based on a review of animal or human studies – Studies must be of “sufficient quality”  OEHHA has published safe harbors only for a minority of the 800+ listed chemicals  If no safe harbor is published, a business must prove the threshold in litigation 12 Prop. 65 Safe Harbors: The 10,000 feet view

13.  Mateel argues that PEL on which safe harbor is based results in blood lead levels causing reproductive harm  OEHHA and Intervenors defend the safe harbor as based on the level that would have no observable effect  Trial court ruling (April 11, 2016): OEHHA and Intervenors win; Mateel loses – Court defers to OEHHA’s scientific findings supporting decision to establish MADL of 0.5 mcg/day  Mateel has filed an appeal 13 Mateel Lawsuit Against OEHHA

14. The Beech-Nut Backlash: The Regulatory Front 14

15.  Administrative petition filed in July 2015 by Center for Environmental Health to repeal or lower the safe harbor level for lead  In response, OEHHA issues a “pre-regulatory” proposal on lead safe harbor and other topics in anticipation of future rulemaking 15 The Regulatory Front

16.  Lead: OEHHA proposes a matrix of different lead safe harbors – Safe harbors range from 0.2 mcg/day to 8 mcg/day – Levels depends on different intervals of exposures (e.g., once every day, once every two days, once every five days, and so on....)  Other reproductive toxicants: Safe harbor levels for reproductive toxicants other than lead could not be averaged over time 16 OEHHA’s Pre-Regulatory Proposal on Safe Harbor Levels

17.  Specifies naturally occurring levels for arsenic in rice and for lead in certain foods and beverages: 17 Other Aspects of Pre-Regulatory Proposal ChemicalFoodConcentration (parts per billion) Inorganic arsenic Lead White rice grain60 Raw leafy vegetables Raw non-leafy vegetables, fruit, meat, seafood, eggs, and fresh milk Brown rice grain 130 8.8 6.2

18.  Would specify that “average” exposure means the arithmetic mean only (precluding geometric mean, median, etc.)  Would not allow business to average test results across different lots of products (vs. from the same lot) – This lot-by-lot approach could necessitate warnings for some lots but not others 18 Other Aspects of Pre-Regulatory Proposal

19.  Public workshops held in Oct. 2015  Public comments submitted by businesses, trade groups, environmental groups, and Prop. 65 enforcers  Next steps by OEHHA? – OEHHA has not yet issued a formal proposal 19 OEHHA’s Pre-Regulatory Proposal

20. Prop. 65 Regulatory Amendment: Safe Harbor Warning Overhaul 20

21.  Original “safe harbor” warning regulations adopted over 20 years ago  Businesses that follow a safe harbor warning are deemed to be providing a “clear and reasonable” warning  Provides certainty to businesses 21 Prior Safe Harbor Warnings (Adopted in 1989)

22.  OEHHA amends safe harbor warnings after a long regulatory process  Finalized August 30, 2016; operative August 30, 2018  Implements one component of Governor Brown’s Proposition 65 “reform initiative” – Other elements of his initiative stalled, including litigation reform 22 Safe Harbor Warning Amendment

23.  On-product warnings must contain this triangle symbol – Warnings on the product label must be set off from other surrounding information and boxed off  For most other types of warnings, a business must name at least one chemical and specify whether that chemical is known to cause birth defects or reproductive harm, cancer, or both  Size and location specifications for other types of warnings (retail signs, internet warnings, etc.) 23 Safe Harbor Warning Amendment: Key changes

24. WARNING: Consuming this product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer and [name of one or more chemicals], which is [are] known to the State of California to cause birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov/food 24 New Warning Language for Foods and Dietary Supplements

25.  Warnings after the point of purchase are prohibited – Prior safe harbor warnings allowed a warning to reach the consumer before either use or purchase of the product – i.e., after the point of sale – Therefore, these would not be within the safe harbor: Package insert warnings Warnings on invoices On-product warnings for product shipped to internet or catalog customers – Points of purchase: on-product labels (for products sold in stores), retail signs, internet/catalog warnings 25 Warnings Must be Given Prior to Purchase

26. May Businesses Provide Supplemental Information to Contextualize the Warning?  YES, within certain limitations.  For safe harbor warnings, the warning content may contain supplemental information, but that information must be limited to identifying the source of the exposure or providing information on how to reduce exposure.  Other supplemental information might be permissible if it is not included as part of the warning content (i.e., package insert, website FAQ, etc.) 26 “Supplemental Information” for Warnings?

27.  Grandfathering of warnings in a court-approved consent judgment: “A person that is a party to a court-ordered settlement or final judgment establishing a warning method or content is deemed to be providing a ‘clear and reasonable’ warning for that exposure for purposes of this article, if the warning complies with the order or judgment.”  Important limitation: Grandfathering applies only to the parties to that consent judgment, the products covered in that consent judgment, and the exposure at issue in that consent judgment 27 Grandfathering Clause for Warnings in Court-Approved Settlements

28.  Other languages: Warnings must be provided in English, and if a product sign, label, or shelf tag used to provide a warning also contains consumer information in a language other than English, the Proposition 65 warning must also be provided in that language  Puts primary responsibility for warnings on suppliers rather than retailers – Retailers still have responsibility for private label products or if other exceptions apply  Tailored warnings for other types of exposures (consumer products other than foods/supplements, restaurants, etc.) 28 Safe Harbor Warning Amendment: Other Key Changes

29. Proposition 65: Other Developments 29

30.  Bisphenol-A emergency warning program – Provides for a special retailer-based warning program as an alternative to traditional safe harbor warning methods such as on- product warnings – Applies to hermetically sealed glass or metal canned and bottled foods and beverages – Requires suppliers to notify to the retailer BPA-containing products at issue – Retailers then post a special BPA-specific sign at the point of sale – Adopted May 11, 2016; expires October 18, 2016 unless readopted  Proposed extension to December 30, 2017 – Would require submission of product identities to OEHHA database if BPA is intentionally used – Comment period closes September 26, 2016 30 Other Developments in Prop. 65: BPA

31.  Recent listings of plant or plant-derived substances – Pulegone – Beta-myrcene – Goldenseal root powder – Aloe Vera, non-decolorized whole leaf extract  The “naturally occurring” defense under Proposition 65 may apply to these ingredients – Natural forms of these ingredients only (not synthetic, like synthetic pulegone)  OEHHA has proposed to list glyphosate – Lawsuits over “natural” products containing glyphosate  Aspartame has been proposed for prioritization by the Carcinogen Identification Committee 31 Other Developments in Prop. 65: Recent Listings and Proposals

32.  What are the litigation trends affecting the supplement industry? – Lead and cadmium in chocolate products (cocoa powder, dark chocolate bars, protein shakes and bars, etc.) – Lead and cadmium in ground spices – Lead and naphthalene in certain teas (wood-roasted) – Ginger products (crystallized ginger, ginger powder, etc.) – Lead in other types of dietary supplements (herbal products, pills, capsules, powders) 32 Other Developments in Prop. 65

33. Slack Fill 33

34.  The difference between the actual capacity of a container and the volume of product in it – False walls, air in packaging, etc. – Safe harbor exemptions  FTC can enforce under its authority to prevent deceptive packaging  Most claims brought under California’s slack fill law – In the past 10 years, more California slack fill cases have been brought by DAs than private plaintiffs 34 Slack Fill

35.  Guiding concept: protect consumers against the potential deception of “nonfunctional slack fill,” the empty space in a commodity package that has no legitimate purpose and that might deceive consumers into believing they are buying more than what they are actually getting – “No container wherein commodities are packed shall have a false bottom, false sidewalls, false lid or covering, or be otherwise so constructed or filled, wholly or partially, as to facilitate the perpetration of deception or fraud.” Cal. Bus. & Prof. Code § 12606(a) 35 California Definition of “Nonfunctional Slack Fill”

36. 1.Protection of the package contents 2.Requirements of the machines used for enclosing package contents 3.Unavoidable product settling during shipping and handling 4.Space for mandatory labeling 5.Container has value 6.Inability to increase level of fill or reduce size of package 7.“Reasonable relationship” between container and actual amount of product inside 8.Representation of actual size on the product container 9.Necessary space for mixing by consumers prior to use 10.Package contains a delivery or dosing device 11.Package contains component kit 12.Product is routinely displayed using tester or display units in retail stores 13.Holiday and gift packages 14.Free sample or gift 15.Package contains computer hardware and software 36 Slack Fill “Safe Harbors”

37. “Made in USA” Labeling Claims 37

38.  FTC standard: “all or virtually all” of a product be made in the United States, examining the foreign content of a product as a whole  Pre-2016 California standard: Much more stringent than FTC standard: – Prohibited statement when “any article, unit, or part thereof”—no matter how small—has been “made, manufactured, or produced outside of the United States” 38 “Made in USA” Labeling Claim

39.  California standard relaxed as of 1/1/16: – Allows foreign “articles, units or parts” to be up to 5% of “final wholesale value” of the product – Allows foreign articles, units or parts to be up to 10% if not available in the US (based on considerations other than cost) – Burden of proof is on the manufacturer 39 “Made in USA” Labeling Claim

40.  Regulations for “Made in California” define “final product’s wholesale value” and may be instructive – Direct and indirect material and labor costs – Costs of inputs, not prices charged by manufacturer – Indirect material and labor costs = overhead Some portion can be allocated to final wholesale value – Conservative approach would not include: Shipping costs for manufactured product Taxes on manufactured product Packaging used for shipping manufactured product – Very conservative approach would not include: Shipping or taxes on incoming materials 40 California Standard (Post 1/1/16)

41.  Caution: California’s standard for “final product’s wholesale value” differs from FTC’s – “cost of goods sold or inventory costs of finished goods” – which “generally are limited to the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead” 41 California Standard (Post 1/1/16)

42. 42 Your questions? Sarah Esmaili 415.471.3283 Sarah.Esmaili@aporter.com