[Special thanks for this guest blog from Wendel Rosen attorney Wendy Manley.]

Those on the forefront of the burgeoning cannabis industry are a bold lot, striking out into the frontier of new, shifting and unanticipated regulations. While these pioneers may have know-how in cultivating, developing and marketing new cannabis products, they likely never imagined the tangle of regulations they would need to manage. Perhaps chief amongst those is the Safe Drinking Water and Toxic Enforcement Act, more commonly known as Proposition 65, or “Prop 65.” Prop 65 is the law behind that sign you’ve seen for more than 30 years in California warning that some thing or place may contain chemicals known to the state to cause cancer or reproductive harm. Many cannabis products, as it turns out, are subject to Prop 65.

Prop 65 requires businesses to provide a warning to Californians of potential exposure to a chemical on the State’s Prop 65 list. Failing to do so leaves a business vulnerable to expensive enforcement action, most of which occurs at the hands of an aggressive citizen contingent (plaintiff’s attorneys) rather than by the state or an agency. While the responsibility for providing the warning rests primarily with the manufacturer, every party in the chain of commerce is potentially liable, including unsuspecting retailers.

Any cannabis business needs to consider whether any listed chemicals in their products could cause an exposure and trigger the warning requirement. Chemicals listed by the state number well over 900, and “marijuana smoke,” not surprisingly, is one of them. As with other consumable products (most notably food), there is a potential for exposure to listed pesticides and metals. A number of cannabis edibles have been stung for cadmium and lead, which appear to have originated in chocolate ingredients. In addition to cannabis products themselves, paraphernalia used for smoking cannabis should also be labeled for exposure to cannabis smoke and possibly other chemicals. More generally, various pthalates and metals such as lead and cadmium seem to be showing up in a vast array of products.

Prop 65 warnings must be “clear and reasonable,” a subjective standard if ever there was one. Fortunately, the regulations provide some specifics for both warning content and the method for transmitting the warning. A warning in conformance with the regulations is deemed “clear and reasonable.”

But – the warning regulations have recently changed, leaving some who previously complied now exposed to litigation. The warning must now state a product “can expose you to chemicals” rather than simply that it “contains chemicals.” It also must name at least one listed chemical for each endpoint (cancer or reproductive toxicity), which requires closer examination of the potential chemicals. The regulations now require a reference to the new Prop 65 webpage and sharply restrict additional information in the warning.

In addition to the specific wording, the regulations include parameters for the appearance of the warning, which vary depending on the product or circumstances. Food warnings, for example, need to be placed in a box, while non-food warnings require a yellow triangle symbol enclosing an exclamation point. Signs posted in designated smoking areas must be 8.5 x 11 inches and contain the warning in 22-point type within a box. And Internet warnings must be provided before purchase. As these examples illustrate, there are a lot of details, and the devil is definitely in those details.

While applying the regulations can be a tedious and nuanced process, those who have weathered the cost and turmoil of an enforcement action understand the risk of taking the matter lightly. The cost of resolving a citizen suit is significant under the best of circumstances. Even if a matter is settled without litigation, defendants must pay the attorneys’ fees of their accusers in addition to penalties, and so typically face paying tens of thousands of dollars without ever mounting a serious defense.

The new warning regulations took effect August 31, 2018. It is high time for everyone in and out of the cannabis industry to carefully review their compliance with Prop 65, and consider getting help with interpreting the regulations for their particular circumstances.

[Author note: this post was written by Wendel Rosen attorney Wendy Manley.]

Just weeks after a court determined that a Proposition 65 (Prop 65) warning is required for acrylamide in coffee, a California appellate court ruled a warning is NOT required for acrylamide in breakfast cereals.  Acrylamide is listed as a carcinogen by the State of California and, consequently, a warning must be provided before exposing California consumers to acrylamide.

Warning exemption pending for acrylamide in coffee 

Not surprisingly, the coffee decision created a high degree of confusion and disbelief among dedicated coffee drinkers who, just months earlier, embraced the good news that coffee may protect against certain cancers.  In June, the International Agency for Research on Cancer (IARC) released a monograph that reviewed more than 1,000 studies of coffee and cancer.  IRAC concluded that coffee is associated with a reduced risk of liver and uterine cancer and there is inadequate evidence that coffee causes cancer.  In other words, the scientific studies show that while acrylamide causes cancer, coffee — which contains acrylamide — does not.

Recognizing that the Prop 65 warning requirement cannot be reconciled with the science, OEHHA (the Office of Environmental Health Hazard Assessment) immediately proposed a new (and still pending) regulation exempting coffee from Prop 65 warning requirements with respect to acrylamide and certain other chemicals.  The proposed rule states: “Exposures to listed chemicals in coffee created by and  inherent in the processes of roasting coffee beans or brewing coffee do not pose a significant risk of cancer.”  In its Initial Statement of Reasons supporting the rule, OEHHA identifies other Prop 65 chemicals formed in the brewing of coffee that would be encompassed by the exemption, including acetaldehyde, furfuryl alcohol, formaldehyde, naphthalene, and several chemicals with polysyllabic, tongue-twisting names.

The coffee research highlights a gap in Prop 65’s science: the mere presence of a chemical known to cause cancer (even at levels above what is believed to be safe), does not necessarily equate to a risk of cancer from exposure to an item that contains that chemical.  Most products, unlike coffee, have not been exhaustively studied for cancer risk, and few manufacturers either have or are willing to expend the resources necessary to undertake a comprehensive risk assessment to determine whether a product containing a Prop 65 chemical in fact presents a risk of cancer or reproductive toxicity under Prop 65.  As a result, many warnings are not supported by science, and some may not be supportable were the research performed.  To add further uncertainty, OEHHA has not established “safe harbor” levels for most of the more than 900 chemicals listed under Prop 65, making it even more difficult for manufacturers to complete a risk assessment.

OEHHA will hold a hearing on the proposed coffee warning exemption on August 16, 2018, and will accept comments through August 30, 2018.  Follow developments on the OEHHA website.

Warning requirement for acrylamide in breakfast cereal preempted

In another recent decision, a court determined that Prop 65 warnings are NOT required for breakfast cereal.  The basis for the decision was the principle of federal preemption: states cannot implement laws that conflict with federal laws.  The court found that Prop 65 poses an obstacle to the accomplishment and execution of a policy under federal law in which the Food and Drug Administration (FDA) promotes whole grain foods in the American diet.  When there is no express preemption provision in federal law, the court examines the entire scheme of a federal statute for implied preemption, and if the court determines that its purpose and operation are frustrated by the state law, then the state law is preempted.  In Post Foods v. Superior Court, the court found Prop 65 is an obstacle to the accomplishment and execution of the FDA policy of promoting whole grain foods in the American diet.

Although most cereals contain acrylamide at a level that would require a Prop 65 warning, whole grains are a significant source of important vitamins, minerals and fiber.  Based on research demonstrating the health benefits of whole grains, the FDA established a policy to promote the consumption of whole grains.

FDA described its policy in two letters to OEHHA and the Attorney General in 2003 and 2006 advising against acrylamide warnings on food.  FDA was concerned that labeling foods with warnings about dangerous levels of acrylamide would confuse and potentially mislead consumers, both because the labeling would be so broad as to be meaningless and because the risk of consumption of acrylamide in food is not yet clear.  FDA also worried the warning would dilute its messaging about healthy eating, mislead consumers into thinking acrylamide is only a hazard in store-bought foods, and ultimately cause consumers to avoid grains (specifically breads and cereals), potentially increasing their risks of disease from less fiber and other beneficial nutrients in their diets.  FDA concluded that Prop 65 warnings on foods would “conflict with FDA’s ongoing efforts to provide consumers with effective scientifically based risk communication to prevent disease and promote health.”  FDA’s advised that Prop 65 warnings for acrylamide should not be placed on foods, including breakfast cereals, unless and until the science supports such a warning.  FDA noted that even if acrylamide warnings became warranted, FDA may require manufacturers (as it does with trans fats) to identify foods containing acrylamide and the amount based on quantities consumed.

The Second District Court of Appeal found FDA’s letters thorough, consistent, and containing persuasive reasoning why Prop 65 acrylamide warnings on whole grain cereals would mislead consumers and lead to health detriments.  Prop 65 warnings, it concluded, conflict with a clear federal program to encourage healthy eating by consumers, and so is preempted.

Under the Post Foods case, breakfast cereals are now exempt from Prop 65 warnings (pending any potential appeal).  The exemption should extend to other grain products such as bread and granola bars, and arguably to other foods encompassed by FDA’s letters, but it is not generally felt that the decision will discourage all Prop 65 food claims based on acrylamide.  The decision may also invigorate other defendants to pursue federal preemption arguments, given appropriate supportive facts.

My favorite Megan Mullally quote, and there are many, is her ode to coffee: “I’ll quit coffee. It won’t be easy drinking my Bailey’s straight, but I’ll get used to it. It’ll still be the best part of waking up.”

Wendel Rosen attorney, Wendy Manley, recently wrote about the new labeling requirements for coffee. As she noted, a California court recently determined that coffee must bear a warning under the state’s Safe Drinking Water and Toxic Enforcement Act (aka “Prop 65”) regarding acrylamide, a carcinogen found in low levels in coffee due to the roasting and/or brewing process. As it turns out, things may not be so dire after all, and coffee lovers may soon raise a mug to celebrate California regulators.

On Friday, June 15, the Office of Environmental Health Hazard Assessment (OEHHA) proposed to add a new section of the California Code of Regulation, stating that no significant risk of cancer is presented by drinking coffee. OEHHA is the lead state agency that implements Prop 65 and has the authority to promulgate and amend regulations pertaining to it. Citing to the International Agency for Research on Cancer (IARC) in its press release, OEHHA justified its proposed regulation, in part, on the IARC’s conclusion that drinking coffee does not present a significant risk of cancer. Thus, while acrylamide is designated as a probable human carcinogen, a cup of joe is not considered to be, according to IARC research.

This conclusion isn’t surprising to the coffee industry. In 2016, the cancer agency of the World Health Organization removed coffee from its “possible carcinogen” list, and there have been numerous published studies touting the potential health benefits of drinking coffee over the years.

OEHHA maintains that its proposed regulation will benefit “the health and welfare of California residents by helping to avoid cancer warnings for chemicals in coffee that do not pose a significant cancer risk.” One can’t help but wonder, though, if this regulatory about face is intended to benefit Prop 65, too. As reported in Law360 (a subscription is required), a bipartisan group of members of the U.S. Senate and the U.S. House of Representatives may be looking to undermine labeling requirements on the federal, state and local levels, and in particular, Prop 65, by requiring that labels clearly identify potential cancer risks of products based on the “best available science.”

The proposed legislation, H.R. 6022 and S. 3019, would require labeling warnings that are supported by science that is based upon objective scientific practices, which includes findings and data that are reliable and peer reviewed when possible. According to Rep. Adam Kinzinger (R-Ill.), the proposed federal legislation is intended to counter state laws that may cause some products to be “incorrectly labeled with warnings about harms that do not exist.”

To be sure, the fight over coffee and the scope of Prop 65 will not end soon. Public comment on the proposed regulation will be open until August 30, 2018, likely fielding comments for and against the regulation. Should OEHHA’s proposed regulatory change pass, it is also likely that it would be challenged in court. And, given the detractors of Prop 65 both in and outside of California, a challenge to OEHHA’s proposal may be the least concern. Congress rarely agrees on much these days, but they definitely seem jittery over the recent efforts to regulate their morning cup. So, we’ll continue to monitor this potential food fight and keep you posted.  For now, just “sip” back and relax.

[This post was written by Wendel Rosen environmental attorney Wendy Manley.]

Coffee drinkers were pleasantly surprised recently to learn their daily beverage may afford a number of health benefits. The beverage contains antioxidants and nutrients, and may protect against Type 2 diabetes, Parkinson’s, Alzheimer’s and liver cancer. Make that a double latte, please.

            NEWS FLASH:

Warning: coffee contains acrylamide, a chemical known by the State of California to cause cancer.

What just happened?

In short, after eight years of litigation, a California court determined that coffee must bear a warning under the state’s Safe Drinking Water and Toxic Enforcement Act, otherwise known as Proposition 65 or “Prop 65.”

Prop 65 was enacted by voters in 1986 with the objective of eliminating toxic chemicals in consumer products by requiring a warning before exposing a person in California to a chemical listed by the State as causing cancer or reproductive toxicity. If your product contains a listed chemical, it may need a Prop 65 Warning.

While there have been some success stories – trichloroethylene out of correction fluid and lead out of wine bottle caps, jewelry, brass faucets, calcium supplements and ceramic ware, for example – Prop 65 has spawned a cottage industry of citizen enforcers, some of which seek to safeguard human health, others of which are motivated by the reward of penalties and attorney fees.

There are more than 900 chemicals on the Prop 65 List that cause cancer or reproductive toxicity or both. In a few cases, the state has set a “safe harbor” level below which no warning is required. Plaintiffs can initiate an enforcement suit based on a lab test showing the presence of a listed chemical, and the burden falls to the defendant to prove the exposure poses “no significant risk,” which is one excess case of cancer in an exposed population of 100,000 assuming a 70 year lifetime of exposure at that level. The risk assessment needed to establish the no significant risk level (NSRL) is complicated, expensive, and vulnerable to attack in a courtroom. Consequently, the vast majority of cases are settled regardless of the merits of the claim.

Acrylamide was added to the Proposition 65 list in 1990, but not discovered in food until 2002. Since that time, more than 650 Prop 65 claims have been brought for failure to warn about acrylamide in a wide range of food products, including french fries, potato chips, sweet potato chips, vegetable chips, hash browns, bread, bagels, English muffins, breakfast cereals, granola bars, animal crackers, ginger snap cookies, molasses, toasted almonds, black olives, and coffee.

A listed chemical is often times present as an ingredient or contaminant. In many cases, such as lead or cadmium in chocolate or seaweed, it is naturally occurring, and exempt from the Prop 65 warning. Acrylamide is unusual in that it is neither added to coffee nor does it occur naturally – it is created during roasting. Cooking at high temperatures, including frying, roasting and baking, transforms sugars and the amino acid asparagine into acrylamide through the Maillard reaction. Consequently, acrylamide is unavoidable in conventional coffee roasting techniques.

Back to the coffee case. In Council for Education and Research on Toxics v. Starbucks, defendants first argued and lost several defenses based on the NSRL, First Amendment and preemption by federal law. In the second phase of the trial, which concluded in January 2018, defendants argued a rarely utilized defense involving an Alternative Significant Risk Level (ASRL) based on considerations of public health. The regulations provide that “where chemicals in food are produced by cooking necessary to render food palatable or to avoid microbiological contamination,” considerations of public health allow for an ASRL.

The Coffee defendants’ risk assessment calculated an ASRL of 19 micrograms per day, which was an order of magnitude higher than the State’s established NSRL of 0.2 micrograms per day.

To their disappointment, the coffee producers failed to persuade the judge that the ASRL should apply. The court found their expert’s quantitative risk assessment deficient, analytical chemistry methods unacceptable, evidence of health benefits unpersuasive, and the minimum quantity of acrylamide necessary to render the coffee palatable unsubstantiated, among other things. In their objections to the proposed Order, the defendants took issue with a number of the court’s findings and regulatory interpretations. Although the plaintiff immediately filed a motion for permanent injunction, it is widely expected that some or all of the defendants, which total 91, will appeal.

Just as Yogi Berra famously said, it ain’t over till it’s over. If the case is appealed, it will likely be quite some time before we know whether a Prop 65 warning is required for acrylamide in coffee. If a warning is ultimately required, specific warning language may be developed for coffee. Meanwhile, high doses of acrylamide administered to rodents suggests acrylamide may cause cancer in humans, but questions still remain whether one can even drink enough coffee to raise the risk or whether the health benefits more than offset the potential risks.

Food producers investigating acrylamide in their products need to think more broadly, since furfural alcohol is also a Prop 65 chemical generated from the Malliard reaction during cooking. And the Prop 65 plaintiff’s bar knows about it.

If you’re in the cannabis business you know about the risk of federal prosecution and the risk of state action, especially if you fail to dot your i’s and cross your t’s under your state’s recreational/medicinal regulations. But have you considered the third rail—liability in civil litigation? Here are a few of the liability risks facing your cannabis business.

Government Civil Actions

In an interesting twist, some city and county authorities are foregoing criminal actions and bringing civil actions, seeking substantial penalties (up to $2,500 per day per violation) under the unfair competition law, California Business and Professions Code Section 17200. These actions are based on violations of other statutes or ordinances, so if your cannabis business violates any provision of the recently adopted Proposition 64, any building code, or other local ordinance, you could find yourself defending a civil case brought by the district attorney, code enforcement or some other local agency. Colorado has a similar statute, authorizing the Attorney General or district attorneys to seek civil penalties ($2,000 per violation) under Colorado Consumer Protection Act Section 6-1-112.

Beware of Sharks-Plaintiff’s Attorneys Using “Rinse and Repeat” Tactics

Some plaintiff’s attorneys wait for aggrieved clients to come for them; others go out looking for trouble. New businesses attempting to follow new laws are prime targets by this latter, more “entrepreneurial” type of attorney. For example, for many years certain plaintiff’s attorneys have filed cookie cutter complaints alleging violations of California’s Proposition 65 warning requirements. Prop 65 requires businesses to notify customers if their products contain chemicals that cause cancer, birth defects or other reproductive harm. Some law firms focus their practice on bringing Prop 65 actions against businesses, large and small that failed to provide the required warnings. Suppliers, distributors and retailers face potential liability. Now that California has decriminalized recreational cannabis and hundreds of new companies are open for business, these attorneys are targeting these cannabis businesses, alleging that they have failed to provide a Prop 65 warning regarding the health risks associated with smoking, or in some cases with ingesting, cannabis products. We’ve seen certain law firms filing dozens of identical Prop 65 cases against various cannabis businesses. These businesses also face the same exposure to Americans With Disabilities Act claims, wage and hour (pay) claims and other “cookie cutter” type cases faced by non-cannabis businesses.

Competitor, Partner and Co-Owner Civil Actions

Despite the popular image that cannabis people are laid back and litigation averse, some in the industry are willing to use litigation to seek competitive advantage. Many of the jurisdictions allowing cannabis cultivation or dispensaries have capped the number of permits. As a result, some competitors are filing lawsuits alleging unfair business practices, trade secret misappropriation, trademark infringement or other similar claims, seeking to disqualify competitors or, at a minimum, saddle them with costly litigation and slowing their growth. Cannabis businesses have vendors/suppliers, customers and employees, and each of these relationships has the potential for misunderstandings, disputes and ultimately litigation. Many cannabis operators historically ran their businesses on handshake deals, in part because until recently one could not enforce a contract with an illegal purpose. But in October, California adopted AB 1159, which provides that “activity relating to medicinal cannabis or adult-use cannabis conducted with California law…. shall be deemed to be … a lawful object of a contract….” In short, now you can enforce a contract relating to your otherwise legal cannabis business.

What You Can Do to Minimize Your Litigation Risk

Know Your Rights And Obligations. Ignorance of the law is no defense, so make sure to scrupulously follow the local ordinances as well as state law. Prominently post your Proposition 65 warnings today. Listen to cannabis trade groups as they track and report on the litigation trends.

Read the Whole Contract Before You Sign and Before You Act. Absent extraordinary circumstances, “I didn’t read it” and “I didn’t understand it” are also poor defenses. Consult with legal counsel if you have any doubts about the applicable cannabis laws and regulations. Make sure you use the right type of contract. Don’t try to repurpose a lease as a sales agreement, or an independent contractor agreement as an employment agreement. The result will be a Frankenstein agreement that exposes you to monster litigation.  Try to anticipate future events and make certain you understand the implications of the contract language. For example, under your packaging agreement, who bears the risk if the packaging plant is flooded ruining your entire crop?

Get It/Put It In Writing. In dealing with vendors/suppliers, customers, landlords, tenants or employees, if you spell out what you expect from one another there is less opportunity for the ambiguities that lead to disputes that result in litigation. Especially if you are forming a new business, make sure you and your partners have a heart-to-heart discussion about your “shared” vision for the company and that you draft a comprehensive agreement that spells out who owns what, how your company will make decisions and how you will resolve any disputes that may arise.

Play out various scenarios under your ownership agreement; what happens if you are super successful and Amazon wants to buy you out? What happens if the crop fails?  What happens when your company ownership changes hands? Who’s on the hook to the landlord for rent and other obligations?

An ounce of prevention can avoid the pounding headaches that come with civil litigation.

Is it odd for a lawyer to write a blogpost about how to avoid lawyers?  Not at all. We hate to see claims of misrepresentation made against our clients by plaintiff’s class action attorneys. Typically, their claims have little merit and mean only wasted time, money and energy.

The goal of the class action attorneys is to extract the largest ransom with the least work. Anyone with a computer can generate rafts of “cut and paste” demand letters and complaints. They usually try to exploit vagueness in the law, often using professional plaintiffs who show up in scores of copycat lawsuits.

Enough diatribe! Your New Year’s resolution should be to stay away from class action attorneys in 2018. Here are some guidelines that will help you do that. We’ll have more posts on the subject as the year progresses.

Prop. 65: California Prop. 65 requires that you make disclosures on your labels if your product contains more than specified limits of identified chemicals. If you are selling in California, look at the list of chemicals on the Prop. 65 list. Now find a qualified lab that can test samples of your product runs for Prop. 65 chemicals and get the testing done. I can assure you that if your product category (chocolate – for example) is known for having trace elements of Prop. 65 chemicals, there are plaintiff’s lawyers who are testing your product. You should know the results of those tests before they do. If your product does have amounts of these chemicals that require Prop. 65 notices, it may be cheaper to put notices on your packages than it is to reformulate. It will certainly be cheaper than settling a class action claim for failure to include a Prop. 65 notice.

“Natural”: “Natural” is an accepted term to describe the marketplace. The largest industry event is “Natural Products Expo West.” The main retail publication is the “Natural Foods Merchandiser.” Food stores, whether independent or parts of a chain,  are referred to as “Natural Food Stores.” However, just because “natural” is used by the industry and the public to describe minimally processed foods does not mean it should have a home on your label. There’s no legal definition of “natural.” In 2015, in response to industry requests, the FDA asked for comment about whether “natural” should be defined and, if so, how. After receiving many comments, the FDA did nothing then. Last year, FDA Commissioner Dr. Scott Gottlieb said that the FDA is now looking at how to define “healthy” and “natural” more uniformly. “Natural” claims are one of the largest source of class action suits. Until “natural” has a clear legal definition and you are sure that your product meets it, don’t put the word on your label. It’s as simple as that.

“Healthy”: Is your product healthy? Of course it is. Would you be selling a food product that is unhealthy?  Of course not. Would you be advertising “Now, Even More Unhealthy In Convenient Family Pak?” Of course not. Unlike “natural,” the FDA does have a definition for “healthy.” However, the definition must be used carefully. It is out of date, contrary to current nutritional science and is under review. The FDA is reconsidering the definition and, last year, agreed that KIND bar could continue using “healthy” on its labels even though KIND bars exceeded the amount of fat allowed in the FDA definition. Our best advice is not to use the word “healthy” until there is a new definition. However, it you feel compelled to use it, find out if your product satisfies the requirements.

That’s it for now. I hope this New Year’s resolution comes true for you. See you at the Specialty Food Show or EXPO West.