Protecting Your Cannabis Business from Proposition 65 Lawsuits in the New Year

December 28, 2020

Everyone in California has seen them:

CALIFORNIA PROPOSITION 65 WARNING:
WARNING: This product contains a chemical known to the state of California to cause cancer.
For more information: www.P65Warnings.ca.gov

and

CALIFORNIA PROPOSITION 65 WARNING:
WARNING: This product contains a chemical known to the state of California to cause birth defects or other reproductive harm.
For more information: www.P65Warnings.ca.gov

Prior to now, cannabis products meant to be consumed via smoking required a warning regarding cancer, but as of January 3, 2021, products sold at retail in California containing Δ9-THC, the active ingredient in cannabis, will require a reproductive harm warning regardless of whether it is to be consumed via smoking, eating, or otherwise.

The Office of Environmental Health Hazard Assessment, (the State Agency in charge of determining what products require warnings regarding cancer and reproductive toxicity) has deemed Cannabis smoke and the active ingredient in Cannabis, Δ9-THC, to require Prop 65 warnings regarding reproductive harm, and enforcement begins Sunday, January 3, 2021. California’s proposition 65, passed in 1986, requires labels on products listed as causing cancer and reproductive harm. The State enforces these requirements, and penalties are up to $2,500.00 per day for violations. The law also allows private entities to sue for violations in the public interest: it rewards them with 25% of the penalties recovered and allows them to collect their attorneys’ fees from the violator. Defending against such lawsuits requires experts, and expenses quickly add-up. As a result, “bounty hunter” lawyers sue businesses and extract settlements for violations of Prop 65, and we expect them to set their sights on cannabis businesses come January 3, 2021.

Non-combustible cannabis products will need the Prop 65 birth defects warning, and combustible cannabis products will need both the cancer warning and the reproductive harm warning. Of note, the State has not prescribed a minimum amount under which no label is necessary, so any business whose retail products contain THC is potentially subject to such lawsuits. Note: this potentially includes CBD companies whose products are legally hemp (i.e. they contain less than .2% THC). Proposition 65 allows companies up and down the supply chain to be pulled into such lawsuits – those including cultivators, manufacturers, distributors, and retailers are all potentially liable.

Fortunately, cannabis companies have a means of protecting themselves from such lawsuits: compliance and contracts.

Because all cannabis and hemp products can be presumed to have some THC, all products should have the statutory warning label regarding birth defects so as to avoid these lawsuits. Cannabis businesses should modify their SOP’s to include verification that products they handle in the supply chain comply with the statutory warning requirements. Further, although retailers are often the easiest, most visible target of these lawsuits, they are typically not responsible for the packaging of particular products. As such, retailers and distributors can require upstream manufacturers and cultivators (i.e. those who typically design and procure product packaging) to indemnify them in the even of such a lawsuit – that is, the indemnifying company would need to pay for the cost of defending the retailer or distributor in the lawsuit as well as being responsible for paying the cost of any settlement or judgment in the case.

As part of their purchase agreements with others in the supply chain, cannabis businesses should take a cue from other industries that have dealt with these proposition 65 “bounty hunter” lawyers. Cannabis businesses should take proposition 65 seriously and act proactively.

For assistance with integrating proposition 65 compliance into your standard operating procedures and accounting for the risk of proposition 65 lawsuits via your contracts, please contact Adam Winokur with Murchison & Cumming at 213.264.7179.