From high tax rates to regulatory red tape, California has long been considered one of the least friendly states toward small businesses. Luckily, Congress is considering legislation that could keep one of California’s most annoying regulatory barriers from being exported to other states.
Proposition 65, officially known as the Safe Drinking Water and Toxic Enforcement Act, requires businesses that serve Californians to warn consumers of any possible exposure to one of nearly 800 chemicals, regardless of how remote the threat. This means warning labels are put on everything from shower curtains to French fries.
The law was passed in 1986 as a way of improving public health, but since the law took effect, California has seen no decrease in cancer rates, either absolutely or relative to the rest of the nation. Instead, this law is a perfect example of unintended consequences. It needlessly worries consumers, drives up costs, and threatens businesses with lawsuits.
For restaurant owners, the law is particularly annoying. According to the state of California, alcohol is a carcinogen. It doesn’t matter that the health benefits of responsible alcohol consumption — reducing the risk of heart disease and certain cancers — have been well-documented by researchers. Restaurants must post a “clear and reasonable warning” that customers are entering an area that contains chemicals “known” to the state of California to cause cancer or birth defects.
And it’s not just alcohol that restaurants have to worry about. Chemicals that naturally occur in foods, such as acrylamide, are also listed as carcinogens. Restaurants even have to warn consumers about possible exposure to carcinogens in cigarette smoke outside their restaurant since California’s smoking ban has sent all smokers outside.
The law drives up the cost of doing business for companies across the nation. In order to comply, business suppliers are faced with two high-cost options: Put warning labels on all goods nationwide, potentially scaring consumers outside of California who aren’t used to seeing so many warning labels. Or use special packaging solely for California, disrupting supply chains and logistics.
But Prop 65’s biggest business burden is the threat of frivolous lawsuits. Designed so citizens rather than the state government enforce the legislation, plaintiffs are awarded one-quarter of any financial penalty imposed on noncompliant businesses. This has led to an army of citizen “bounty hunters” in cahoots with lawyers who specialize in Prop 65 matters, bringing thousands of frivolous lawsuits each year against companies for “failure to warn.”
Rather than fight expensive lawsuits, most businesses settle. Last year, a single plaintiff threatened 20 Los Angeles-area restaurants with Prop 65 lawsuits for failing to post proper warning signs, settling with several for more than $15,000 each in penalties and legal fees. While larger businesses have more resources to absorb these costs, larger Prop 65 settlements have contributed to a number of small business bankruptcies.
Between 2000 and 2010, almost $90 million — or 68 percent of the $142 million in settlement money — went to plaintiff attorney’s fees. In 2012 alone, businesses paid roughly $22.5 million in settlements under the law — around double the $11.8 million paid in 2007.
Despite all the problems with Proposition 65, other states like neighboring Washington have considered adopting similar chemical regulations. A patchwork of different laws poses a significant problem for businesses trying to operate in multiple states, which is why a bipartisan group of Congressional co-sponsors have signed onto legislation designed to update the federal Toxic Substances Control Act (TSCA) in a way that would ensure federal supremacy over chemical regulation.
Without federal action, environmental activists will continue pushing to expand California’s regulatory nightmare from coast to coast, further enriching trial lawyers at the expense of small businesses and consumers.