Litigation Risks Arising From Failed Contract Negotiations

Although it did not make my Top Ten list, one significant litigation risk that companies in California face relates to tort claims that arise from failed contract negotiations.  California recognizes a cause of action for failure to negotiate in good faith.  I discuss this theory in a recent article that first appearing in the Orange County Business Journal


Are You as Green as You Claim to Be? Compliance with California’s Environmental Marketing Claims Act

The great legal philosopher, Kermit the Frog, once observed “it’s not easy being green.”

He could have added that it may no longer be as easy to claim you are green when you aren’t.  The passage of the California’s Environmental Marketing Claims Act (“EMCA”), for companies manufacturing or distributing products in California, is aimed at those, unlike our friend, Kermit, who are not as green as they might suggest.

Any common observer will note that an in vogue marketing message is to tout a product’s “greenness” as the environment is a key component of many consumers’ buying decisions. As a result, there has been a significant rise in companies’ efforts to “greenwash” or promote the eco-friendliness of their products. True to form, the California Legislature decided to tackle this problem with gusto, by passing the EMCA. The law makes it “unlawful for any person to make any untruthful, deceptive, or misleading environmental marketing claim, whether explicit or implied.” Bus. & Prof. Code § 17580.5.

An “environmental marketing claim” is a defined term and includes any claim contained in the Green Claims Regulations (the “Green Guides”) published by the Federal Trade Commission (“FTC”). Bus. & Prof. Code § 17580.5(a). Under the Green Guides, an environmental marketing claim includes any statement in labeling, advertising, promotional materials and all other forms of marketing, whether asserted directly or by implication, through words, symbols, emblems, logos, depictions, product brand names, or through any other means, including marketing through digital or electronic means, such as the Internet or electronic mail. It also includes any claim about the environmental attributes of a product, package or service in connection with the sale, offering for sale, or marketing of such product, package or service for personal, family or household use, or for commercial, institutional or industrial use. 16 C.F.R. § 260.2(a) (2011). Claims such as: “biodegradable,” “compostable,” “recyclable,” “recycled,” “refillable,” and “ozone safe” are covered in the Green Guides. 16 CFR § 260.1 (2011). Not presently included in the Green Guides, but currently under review by the FTC, are claims such as “eco-friendly,” “sustainable,” and “carbon neutral.”

The Green Guides themselves “are not legislative rules under Section 18 of the FTC Act and therefore are not themselves enforceable regulations, nor do they have the force and effect of law.” ( Id., § 260.2(b).) However, by incorporating the Green Guides into the EMCA, they are enforceable in California. Under the Green Guides, and by extension under California law, “[i]t is deceptive to misrepresent, directly or by implication, that a product, package or service offers a general environmental benefit. . . . [E]very express and material implied claim that the general assertion conveys to reasonable consumers about an objective quality, feature or attribute of a product or service must be substantiated (16 C.F.R. § 260.7(a) (2011)) and “[a]n environmental marketing claim should not be presented in a manner that overstates the environmental attribute or benefit, expressly or by implication.” 16 C.F.R. § 260.6(c).

The Green Guides are composed of general principles on the use of environmental claims, and include examples of what does and does not constitute a deceptive representation. While the examples do not illustrate all possible permissible claims or disclosures, they do provide a “safe harbor” for marketers who want certainty about how to make environmental claims. 16 C.F.R § 260.4. For example, the Green Guides indicate that if a box of aluminum foil is labeled with the claim “recyclable,” without further elaboration, it is deceptive if any part of either the box or the foil, other than minor, incidental compenents, cannot be recycled. Similarly, a package labled “50% more recycled content than before” is technically true if the manufacturer simply increased the recycled content of its package from 2% recycled material to 3% recycled material, but will be considered deceptive because it is likely to convey the false impression that the advertiser increased significantly the use of recycled material.

In enacting the EMCA, and applying the broad language of the Green Guides, the California Legislature explained:

The Legislature finds and declares that it is the public policy of the state that environmental marketing claims, whether explicit or implied, must be substantiated by competent and reliable evidence to prevent deceiving or misleading consumers about the environmental impact of products and packages.

In furtherance of this stated purpose, the EMCA requires that any person making an environmental marketing claim by representing in advertising or on the label or container of a consumer good that the consumer good it manufactures or distributes is not harmful to, or is beneficial to, the natural environment must maintain written information and documentation supporting the validity of the environmental marketing claim. Such written documentation must include:

(1) A statement of the reasons why the person believes the representation to be true;

(2) Any significant adverse environmental impacts directly associated with the production, distribution, use, and disposal of the consumer good;

(3) Any measures that are taken by the person to reduce the environmental impacts directly associated with the production, distribution, and disposal of the consumer good;

(4) Violations of any federal, state, or local permits directly associated with the production or distribution of the consumer good;

(5) Whether or not, if applicable, the consumer good conforms with the uniform standards contained in the Federal Trade Commission Guidelines for Environmental Marketing Claims for the use of the terms “recycled,” “recyclable,” “biodegradable,” “photodegradable,” or “ozone friendly.”
Bus. & Prof. Code § 17580.

The pitfalls of “greenwashing” were recently addressed in Hill v. Roll Intern. Corp., 195 Cal.App.4th 1295 (2011) (“Hill”), a California case brought under the EMCA. In Hill, a consumer of Fiji-brand bottled water asserted that a picture of a green water drop on the label led her to believe that Fiji water was environmentally superior and endorsed by an independent environmental organization, when in fact it was not. Plaintiff asserted violations of the California Unfair Competition Law (Bus. & Prof. Code § 17200, et seq.), False Advertising Law (Bus. & Prof. Code § 17500, et. seq. ) and Consumers Legal Remedies Act (Civil Code § 1750, et. seq.), as well as common law fraud and unjust enrichment, claiming that Fiji was guilty of “greenwashing” its product (i.e., making false or misleading claims of environmental benefits). Even though the Court ultimately concluded that Fiji water did not violate the EMCA because Plaintiff could not establish that the green drop on Fiji water bottles conveyed to a reasonable consumer that the product was endorsed for environmental superiority by a third party organization, the case draws attention to the care that companies must take when branding their products as environmentally friendly and the likelihood of continued and increased litigation in this cutting edge area of the law.

In light of the broad language of the EMCA and the California legislature’s stated intent to prevent manufacturers from deceiving or misleading consumers about the environmental impact of products in a wide variety of contexts, there are significant risks and potential liability for proceeding to market in California with a product claiming environmental friendliness. The bottom line: unless your product is demonstrably green (and supporting records are maintained), environmental marketing claims should be avoided in California.

Special thanks to Lynnda McGlinn of Dorsey & Whitney who authored this blog entry.   

The Inaugural Post–What Are the Greatest Risks?

Consistent with the purpose of this blog, it is appropriate that the first post list the Top Ten litigation liabilities for California businesses.

Knowing your company’s risks is the first step to avoiding senseless and costly litigation.  Based on the past several years of monitoring new case filings and defending companies in every conceivable type of lawsuit throughout the State of California, several litigation trends emerge.  Here then are the Top Ten risks that businesses engaging in commerce in the Golden State face:

(10)  Prop 65 Liability: Does the product that you manufacture and ship into the State of California contain traces of chemicals, lead or carcinogens that have been determined by the State of California to cause cancer or reproductive harm and thus require a warning label?  An explanation of Prop 65 can be found here.

(9)  ADA Accessibility Issues:  Is the wheelchair ramp at the entrance to your retail store too steep?

(8)  Employment Law including Unenforceable Covenants Not to Compete:  Are you engaging in a violation of California law by seeking to enforce a covenant not to compete? Do you also comply with the dozens of other rules design to protect employees?

(7)  Product Liability/Warranty Risks:  Does the lawnmower that you manufactured for sale in California include a warning that it is not intended for clipping hedges?

(6)  Industry Specific Statutory Regulations:  Is your line of business one that the California Legislature has considered to have a history of fraud and abuse which threatens the public welfare in the State of California such as . . . wait for it . . . dance studios?  No, I’m not making this up.  See Cal. Civ. Code Sec. 1812.50 (“The Legislature finds that there exists in connection with a substantial number of contracts for dance studio lessons and other services, sales practices, and business and financing methods which have worked a fraud, deceit, imposition, and financial hardship upon the people of this state; that existing legal remedies are inadequate to correct these abuses; that the dance studio industry has a significant impact upon the economy and well-being of this state and its local communities; and that the provisions of this title relating to these contracts are necessary for the public welfare.”)

(5) Greenwashing:  Do you market you products or services as being “eco-friendly” or “green” without an objective determination to support that claim? More on this litigation risk here.

(4)  False Advertising:  Do you make any other statements concerning your goods or services that are likely to mislead consumers?

(3)  Consumer Privacy Lawsuits:  What about all of that customer data or employee information that you have?  Are you protecting it from disclosure to third parties?

(2)  Unfair Practices Act:  Do any of your business practices violate the enumerated prohibitions under the Unfair Practices Act?

(1)  Unfair Competition Law (“Seventeen-Two-Hundred”):  Do you engage in any business practices that is “unfair”, “fraudulent” or “illegal” under any local, state or federal regulations which may give rise to a class action lawsuit?

Although this blog will address topics that do not fall under these categories, most material you will find here relates to one or more risks listed above.  If you haven’t decided to abandon the California market and restrict your business activities to the other 49 states, please read on.  I hope you will find this blog useful.