California Proposition 65 reform: AB 2577 overhauls settlement approval and attorney’s fees provisions

Key takeaway

AB 2577 amends Proposition 65 in-court settlement approval procedure by adding new “public interest” and “public benefit” requirements, and creates a bifurcated procedure allowing courts to approve settlements while disputes over stipulated fee awards proceed separately. In practice, status quo settlements effectively lacking reformulation or new warnings are no longer viable, potentially increasing defendants’ post-settlement compliance costs.

Background: Proposition 65, private enforcement, and settlement

The California legislature recently enacted AB 2577, which amends the state’s Proposition 65 law to require judges reviewing proposed settlement agreements, called “consent judgments,” to find that they provide a “public benefit” before they can be approved. Additionally, the bill allows reviewing judges to unilaterally – over the objection of the settling parties – reduce stipulated awards of attorneys’ fees for lack of substantiation.

The changes are unlikely to significantly curb the use of Prop 65 by plaintiff’s lawyers and private enforcers who annually receive tens of millions of dollars from settling defendants. Rather, a portion of settlements may see payments partially shifted from attorneys’ fees to civil penalties, and one infrequently used avenue to resolve litigation with “status quo settlements” will be foreclosed.

Additional requirements for in-court settlement approval

Under the new prerequisites for in-court settlement approval – the bill does not affect out of court settlements – a court reviewing a motion to approve a settlement is required to find “[t]he settlement is in the public interest and provides a public benefit.” Additionally, a settlement is “presumed” to do both if it requires the defendant to either “[r]educe the exposure to the listed chemical from the level that existed before the settlement” or provide a warning “if that warning was not provided previously.”

This change follows years of professed concern within the California Attorney General (AG)’s Office over “status quo” settlements that resolve costly litigation for companies and transfer significant sums to plaintiff’s attorneys but do not require defendants to provide warnings or reduce alleged exposures to one of the 900-plus chemicals on California’s Prop 65 list.

The bill’s author, Assemblymember Damon Connolly, cited as cause the pending appeal of the consent judgment approved in Blue Water Cosaint, LLC v. Bumble Bee Foods, LLC, No. 24CU003388C (San Diego Co. Sup. Ct., 2024), a case alleging failure to warn for mercury in seafood. The AG’s Office unsuccessfully argued to the lower court that the parties’ stipulated warning standard effectively permitted mercury levels in the product to increase, noting that the 0.3 mcg Hg/serving/day standard was higher than the single-serving exposure shown in the evidence (mercury testing) submitted by the plaintiff. While the judge in Blue Water Cosaint approved the settlement over the AG’s objection, such “status quo” settlements are more often rejected, and, in recent years, few companies (and plaintiffs) attempt them.

Notably, in Blue Water Cosaint, the AG’s Office only objected to the award of fees and did not argue that the case lacked merit. Yet, in comparing the plaintiff’s test results against the settlement’s stipulated warning standard, the parties established that the alleged exposure was below the warning threshold from the outset of the case. To avoid a warning on consumer goods, defendants must show exposure below the stipulated warning standard in a settlement or, alternatively, below the applicable standard established at trial. That burden at trial falls on defendants, which is why defendants will still settle on terms that would establish their innocence if proved at trial.

Bifurcated procedure for objections to stipulated attorney’s fees awards

AB 2577 also creates a bifurcated procedure when the AG objects to awards of attorneys’ fees and the court finds the objection meritorious. In such circumstances, which are uncommon, the court issues an order setting a schedule for either party or the AG to submit additional evidence for or against the proposed fee award, after which the court may adjust the fee award so long as the new amount does not exceed the amount originally proposed.

As with the new “public benefit” standard, this streamlined process for judicial modification of attorneys’ fees awards addresses another expressed concern of the AG’s Office, this time arising from Leeman v. Adams Extract & Spice, LLC, 236 Cal.App.4th 1367 (2015). In Leeman, the Court of Appeal effectively barred judges from unilaterally modifying stipulated consent judgments. The bill reverses that holding and, notably for the AG’s Office, effectively requires judges to share the burden of monitoring plaintiff’s lawyers’ compliance in Prop 65 settlements. Now, when the AG objects to a fee award, usually on the grounds that the fees incurred are not substantiated or are unreasonable (i.e., inflated), the court need not reject the entire settlement, as required under Leeman’s “all-or-nothing” approach.

For settling defendants, this may be a welcome development, as a defendant's interest usually is simply to see the case closed, not how to divide settlement payments between civil penalties and fees. On the other hand, the primary incentive remains for plaintiff’s lawyers to file thousands of Prop 65 claims each year, most of which are of questionable merit. So too does the law’s “reverse” burdens of proof (i.e., the requirement that defendants prove their innocence to avoid liability).

Going forward, settlement terms are more likely to include lower warning or reformulation thresholds, as plaintiffs seek to avoid AG objections on the grounds that the initial testing shows that the defendant is already in compliance. Also, the new provisions could lead to increased AG involvement in the review of proposed settlements. In some cases, the AG's Office has objected to proposed settlements and sought stricter reformulation commitments, additional testing requirements, or other injunctive terms. This law could encourage more such interventions.

Among companies facing the prospect of costly product warnings, reformulation, or discontinuation, some choose to litigate despite the costs and uncertainties associated with trial. For those companies, the law should still provide numerous defenses at trial.

Visit DLA Piper’s California Proposition 65 capability page for more information.