Environmentally progressive California is leading the eco-charge once again with a new regulation, and its impact will likely reverberate far beyond the state’s borders.

The California Green Chemistry Initiative Proposed Regulation for Safer Consumer Products, scheduled to be released in final form Jan. 1, 2011, holds companies responsible for using the least hazardous chemicals and processes possible in each phase of a product’s life. It covers any product sold in California–from lunchboxes to laundry detergent–and provides strict guidance for a product’s design, manufacture and end-of-life disposal.

“So many people are focused on how California’s climate change laws will affect the U.S.,” says Peter Hsiao, head of Morrison & Foerster’s Environmental Practice. “But this will have an equally large effect on the U.S. economy.”

Upon the rule’s enactment, a final draft of which was released for public comment Sept. 15, California’s Department of Toxic Substances Control (DTSC) will publish a list of priority chemicals that companies must cross-reference with their products’ components. If they use any of those chemicals in a product, the company must then perform an alternative assessment to determine if a safer substitute exists. Unless the company substitutes a safer chemical, it will face repercussions that range, depending on the level of hazard, from a warning label to a market ban.

Even though California is just one state, it’s a massive economic force: In 2008, its $1.84 trillion gross state product ranked it the ninth largest economy in the world, just behind the U.S. as a whole, according to California’s Economic Development Committee. Therefore, any change in what product formulations are OK for sale will send waves of change not just through the U.S., but to key manufacturing centers across the globe.

Earlier Efforts

The initiative, while a first for the U.S., mirrors the EU’s Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) program. Launched in June 2007, REACH holds industry responsible for evaluating and substituting chemicals as necessary. Because REACH is being phased in over time, Hsiao says it’s still too early to gauge how significantly it has affected the EU’s economy.

The most comparable regulation already in existence in the U.S. is California’s own Proposition 65, otherwise known as the Safe Drinking Water and Toxic Enforcement Act of 1986, which requires products that contain carcinogens or reproductive toxins to feature a warning label. The new initiative, however, is more expansive on many levels.

At roughly 100,000 chemicals, the list of toxins the initiative will potentially regulate dwarfs Prop 65′s reach–about 900 chemicals appear on that list. For existing products, manufacturers will need to evaluate whether they can reformulate questionable items with safer chemicals or risk having them pulled from the market. New products will face scrutiny from the get-go. An initial list of priority chemicals is scheduled to be released in March 2012, followed in September 2013 by a rundown of products that use those chemicals.

For many companies, it will make economic sense to reformulate targeted products nationwide rather than create a California-only version, says Dechert Partner Sean Wajert.

“State borders really mean nothing anymore,” he says. “If you have any hope for marketing at a national or regional level, you have to make an assumption the product will get into California.”

The initiative also aims to address in a product’s design phase the cost of cleanup and any subsequent risks associated with the end of its life. Companies will have to assess whether there are ways to prevent the product from becoming waste through reuse or recycling.

“It’s the intersection of product liability and environmental cleanup,” Hsiao says.

Stirring the Pot

While the state promises to come down hard on companies that don’t comply with the regulation, plaintiffs attorneys will likely find plenty of litigation opportunities in the initiative.

“If you look at Proposition 65, which is only a few lines long, there’s been a huge amount of litigation,” says Lee Smith, a partner at Stoel Rives. “This thing is 92-pages long. There’s a lot of mischief to be had in there.”

In the proposed rule, each ring in the supply chain is responsible for complying with the regulation, which Smith says could lead to infighting if litigation arises. Companies may also litigate over what constitutes a hazardous exposure and how that hazard balances with the economic feasibility of replacing the chemical with something safer.

But even companies that fully comply with the regulation could still be exposed to litigation from plaintiffs that argue changes should have been made earlier, Wajert says.

“The plaintiffs attorneys won’t be able to directly hang their hat on a chemical now that it’s banned, but they can use all the reasons why it’s banned or restricted now to say ‘You knew this five years ago. You were negligent and only [changed the formula] when you had to,’” Wajert says.

Pick Your Poison

Any way you look at it, the initiative will be an expensive proposition for industry. Companies must accept the burden of screening their products and performing the alternative assessment with no state aid. In addition to reformulating a problematic product for future sale, a company could be required to recall existing versions from the market.

Once DTSC releases the draft list of priority chemicals, which ranks chemicals based on their potential toxicity, Smith says it’s critical for in-house counsel to comment.

“People need to get involved early in the process to make sure their ox doesn’t get gored while they’re not looking,” he says.

There doesn’t appear to be an easy mechanism for getting a chemical or product off the list once it’s finalized, so Wajert says the only opportunity to shape the list is during the comment period.

In-house counsel will also want to stay abreast of how the DTSC defines the risks associated with various levels of exposure. As it stands, there’s no guidance on what could be considered a safe limit.

“An important part of economics is making reasoned judgments about exposure and dosage,” Wajert says. “The dose makes the poison. If a company’s using the chemical in way that consumers won’t get a significant exposure, doesn’t that
mean something?”