Forever Chemicals, and False Labels: A Class Action

CPG and the Pivot to Health & Wellness

Private equity and venture capital firms have long viewed consumer packaged goods (CPG) as a viable target industry. CPG generally benefits from steady investment tied to predictable cash flows and defensible market positioning. The sector has seen a significant increase in fundings recently as firms try to stabilize their portfolios. Beyond big-ticket deals, such as Blackstone’s acquisition of Jersey Mike’s or PepsiCo’s acquisition of Siete Foods, increased capitalization presents tremendous growth and exit opportunities for emerging CPG companies within the health and wellness space. For example, notable private investment firms report being bullish on CPG and highlight the growing emphasis being placed on sustainability and health-conscious innovations within CPG. Still, as capital deploys, bubbling legal developments in trendy litigation may create a headwind that negatively affects investment returns. The current climate suggests that CPG is in for a fresh downpour of class actions for the foreseeable future.

Consumer Protection in California

Last year over five hundred false advertising class actions were filed in California district courts alone. Although most of these claims fail at the pleading stage, defending against a litany of class actions is costly for business. CPG, in particular, has been subjected to two recent trends—class actions that challenge the use of both “forever chemicals” and “greenwashing” in product packaging. “Forever chemicals” are widely used, long lasting chemicals, which are harmful and break down slowly over time. “Greenwashing,” on the other hand, specifically refers to the act of making false or misleading statements about the environmental benefits of a product or service. 

These claims arise under California’s three closely related consumer protection laws: the False Advertising Law (FAL), the Unfair Competition Law (UCL), and the Consumers Legal Remedies Act (CLRA). The FAL targets misleading statements, the UCL broadly prohibits unlawful, unfair, or fraudulent business practices, and the CLRA makes it unlawful to engage in deceptive acts when selling to consumers. A private right of action incorporates the three, and plaintiffs can plead collective violations to obtain broad relief including injunctions, restitution, and substantial damages. Prevailing plaintiffs are then entitled awards for court costs and attorney’s fees.

“Forever Chemicals” and “Greenwashing”

“Forever chemicals,” is the common, informal name for a large class of synthetic chemical compounds known as Per- and Polyfluoroalkyl Substances (PFAS). They are known as “forever chemicals” because of their chemical structure, which makes them persistent in the environment and the human body. There are thousands of PFAS chemicals found in various consumer, commercial, and industrial products. Scientific studies have shown that exposure to PFAS in the environment may be linked to cancer and other harmful effects. 

Due to a rise in public awareness surrounding “forever chemicals,” PFAS litigation has grown significantly in recent years. If the presence of PFAS is not disclosed in consumer products like plastic packaging, plaintiffs can allege that companies are misrepresenting the product’s quality by materially omitting information regarding the chemicals’ presence. 

Similar to PFAS claims, class actions have targeted deceptive environmental claims. As a majority of consumers indicate they will pay a premium for environmentally friendly products, CPG is incentivized to endorse eco-friendly initiatives that can be misleading if not substantiated. California, however, has enacted several climate-focused disclosure laws, making it easier to challenge companies' eco-claims. As a result, “greenwashing” actions are expected to accelerate in upcoming years. Collectively—AB 1305, SB 261, and SB 253—establish comprehensive disclosure checks that require companies operating in California to report their environmental claims and data. While these laws do not create a separate private right of action, they create a vast new source of evidence that plaintiffs can use to prove claims under the State’s existing consumer protection laws (FAL, UCL, and CLRA). 

Costly Consequences of Class Actions

Within the CPG sector, a class action settlement can prove detrimental to operations. Even in the case of settlement, the defendant agrees to pay a lump sum known as the Settlement Fund. The Settlement Fund takes into consideration, among other things, specific statutory penalties and various forms of equitable relief. For example, California’s UCL empowers consumers to seek injunctions, restitution, and civil penalties. Without even considering attorney’s fees awarded to the prevailing plaintiff, a nationwide—or even a statewide—class action settlement can add up quickly. 

Settlement Funds regularly surpass millions of dollars. Arhaus, a home furnishing company, recently agreed to a $6 million class action settlement to resolve allegations of misleading discounts. Similarly, HelloFresh, a meal kit delivery service, reached a $7.5 million settlement to resolve claims that it charged customers for subscription renewals without their consent. As mentioned above, a majority of PFAS claims have failed at the pleading stage. However, this trend is not dispositive of the merits, and CPG companies remain exposed to the risk of these multi-million-dollar lawsuits. 

Risk Mitigation Through Operational Expertise

Beyond a significant capital infusion, private investment also offers a synergistic opportunity to bolster compliance within the CPG sector. By acquiescing to private investment firms’ operational expertise, CPG companies can mitigate exposure to consumer class action claims. On the other hand, comprehensive due diligence and operational oversight protects firms’ investments in target CPG companies. Investment due diligence requires an investigation and analysis of every aspect of the business to verify information, assess potential risks, and evaluate the viability of a potential investment before committing capital. Regardless of the investment stage (i.e., early-stage versus late-stage), investment due diligence provides a non-regulatory audit into the target company’s advertising and operational practices. Thus, effective due diligence identifies—and ideally mitigates—any potential legal liability resulting from advertising and labeling claims before the target company leverages the private capital to scale into new and existing markets. 

Institutional knowledge can also guide a company's operations by informing its branding to develop defensible assertions. Investors have strategies in place to address potential risks. For example, investors regularly implement checks to ensure CPG and third-party collaborators align with the brand’s identity and each assertion it makes. 

Finally, private investment offers additional operating capital. CPG accounting is intricate and time-consuming where CPG companies manage a broad range of products, sales, distribution channels, and promotional agreements. Compliance is considered an afterthought. Private investment firms readily support compliance efforts to protect both the portfolio company and the firm’s own brand identity and legal exposure. Private investment further opens the door to an expansive market of professionals, including lawyers and auditors with specialized expertise on false advertising and class action defense. In short, CPG companies can focus on compliance, and private investment firms can foot the bill. 

Conclusion

Aggressive putative class actions and new regulatory trends signals a dramatically heightened risk of litigation for CPG, especially in the health and wellness sector. Plaintiffs are now empowered with required data to challenge undisclosed PFAS content unsubstantiated “greenwashing” claims. Consequently, mitigating risk requires transparency to be viable, and institutional knowledge should be leveraged to ensure CPG assertions are defensible and substantiated. 

*The views expressed in this article do not represent the views of Santa Clara University.