Despite positive projections about the future of the beauty industry, insiders say brands of all sizes are quietly grappling with unseen legal struggles.
On the surface, the beauty industry seems to be thriving: Total prestige beauty sales hit $18.3 billion year-to-date through August, up 15% compared to last year, according to market research firm Circana. But behind exciting launches and shiny social media images lies a slew of problems that are quietly shuttering beauty brands.
Glossy spoke to former and current founders from struggling and recently closed brands over the past week and found many of their obstacles to be universal. Rising inflation, increased customer acquisition costs, soaring interest rates and a contracting VC landscape have turned up the financial pressure. And for some, unexpected lawsuits are acting as the nail in the coffin.
“A lawsuit is the real reason we closed,” said the founder of a well-known omnichannel clean beauty brand that garnered headlines when it shuttered earlier this year.
Another, who is in the middle of her company’s third lawsuit in three years, said it’s all but knocked her down physically, emotionally and financially. She’s considering closing her masstige personal-care business, despite having distribution in online and retail stores across the country. “I want off this ride,” she said.
Both founders preferred to remain anonymous to protect themselves from further legal attention.
Both blamed, in large part, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Prop 65.
“[Prop 65] requires products sold in California to have a special warning label if use of the product causes an exposure to one or more chemicals identified as causing cancer, birth defects or other reproductive harms,” said lawyer Kelly Bonner, Esq., an associate at Duane Morris Law Firm LLP.
There are currently more than 900 chemicals on the Prop 65 list, with more added annually. The list included 235 chemicals when it was released in 1988. Among them are chemicals that may be found in cosmetics, like phthalates, perfluoroalkyl (PFOS) and polyfluoroalkyl substances (PFAS) and UV filters in sunscreens, Bonner said.
Once a new chemical goes onto the list, a company has one year to warn consumers about its presence in a product that includes it. Businesses with less than 10 employees are exempt.
One of the founders we spoke to believes she may have avoided legal attention if she had added a Prop 65 warning sticker to products that included titanium dioxide. Since the ingredient is commonly found in sunscreen and is FDA-approved as a colorant in makeup, she didn’t assume it would be necessary. But the California Office of Environmental Health Hazard Assessment, which oversees Prop 65, includes titanium dioxide when in “airborne, unbound particles of respirable size.” She believes she was unfairly targeted, and so far, it’s cost her thousands to defend herself.
For another, it was a chemical in the plastic composition of a gift-with-purchase accessory that flagged a legal team. She said she had no idea the chemical was present in the product, which was made overseas, so she was unaware that a Prop 65 label could have waved off circling lawyers. “They asked for a million dollars and ended up settling for $1,000,” she said, noting that she spent thousands defending herself, then more on lost inventory after pulling the product from shelves.
Chances are you’ve seen Prop 65 labels on all kinds of consumer goods and, in California, displayed on entrances to office buildings, parking garages, restaurants and just about anywhere there is a slight chance of coming into contact with a chemical on the list. The chemicals also include carbon monoxide from an engine’s exhaust, lead from paint and various chemicals that make up some plastics.
But the vast majority of the beauty industry has been unwilling or unable to comply, whether due to negligence or the fear of scaring off customers with stickers that warn of possible cancer and birth defects. A brand need not be based in California to be at risk: If it sells into the state through direct-to-consumer channels or retailers like Sephora, Target, Walmart or Amazon, the brand is subject to Prop 65.
Insurance claims don’t commonly cover Prop 65 lawsuits, and negligence in communicating with contract manufacturers or retailers can leave brands with a target on their backs. Some retailers also include indemnity clauses in their contracts with vendors, which means brands are solely responsible for all fees incurred by retailers due to these suits or warnings. Oftentimes, retailers are listed as the second or third defendant, tacking on additional financial burdens for brands.
Here’s where it gets more complicated: Because the state of California doesn’t have the resources to enforce all of its laws, it allows anyone to sue a brand for certain violations, including Prop 65.
“Because Prop 65 allows private firms to recover fines and attorneys’ fees if they successfully pursue Prop 65 claims against businesses, it incentivizes firms to act, essentially, as private attorneys general, and bring these cases without actually having an injured plaintiff or someone who experienced health issues as a result of being exposed to these products,” said Bonner.
Individual lawyers and firms both pursue these cases in California, oftentimes under LLCs with environmental-sounding names like Clean Product Advocates, LLC or Ecological Alliance, LLC. Legal action begins with a 60-day notice sent to the brand and/or retailer warning of possible impending legal action.
According to the California Office of the Attorney General, over the past few months, one San Diego-based company called Environmental Health Advocates, Inc., has sent Prop 65 notices to Smashbox, Victoria Beckham Beauty, Mob Beauty Inc., RMS Organics, Uoma Beauty, Inc, Jones Road and Pat McGrath Cosmetics LLC, among many others. It’s just a small fraction of the notices that have gone out to beauty brands over the past few years, which include a who’s who of popular brands, both independent and owned by large conglomerates. Oftentimes, they’re settled out of court. The brands listed here did not immediately reply to Glossy for comment.
“Citizen prosecutors have filed more than 30,000 violation notices since Prop 65 went into effect in 1988,” said Bonner, adding that settlements get larger and larger each year. “The majority of this amount is attorneys’ fees, with some penalties. Recently, we’ve seen some very large settlements, seeking tens of thousands in civil penalties, as well as hundreds of thousands in attorneys’ fees, not to mention the costs of a potential reformulation.”
As for the cost incurred on brands? “It depends,” said California-based attorney Cyndie M. Chang, Esq. a partner at Duane Morris Law Firm LLP. “If it can be settled or resolved early, it may be tens of thousands. If it goes to trial, it may be hundreds of thousands of dollars.”
In a comment sent to Glossy from Noam Glick, the attorney behind the Environmental Health Advocates, LLC, he said that he is very proud of the work protecting the health and safety of California consumers.
“EHA does not seek to ‘shutter’ any business,” says Glick. “To the contrary, EHA invites smaller companies to present evidence of financial hardship as a factor in any settlement discussions, but these companies must first agree to remove dangerous chemicals … from their products.”
Between May and October of last year, EHA filed suits against The Creme Shop, Too Faced Cosmetics, Forma Brands, Physicians Formula, Urban Decay and Mineral Fusion, all for titanium dioxide labeling, according to the Perkins Coie Law Firm. The brands listed did not immediately reply to Glossy for comment.
“Ensuring that these products can be used safely, with minimal health risks to unsuspecting customers, should be a non-controversial, industry-wide objective,” said Glick. He added that some companies “have focused instead on fighting in litigation rather than solving the problem and ensuring consumer safety. We find that unfortunate.”
But EHA is just one group behind the growing trend. In 2019, the most recent year the data is publicly available, 898 businesses paid more than $29 million to settle Proposition 65 claims against them. This is up from more than $11 million in 2000 and $13 million in 2010.
In 2019, the lion’s share — or about $24 million — went directly to plaintiffs’ lawyers, while California’s cut was about $2.7 million, according to Conkle, Kremer & Engel Law group.
“These firms have sued everyone from mom-and-pops to huge conglomerates, and they’re not going away,” a former beauty founder told us. The only difference? Where large companies might shrug it off as a line of their P&L, indie brands can be easily knocked down.