10 Beauty Regulatory & Litigation Concerns for 2021

With consumers and investors pushing companies for public statements related to ESG, new risk exposure emerges.
With consumers and investors pushing companies for public statements related to ESG, new risk exposure emerges.

As we jump into 2021 with eagerness to put 2020 behind us, one area in which we hope to see positive change is cosmetics development and regulation. We have identified activity from 2020 that signals expected progress and risk exposure in 2021 to help the cosmetics industry plan ahead.

1. A New Year “Free of” COVID and Toxins

While we are hopeful that 2021 will be a year free of COVID-19, we can expect that cosmetics formulations will be free of known “toxins.” This practice is in large part influenced by California’s Toxic Free Cosmetics Act passed on September 30, 2020 (a.k.a. Assembly bill 2762; the “Act”).

California is the first state to ban 12 ingredients used in personal care products, including formaldehyde, mercury, isobutylparaben and isopropylparaben. The Act states it is intended to be consistent with the prohibition enacted by the European Union (EU).

While the Act does not become active until 2025, we can anticipate most of these ingredients will be phased out of products—if they haven’t been already. In fact, many retailers have enacted programs to restrict sales to products free of such ingredients.

Soon after, on October 1, 2020, California Governor Gavin Newsom, also enacted the Cosmetic Fragrance and Flavor Ingredient Right to Know Act of 2020. Beginning January 1, 2022, this law will require cosmetic manufacturers to disclose to California’s Division of Environmental and Occupational Disease Control a list of each fragrance ingredient or flavor ingredient that is included on a designated list, as defined, and a list of each fragrance allergen that is present in the cosmetic product in specified concentrations.

In turn, the division will post on its existing database of cosmetic product information a list of those fragrance ingredients and flavor ingredients in the cosmetic product and its associated health hazards. Even if other state legislatures do not follow California’s lead, California has sent a clear message that it will not wait on federal legislation to get the job done.

2. ESG Takes Priority

This year has certainly underscored social and civil issues, putting companies to the test to act beyond public statements. What began as a motive for purchases and investing has now become a key factor for business.

As a result, Environmental, Social and Corporate Governance (“ESG”) has moved to the forefront of business priorities and strategic planning. For most cosmetic companies, ESG measures are exhibited through sustainability efforts, which have only been accelerated by COVID-19.

Sustainability impacts all facets of product development, from ingredients to supply chain to packaging and distribution.

Measures to improve sustainability include procuring more local and responsibly sourced materials, reducing emissions, and eliminating waste. There is no regulatory reform for sustainability, but the U.S. Federal Trade Commission’s (FTC) maintains the Green Guides to “help marketers ensure that the claims they make about the environmental attributes of their products are truthful and non-deceptive.”

With consumers and investors pushing companies for public statements related to ESG, new risk exposure emerges. Representations in product packaging, marketing and advertising materials should be backed by reliable data and support and otherwise consistent with the Green Guides. This extends to mission statements and policy statements of the like.

Relatedly, while U.S. securities laws typically do not require the disclosure of ESG data, public companies have increased ESG disclosures on securities related filings. If voluntary disclosures are materially misleading or false, they could subject a company to litigation risk under securities and consumer protection laws. Until universal standards for ESG exist, companies must balance the risk and reward of making public statements about ESG activities.

3. Natural Beauty

Related to the concept of sustainability, consumers are equally attracted to “natural” or “clean” products. Yet, there continues to be no regulatory definition in the U.S. for “natural.” In November 2019, the Natural Cosmetics Act was introduced to help create clarity by defining the terms “natural” and “naturally-derived ingredient” as they are used in personal care products.

Of course, the legislation was shelved as priority shifted to COVID-19 relief lawmaking. While the legal term “natural” remains in limbo and any legal confines to “clean” is decades away, companies remain exposed to often frivolous class action lawsuits from consumers claiming that the use of these terms to describe their products is misleading.

In December 2020, two new class actions were filed based on “natural” claims for a shampoo and lip balms that purportedly contain synthetic ingredients. We expect this to continue to be a source of litigation and hefty settlements if companies cannot escape cases early. In the interim, companies should be mindful of “natural” and “clean” marketing where ingredients are sourced from synthetic means.

4. Data Driven Cosmetics

An emerging trend in the cosmetics space is the use of customer data to drive product development. Typically, consumer data is entered into a database where it is processed by artificial intelligence that in turn creates a detailed analysis of skin concerns and products or ingredient suggestions.

Additionally, brands with a loyal customer base are turning to customers to solicit their suggestions for developing new product lines. In any event, the consumer is driving innovation by sometimes unknowingly providing personal information.

Using consumer information for pecuniary gain raises questions of customer privacy and data protection. In May 2018, the EU enacted the General Data Protection Regulation (“GDPR”) to standardize a wide range of privacy legislation into a single set of regulations to protect consumers in member states. One facet of the GDPR is that it gives consumers more control over how their information is collected and used.

The U.S. does not have a federal GDPR equivalent. California, however, maintains the California Consumer Privacy Act of 2018 (“CCPA), giving California residents the right to know what personal information a business collects about them and how it is used so that they may opt-out of sharing such information, including records of products purchased and internet browsing history.

Expanding the CCPA, in 2020, California passed Proposition 24, the California Privacy Rights Act. Among other changes, the law created a new category of protected information called “Sensitive Personal Information,” which includes biometric and genetic information. The CPRA won’t take effect until January 1, 2023, but it will have a look-back period to January 1, 2022.

In light of GDPR, CCPA and CPRA, data-driven cosmetic companies need to be cautious of their obligations to avoid regulatory action or private litigation. In addition, companies must ensure their privacy policies and representations concerning customer data is not prone to misinformation.

For example, in January 2021, the FTC settled claims against a fertility tracking app for misleading users about its data-handling practice in its privacy policy after sharing health data with third parties.

5. Drugs vs. Cosmetics—Firming Up the Distinction

Manufacturers have pushed boundaries in developing skin care products with promises of rewinding the impact of age under the auspices of improving appearances rather than making any claims that may be construed as drug-related.

The U.S. Food, Drug, and Cosmetic Act (“FDCA”) defines cosmetics as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body ... for cleansing, beautifying, promoting attractiveness, or altering the appearance” (21 U.S.C. § 321(i); emphasis added).

Drugs, by contrast, are articles “intended to affect the structure or any function of the body of man” (Id. § 321(g)(1); emphasis added). If a product qualifies as a drug under the FDCA, the seller must first seek approval from the FDA before selling that product, while cosmetics are not subject to preapproval.

Historically, plaintiffs’ attorneys have used alleged drug-related claims to bring actions against cosmetics manufacturers based on fraud and misrepresentation. But, as the Southern District of California demonstrated in April 2020, U.S. courts are not prime to serve as the forum of deciding whether a product is a drug or a cosmetic.

The Court faced the question of whether a lotion was unlawful under California’s Unfair Competition Law because its label advertised that it improved skin’s firmness and tightness but had not been preapproved by the FDA.

The court held that because the plaintiff was suing based on a violation of the FDCA (i.e., an attempt to privately enforce the FDCA), the action was impliedly preempted—triggering enforcement entrusted to the FDA, not the courts. As a result, the Court granted summary judgment in the product manufacturer’s favor. 

Meanwhile, in September 2020, the FDA proposed amending its medical product “intended use” regulations to clarify the types of evidence relevant to determining the “intended use” of FDA medical devices and drugs. We may expect additional clarity or action by the FDA to cement the distinction between drug and cosmetics and evidence of “intended use.” Plaintiffs may, however, continue to raise fraud claims based on the drug vs. cosmetics distinction albeit not solely on traditional anti-aging claims.

6. E-commerce Legal Considerations

Long before COVID-19 affected retail companies had already started shifting to e-commerce platforms. As observed by Euromonitor International’s 2020 survey, “[d]igital shopping behaviors such as internet-based research and advertising, brand interactions and online purchases have accelerated.”

The survey reported 34% of consumers are “digital beauty” shoppers, meaning that they purchase cosmetic products online and are influenced by digital media and other online content. There are a few areas where compliance assurances are necessary in the e-commerce space—particularly pricing and shipping.

As needs change in light of COVID-19, supply and demand have influenced pricing. Companies cannot artificially inflate a product’s price for short period of time to support a claim that an item is discounted when the price is thereafter reduced.

The FTC’s Guides Against Deceptive Pricing generally require that a retailer offer an item at a price for a reasonable, substantial period of time in good faith, and in the regular course of business, before advertising that price as the former or regular price (16 C.F.R. § 233.1).

A popular phrase provoked by COVID-19 is “price gouging.” This illegal activity is exhibited by the use of “excessive” or “unconscionable” pricing, which may be measured by the average prices in an affected area over a given look-back period prior to the emergency or event that triggered the escalated pricing.

While there is no federal U.S. law governing price gouging, former President Trump issued an executive order (landing page since taken down) instructing the Department of Justice to investigate and prosecute price gouging of medical resources pursuant to the broad executive authority under the Defense Production Act.

Many states also have laws on the books that prohibit price gouging, several of which come with steep fines. (See, e.g., D.C.’s Natural Disaster Consumer Protection Act.) Retailers therefore need to be sensitive to the pricing advertised for products to avoid it be construed as deceptive.

Relatedly, because consumers cannot pick up their products, shipping has become a topic of importance. Under the FTC’s “Mail Order Rule,” when retailers advertise merchandise, they must have a reasonable basis for stating or implying that they can ship within a certain time advertised. When there is no shipment statement, retailers must have a reasonable basis for believing that the products can be shipped within 30 days.

Importantly, if a retailer cannot meet the prescribed shipment date or default 30-day period, it must seek the customer’s consent to the delay. There is specific language that must be included in a notice to a customer about a shipping delay, including offering the customer the option to cancel the order.

The FTC flexed its authority of the Mail Order Rule, with a record-setting $9.3 million financial remedy in a settlement with a retailer who failed to deliver (pun intended) on its shipping promises. The retailer agreed to use the financial assessment to provide compensation to consumers who received gift cards when they should have received refunds.

Failure to follow these fundamental ecommerce laws may be easy traps for enforcement and class action litigation.

7. Digital Marketing and Blurring Reality

With customers relying online to shop for cosmetics, they are equally turning to the internet for advice on what to buy. Since last year, the FTC began cracking down on online marketing tactics.

At the beginning of 2020, then-FTC Commissioner Rohit Chopra warned that “when companies launder advertising by paying someone for a seemingly authentic endorsement or review, this is illegal payola.”

He also observed that despite the FTC’s enforcement actions against popular brands for disguising their advertising, it is not clear that these actions deter misconduct in the marketplace, due to the limited sanctions the FTC has pursued.

In March 2020, the FTC settled claims against a company that, among other merchandise, sold skin care products because its influencers made misleading claims and failed to disclose that the company paid them to endorse its products.

The National Advertising Division also weighed in on influencer marketing in 2020, raising concerns that consumers seeing TikTok videos on Instagram about certain products could not tell that they were paid advertisements because the material connection disclosure did not appear on the video itself.

It remains critical that companies heed to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, ensuring that agreements with partners and thorough online marketing are effective to ensure compliance.

8. Protecting Intellectual Property

We’ve seen a number of feuds over intellectual property this year but not just traditional product formulations. We had contested trademarks for a cosmetics palette and fragrance by different brands, novel registrations for single-color marks from product packaging to shoe soles, and patent infringement lawsuits by an incubator based on its protected business model for two celebrity cosmetic brands.

Brands continue to distinguish themselves from competitors through unique product packaging, trade dress, and color. Efforts to date demonstrate that non-traditional marks may have a greater likelihood of obtaining registration from the U.S. Patent and Trademark Office with a claim of acquired distinctiveness. Meanwhile, failing to appreciate intellectual property protections may lead to private litigation.

The biggest area of concern, however, is counterfeit products. In January 2020, the LAPD seized more than $300,000 in counterfeit makeup and beauty products. A year later, with the pandemic forcing consumers to purchase their personal care products online, companies should anticipate an increase in counterfeit activity.

Successfully combating this fraudulent activity will involve a collaboration between all consumers, online retailers, manufacturers and law enforcement. For their role, brands need to invest in education and monitoring resources so that personnel and consumers alike better understand how to identify fakes and report them.

9. CBD Sales Still on a High

CBD sales have forged ahead despite no true regulatory framework and a slew of regulatory and private actions. On July 22, 2020, the U.S. FDA submitted a draft policy for regulating the CBD market to the White House via the Office of Management and Budget for approval, but the policy and its status have not been made public. The change of administration, however, may prompt more immediate responsive action.

2020 also marked the FTC’s first federal case and parallel FTC administrative action against a CBD marketer for making unapproved new drug claims for its CBD and other products. Most recently, on December 17, 2020, the FTC announced that it was acting against six companies selling CBD-based products.

These companies faced administrative actions by the FTC for “making a wide range of scientifically unsupported claims about their ability to treat serious health conditions,” such as cancer, Alzheimer’s disease and pain relief.

Five out of the six companies also had to pay a fine to the FTC—ranging from $20,000 to $85,000—the first monetary sanctions issued by the FTC against CBD product manufacturers and sellers. Days later, the FDA announced that it issued five more warning letters to companies for selling products containing CBD in ways that violate the FDCA .

Both the FDA and FTC demonstrated in 2020 that they will not just target CBD product manufacturers and sellers, but also the middleman marketer (i.e., marketing affiliates) who promotes and profits from the sale of CBD products.

As for class action litigation arising from CBD products (e.g., drug claims, label misrepresentations, etc.), most courts have declined to adjudicate until the FDA clarifies CBD regulations. To avoid diverse judicial holdings, courts are relying on the doctrine of primary jurisdiction, under which courts can defer matters where a regulator has primary oversight.

This is likely to persist in 2021. Still, it is worth noting that a new area of CBD litigation includes shareholder derivative lawsuits against publicly trade CBD companies for failing to disclose information or making false or misleading statements. Such lawsuits, some of which are follow-on to consumer class actions, are brought by investors against the company to hold officers and directors liable for misconduct.

Needless to say, the fragmented regulatory framework and rising litigation demands special compliance attention and regular monitoring of the changing legal landscape.

10. Cosmetics Regulatory Reform Sidelined

Democratic U.S. Congressional leaders Frank Pallone, Jan Schakowsky and Diane Feinstein have each introduced bills over the last two years to update the cosmetics regulations. In March 2020, the House Energy and Commerce Committee’s Health Subcommittee advanced the Cosmetic Safety Enhancement Act of 2020 (HR 5279), which was introduced by Rep. Pallone in December 2019. The bill was forwarded to full committee.

Nevertheless, legislative activity related to personal care products has generally stalled in light of COVID-19 as priorities have shifted. Of note, through the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the Sunscreen Innovation Act (the “SIA”) will be phased out as of September 2022.

Also through the CARES Act, legislators established significant changes in the monograph process, user fees and exclusivity for over-the-counter (OTC) drugs. Accordingly, new sunscreen ingredients still being reviewed under the SIA may be reviewed under the new process for OTC drugs set forth in the CARES Act.

While the forthcoming changes affect the drug industry, they signal that any future cosmetic regulations will be similar in purpose. Although the FDA will concentrate its efforts on the implementation of the new OTC process, it serves as an indicator of future cosmetic regulatory reform.

A successful approach will modernize but not penalize the cosmetics industry through excessive burden or cost, which may involve tailoring regulatory requirements based on a company’s size or portfolio of products.

In light of the new administration and party leadership in Congress, any legislation will undoubtedly contain measures to ensure consumer health and protection.

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