Nathaniel Bodnar, a summer 2022 law clerk at Washington Legal Foundation, is a second-year student at the George Mason University Antonin Scalia Law School.
Instead of advancing environmental activists’ mission, “greenwashing” litigation can actually hamper their long-term Environment, Social, and Governance (ESG) goals. Current litigation trends, which demonstrate how difficult, if not impossible, it is to substantiate environmental claims, threaten to deter businesses’ ESG commitments. Greenwashing litigation generally involves a claim under state law that a defendant misrepresents its product in such a way that a reasonable consumer will believe that the product is more environmentally friendly than it is. Many of these lawsuits are guided by or rely upon the Federal Trade Commission’s “green guides” to environmental advertising.
Businesses have come to understand (or at least have the impression that) many investors and consumers value ESG goals. Those businesses in turn incorporate the achievement of certain ESG goals into their public communications and, for product manufacturers, onto their product packaging. If courts find those statements to be incompatible with state or federal legal standards, businesses may elect not to pursue those goals at all. While legal challenges to ESG representations may be well-intentioned, over-policing “misrepresentations” may cause companies to curtail the very ESG commitments that activists support.
In California, for instance, violations of the FTC “Green Guides” are a per se violation of the California Environmental Marketing Claims Act. California courts have gained a reputation for being plaintiff-friendly, so, unsurprisingly, much of the greenwashing litigation has taken place in California. In 2018, Costco unsuccessfully tried to dismiss a complaint that alleged the company misrepresented that it was “environmentally responsible” when it printed that statement on its dish soap and laundry detergent packaging. The complaint asserted that the presence of sodium hydroxide, sodium lauryl sulfate, lauramine oxide, and methylisothiazolinone in the soap and detergent rendered the products environmentally “unfriendly.” Even though the products earned accreditations from EPA (“Recognized for Safer Chemistry”), an OECD-recognized “biodegradable formula,” and “USDA Certified Biobased Product,” the Northern District of California allowed the claim to proceed. The court held that the question of whether Costco’s affirmations were not misleading to a reasonable consumer is a matter for a jury, not a judge, to decide.
Last year, in denying a motion to dismiss in Bush v. Rust-Oleum Corp., the Northern District of California cited EPA comments on the Green Guides, writing that “marketers will ‘rarely, if ever, be able to adequately qualify and substantiate such a claim of ‘non-toxic’ in a manner that will be clearly understood by consumers.’” Federal authorities have made similar comments about the term “eco-friendly,” a stance that raises serious questions about whether these types of claims can ever be present in packaging or branding materials.
A lawsuit against shoe maker Allbirds (the subject of a recent WLF publication here) demonstrates the litigation risk of an ESG-related statement. A federal court dismissed that suit but obtaining such a positive outcome imposes financial and reputational costs.
Smaller companies like Allbirds are at the forefront of building environmentally or socially conscious product lines. The plaintiff in Dwyer v. Allbirds Inc. didn’t broadly question the company’s environmental motives or bona fides. Instead, she claimed the metrics Allbirds used were inadequate and that the representations using those metrics misled reasonable consumers. One major point of contention was the calculation of carbon in Allbirds products. The plaintiff argued that the Higg Materiality Sustainability Index, which Allbirds utilized, failed to include “water eutrophication or land occupation” in its calculations, which would mislead a reasonable consumer about the amount of carbon created by Allbirds products. The other dispute centered on the farms Allbirds used to source wool. Plaintiff took issue with the fact that the certification did not track sheep after they left the farm.
In sum, the Allbirds plaintiff disputed the methodology of certifications and metrics created by third parties and used those disputes to sue a corporate defendant. Although Allbirds by no means has pockets as deep as major players like Nike, Allbirds’ 2021 profits were around $150 million. If the plaintiff’s complaint had survived a motion to dismiss and then a motion for summary judgment, Allbirds likely would have settled. A settlement could have cost the company between 1% and 15% of its annual profits.1
With the rise in litigation and the accompanying costs and bad press in mind, some legal and insurance experts recommend that companies reduce or modify their ESG representations. Attorneys at Covington & Burling LLP warned in the firm’s Sustainability Toolkit that committing to voluntary standards for a company’s sustainability can subject a company to heightened legal liability and the potential for negative media attention if it fails to meet its goals. Similarly, Verdant Law cautioned against terms like “all-natural” because such terms are too vague and can potentially mislead consumers, as some harmful substances are naturally occurring, and some consumers may falsely believe that “all-natural” is safe or is inherently environmentally friendly. K&L Gates LLP attorneys warned that even third-party certifications might not protect a company against greenwashing suits. Ultimately, even if a business isn’t targeted directly for greenwashing, companies that make ESG claims will likely have the legal risk priced into their insurance as insurers have become more aware of this risk. Securities and Exchange Commission enforcement of ESG commitments will likely only further disincentivize ESG commitments.
Anti-greenwashing activists run the risk of being too aggressive in their litigation. If a court deems a company’s ESG aspirations unprovable under the broad language of a state consumer protection law—even when verified by a neutral third party—that company may abstain from making or following through on those commitments entirely. Hypocrisy is the first step toward change; progress starts with an aspiration that is not in line with the current state. It takes a recognition that the current state is less than ideal and can be improved upon to create change. If this kind of hypocrisy is penalized, no change will be made. While these activists may earn short-term wins in courts and through settlements, those “wins” may come at the cost of their activists’ larger goals. Numerous suits have targeted companies committed to being more environmentally conscious; an effort to move towards what the activists ultimately wanted resulted in punishment. If companies are attacked for their aspirations, why bother aspiring?
- Fairlife LLC paid $21 million to settle a case where it was alleged that Fairlife misrepresented the treatment of the cows producing their milk. Many greenwashing cases have been settled for smaller but still significant amounts. Keurig settled a greenwashing suit for $10 million; Sunshine Makers settled a greenwashing suit for $4.35 million; and S.C. Johnson settled a greenwashing suit for $2.25 million.