In the following guest post, Sarah Abrams takes a look at a recent settlement of a securities class action lawsuit in which the plaintiffs alleged that the defendant company had failed to disclose its use in its haircare products of certain banned chemicals, and then considers whether the current Make America Health Again initiatives could expose companies to future claims that they allegedly failed to disclose their continued use of banned chemicals. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
A recent securities class action (SCA) settlement entered into between Olaplex Holdings, Inc. (Olaplex) and shareholders for $47.5 million involved allegations of Olaplex’s purported failure to disclose the use of an EU-banned ingredient in its flagship haircare products. Specifically, Olaplex shareholders alleged that it did not address its use of the floral fragrance ingredient, lilial, in its initial public offering (IPO) documents. In 2020, the EU classified lilial as a “reprotoxic,” meaning that it is a chemical that could adversely affect fertility and fetal development. All consumer products formulated with lilial were to stop being sold and off store shelves in the EU by March 1, 2022.
As the Make America Health Again (MAHA) initiatives continue to ramp up, including “urging” the removal of artificial food colors on consumer brands, will there be a risk of similar SCAs against food and beverage companies stemming from failure to disclose the use of harmful ingredients?
Even though the Olaplex SCA involved an EU regulatory ban on an ingredient already in product formulations, many US food and beverage producers have committed to replacing synthetic dyes with natural colors in line with stated MAHA objectives. Some have not.
To determine whether taking a position on the MAHA request may have an impact on D&O underwriter exposure, the following discusses the Olaplex SCA, MAHA directives for removal of FD&C (artificial food dyes), and companies publicly volunteering to comply with those directives, as well as prior SCAs stemming from allegedly harmful ingredients.
Olaplex SCA
The SCA brought by shareholders against Olaplex pled violations of Sections 11, 12(a)(2), and 15 of the Securities Act for allegedly providing false or misleading statements and omissions in the company’s IPO registration materials.
According to the plaintiff shareholders, Olaplex marketed itself as a premium, science-backed, and “clean” haircare brand committed to consumer safety and transparency. However, shortly before its IPO, Olaplex began to reformulate its flagship product, the No. 3 Hair Perfector, to remove lilial, a fragrance ingredient that the EU had banned due to links to infertility and reproductive toxicity.
The plaintiffs further alleged that Olaplex failed to disclose its steps to reformulate its product to comply with the EU ban. Instead, the company’s IPO materials purportedly indicated that regulatory and reputational risks associated with its use of lilial were merely hypothetical. Olaplex allegedly continued to market its haircare product as “clean” and also continued selling No. 3 products that contained lilial after its IPO.
Once the March 1, 2022, EU ban of lilial took effect, the Olaplex SCA plaintiffs allege that public scrutiny over use of lilial in Olaplex products grew, sparked by viral social media posts and news reports. As a result, in addition to product liability lawsuits brought against it, Olaplex also allegedly suffered reputational harm and sales decline. As a result, according to the SCA, Olaplex’s stock fell over 70% from its IPO price.
As D&O Diary readers are aware, reputational damage may impact a company’s brand and, potentially, share price. The risks stemming therefrom may include securities litigation, as was the case with Olaplex. MAHA, while not the same as the EU, is still publicly calling on industries, particularly food and beverage, to stop using artificial additives that may cause health issues.
Make America Healthy Again
This April, Robert F. Kennedy, Jr., Health and Human Services (HHS) Secretary and Food and Drug Administration (FDA) Commissioner Marty Makary announced the objective to remove artificial food colors from the food supply, citing concerns about their potential links to health issues such as ADHD, obesity, and diabetes. With support from the current Administration, the HHS and FDA urged consumer brands to stop using synthetic coloring by December 31, 2027.
The Consumer Brands Association (CBA) recently announced a voluntary commitment to remove FD&C colors from foods served in schools nationwide by the start of the 2026-2027 school year. Various CBA member organizations, including Hershey, Nestle, and Tyson, have further announced that they are voluntarily agreeing to eliminate the use of FD&C Blue No. 1, Blue No. 2, Green No. 3, Red No. 40, Yellow No. 5, and Yellow No. 6 from their product portfolios.
For CBA-associated companies that have begun to revise ingredients to comply with MAHA directives, will there be risk stemming from regulatory disclosures surrounding reformulating certain food and drink to make them healthier? There is caselaw precedent from the pharmaceutical and agriculture industries, where shareholder plaintiffs brought cases against companies that allegedly failed to disclose health concerns associated with flagship products.
Zicam and Roundup
Matrixx Initiatives, a pharmaceutical company, marketed Zicam, an over-the-counter cold remedy containing zinc gluconate. According to shareholder plaintiffs, between 1999 and 2004, Matrixx received multiple reports that users of its Zicam nasal spray experienced anosmia. Allegedly, although the company knew of consumer complaints and was named as a defendant in product liability litigation targeting Zicam, Matrixx continued to publicly describe Zicam as safe and effective.
Matrixx shareholders filed suit alleging violations of Section 10(b) and Rule 10b‑5 of the Securities Exchange Act. In particular, plaintiffs alleged that Matrixx misled investors by omitting material safety information about Zicam. The U.S. Supreme Court ultimately ruled that even without statistically significant evidence linking Zicam and anosmia, consumer complaints about loss of smell from use could be material to investors and must be disclosed if a reasonable investor would consider them significant. The Supreme Court held that Matrixx could not use a lack of statistical proof as a shield to avoid securities liability for health risk omissions.
While not resulting from non-disclosure ahead of an IPO, shareholders of Bayer, filed a securities class action alleging violation of 10(b) and 10(b)(5) stemming from Bayer’s acquisition of Monsanto. Specifically, the plaintiffs alleged that Bayer executives made false or misleading statements about the results of due diligence and the legal exposure associated with Monsanto’s flagship herbicide, Roundup (glyphosate), before and after its $63 billion acquisition in 2018. Plaintiffs alleged Bayer downplayed the mounting number of lawsuits claiming Roundup causes non-Hodgkin lymphoma and falsely assured investors that associated litigation risks were limited.
Conclusion
In light of the above, perhaps the voluntary removal of artificial coloring from chocolate by CBA companies will MAHA. Especially if synthetic additives lead to ADHD and diabetes. However, in light of Olaplex’s recent settlement and, as was the case with Zicam, consumer food and beverage companies that may have downplayed potential health risks related to food coloring in previous regulatory filings and are now reformulating may end up facing shareholder scrutiny.
Because of the success in companies voluntarily and publicly stating compliance with MAHA, HHS, and FDA may continue to “urge” consumer product companies to stop using synthetic ingredients. As a result, those companies being asked by MAHA to change product ingredients may, because of the ask, have increased D&O exposure.
The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with her company, colleagues, or clients. The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter.