California Seeks Disgorgement of Oil Profits For Alleged Greenwashing And Climate Deception

In the June 10, 2024 amended complaint, Attorney General Bonta introduced a novel – and potentially significant – weapon to his litigation arsenal. The amended complaint brings into play one of the remedies afforded by newly enacted California law AB 1366 (Unfair competition and false advertising: disgorgement),¹ which offers the ability of the Attorney General to seek disgorgement of profits from companies found to have committed violations of consumer protection laws. Attorney General Bonta personally sponsored AB 1366, which Governor Gavin Newsom signed into law on October 12, 2023. On its face, AB 1366 does not appear to be designed to capture issues related to environmental matters or “greenwashing” (the act of misleading statements about a product or service’s environmental attributes), but rather the legislative intent of the law focused on ensuring that victims of unlawful, unfair, or fraudulent business acts or misleading advertising would have the additional remedy of profit disgorgement in addition to the other remedies provided under false advertising and unfair competition laws, such as fines and other penalties. Prior to the enactment of AB 1366, victims of false advertising were generally limited to recoveries of not more than $2,500 per violation, with predatory businesses perpetrating such frauds often becoming insolvent before victims could even recover restitution.

The essence of AB 1366 provides for disgorgement of profits – to be allocated to a Victims of Consumer Fraud Restitution Fund held by California’s State Treasury – of companies allegedly misleading consumers and other parties about the environmental impacts of their products. Attorney General Bonta argues that the defendants in this case engaged in deceptive practices by promoting fossil fuels as environmentally beneficial while minimizing their role in exacerbating climate change and intentionally creating doubt about the science behind anthropogenic climate change in order to delay societal action to address it. In doing so, Attorney General Bonta asserts that the state of California and its residents have borne and will continue to bear significant costs and disruptions as the climate warms. While the quantum of damages sought in this suit under AB 1366 is not known, the introduction of this new profit disgorgement remedy is potentially limitless, depending on how far back the alleged wrongdoing occurred and the purported ill-gotten profits associated with it.

The amended complaint comes on the heels of other actions California has recently taken in connection with climate related matters, including implementing new laws regarding emissions disclosures and climate risks and new disclosure requirements aimed at curtailing purported corporate greenwashing.

While California’s lawsuit against the oil majors and API will not be resolved for some time, and any significant adverse ruling against the defendants would almost certainly be appealed up to the United States Supreme Court, the application by the California attorney general of a consumer protection remedy to seek profit disgorgement is a new salvo in the politicized fight pitting constituencies concerned with climate change against the energy industry. It comes as many regulators ramp up pressure,² not only on climate reporting but also on corporate greenwashing, and drives home the need for companies to carefully evaluate how they describe the effects of their products and services on the environment and society broadly to consumers. Companies operating in industries susceptible to environmental scrutiny, particularly those in the energy sector, are urged to proactively assess their marketing and disclosure practices to mitigate legal risks and ensure compliance with evolving regulations.

Please reach out to your Vinson & Elkins team to discuss the potential impacts on your business and how you should be preparing for these developments.

¹ AB 1366 provides that courts take into account the amount of civil penalties and restitution ordered by the court when determining whether to award disgorgement. Disgorgement amounts recovered by the Attorney General will be deposited into a Victims of Consumer Fraud Restitution Fund, which may be used by the Attorney General, upon appropriation by the California State Legislature, to provide restitution to victims of acts or practices for which consumer restitution has been ordered but not paid in an action brought by the Attorney General under certain sections of the Business and Professions Code. In cases where the Attorney General pays restitution from the Victims of Consumer Fraud Restitution Fund and later recovers such restitution from a defendant in the underlying action or from another source, those recoveries may be used to reimburse the Victims of Consumer Fraud Restitution Fund.

² See, e.g., the European Union’s Green Claims Directive and the United Kingdom’s Green Claims Code. In addition, the Federal Trade Commission’s Green Guides are currently under review and are anticipated to be updated within the coming months.