Cannabis businesses starting to use RICO lawsuits instead of being targets in such cases

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Licensed cannabis businesses are turning the tables by deploying a legal weapon that has been used against them for years in order to target unlicensed marijuana retailers as well as law enforcement officials accused of corrupt dealings.

In the past two months, at least two civil lawsuits have been filed by cannabis industry executives in California under the Racketeer Influenced and Corrupt Organizations Act (RICO), a federal statute that was originally intended as a legal weapon against the mafia but has since been used against marijuana businesses in lawsuits.

The two lawsuits could take years to play out.

But there’s reason to believe more cases such as these might be on the horizon, although they’re likely to be few and far between because of the challenges inherent in RICO lawsuits.

“Given the nature and rapid growth of the modern cannabis industry, I would expect we’ll see more civil RICO claims involving its participants and investors moving forward,” said Ben Fox, a RICO expert and partner at the Bondurant Mixson & Elmore law firm in Atlanta.

Another civil RICO expert, Philadelphia-based Gerald Arth, said that “cannabis companies, having been on the receiving end, have come to recognize that it is a potential powerful tool in the toolbox.”

“Whether they will have success or not in (using RICO) remains to be seen,” he added, noting there’s a high failure rate among such lawsuits because the bar set by courts for RICO cases is a tough one to meet.

In general, Fox estimated that 600-900 RICO cases are filed annually across the U.S. Of those, he said, about 85% get dismissed while only a small fraction either settle out of court or end with flat-out victories for the plaintiffs.

The cases

The first of the two recent marijuana cases was filed July 6 in San Diego County Superior Court by licensed retailer March and Ash.

That suit is aimed at a local group of businesses and individuals accused of propping up – and benefiting from – illegal marijuana dispensaries.

Defendants include the alt-weekly newspaper San Diego Reader, which the suit claims has carried numerous ads for unlicensed marijuana shops as well as landlords that were paid rent by illegal retailers, ATM owners that operated cash dispensing machines in the illegal stores and others that support the illicit cannabis businesses.

“Within the last four years, the racketeering enterprise being challenged in this lawsuit has worked … for the collective purpose of profiting off the unlicensed sale of cannabis,” the suit claims.

The case is scheduled for a hearing on Jan. 28, 2022.

The second suit was filed Aug. 9 in Mendocino County Superior Court by four licensed marijuana farmers.

That suit targets two law enforcement officials – a former Mendocino County Sheriff’s deputy and a former official with the state Department of Fish and Wildlife – and implicates the local district attorney and county sheriff’s office.

The suit alleges that a ring of corrupt authorities have conspired against legal cannabis operators for years, stealing from marijuana farmers and then covering up the thefts.

“Certain corrupt law enforcement officers are above the law because the Sheriff’s Office and the District Attorney’s Office have given officers the green light to steal marijuana, guns and cash under color of law,” the suit alleges. “At least some of the local judges have been willfully blind to unlawful conduct by local law enforcement that is common knowledge among many in the community.”

The case is scheduled for a hearing on Feb. 4, 2022.

No responses have yet been filed by the defendants’ attorneys in either of the cases, according to court records.

The owner of the San Diego Reader declined to comment for this story, and none of the other defendants could be reached.

Next steps

How both of these cases might play out is unclear. Both could take years to resolve, experts agreed.

Arth and Fox agreed it’s possible that either or both of the lawsuits could be moved from state court to federal court. If that were to happen, it would make the cases even harder to win, Fox said.

“It’s more defendant-friendly to be in federal court,” Fox said, explaining that defendants have a leg up because federal legal standards are higher for RICO cases.

And in federal court, defendants could use the “unclean hands” strategy, which essentially would be to argue that everyone in the marijuana industry is breaking federal law and therefore RICO claims should be nullified, Fox said.

A case in point is a 2019 civil RICO suit that one California marijuana farmer filed against another. That case was dismissed after a year because the judge ruled there was no standing because marijuana remains federally illegal.

Another reason that there are likely to be more such cases, Arth said, is the possibility of the plaintiffs winning big. But, he noted, that also is one of the reasons RICO cases are tough to win.

“If you’re found liable, there’s not only the reputational harms, but there are mandatory treble damages,” Arth said. “They’re not discretionary. They’re mandatory. And because of that, courts very carefully scrutinize these cases.”

More interest in the industry?

The difficulties of RICO actions aside, there’s already an appetite in certain industry circles for more of the cases.

One marijuana business executive in San Luis Obispo County – who requested anonymity for fear of retaliation from local law enforcement – wrote in an email to MJBizDaily that a civil RICO lawsuit might be the only answer for alleged corruption along California’s central coast.

“I think it may be the only answer to just how systemic the corruption goes,” the executive wrote.

“Our local government has been taking advantage of this county for years on so many levels, and no one has authority to do much to stop it.”

The executive suggested that the recent conviction of marijuana business owner Helios Dayspring, for instance, could be a similar foundation for a RICO case as in Mendocino and San Diego, where the lawsuits were both built upon guilty pleas by former law enforcement officials in criminal cases.

According to federal prosecutors, Dayspring agreed last month to plead guilty to bribery and tax evasion.

According to a news release, he was charged by prosecutors “with bribery for paying a county supervisor approximately $32,000 – most of that in cash – in exchange for the supervisor’s votes and influence on other votes affecting his cannabis business interests.”

And industry insiders have complained for years that local government corruption has been a major issue.

Bret Peace, general counsel for the retailer March and Ash, wrote in an email that he expects more civil RICO cases.

That’s because, he said, the “gray market” in California has become the “laundering of money made in the illegal market into the legal market,” which he said is the “worst-kept secret in the industry.”

“We’re not chasing dollars with this lawsuit. We are chasing an outcome,” Peace wrote, adding he believes others in the legal cannabis industry might wind up filing similar suits for similar reasons because they are “struggling” to survive.

“Our specific focus is on the people at the top and the funneling of the illegal proceeds into the legal market to gain an advantage” over legal marijuana companies such as March and Ash, Peace wrote.

But California marijuana industry lawyer Matt Kumin said he’s not expecting a “slew” of RICO cases.

“Most cannabis folks, even legitimate ones, the whole motivation and desire to sue isn’t there,” Kumin said. “You have to be really hard pressed to sue.

“It takes a lot of money, it takes a lot of energy, it takes a lot of time to put together.”

John Schroyer can be reached at john.schroyer@mjbizdaily.com.