Contract breaches, workplace safety and unsolicited texting can disrupt business operations and prove costly

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US Dept of Labor

Product liability, partnership disputes, labor-related litigation and RICO suits are among the most common and potentially damaging lawsuits facing marijuana companies. But industry executives also should be alert to at least three other legal dangers that could hurt their businesses. These include:

Breach of contract: This is among the most common violations that can kill small businesses, especially upstart grows, said attorney Katy Young of Ad Astra Law in San Francisco.

Unlike product liability or RICO lawsuits, where cannabis businesses are the defendants, companies in a breach-of-contract situation tend to be the victim and must decide whether becoming a plaintiff to recover lost assets is worth the cost and effort.

“The most common reason I see for breach-of-contract disputes in the supply chain is lack of money. It basically comes down to one business in the supply chain being financially mismanaged and then not being able to pay cultivators or other companies,” Young said.

“Those are difficult cases because it doesn’t make sense to sue if there’s no money there. All we get is a judgment, a piece of paper that we chase somebody around with.”

Cannabis executives who want to avoid being stiffed should document all transactions with lawyer-reviewed contracts, Young said. Furthermore, to avoid expensive litigation, the contracts should include clauses about trying to settle disputes through mediation or arbitration before going to court.

Workplace safety: Violations that lead to lawsuits or scrutiny and fines from the Occupational Safety and Health Administration (OSHA) are currently less common than some other legal pitfalls, but they can be expected to increase as the cannabis industry matures.

“It’s simply not the case that because cannabis is federally illegal, OSHA or any number of regulatory agencies are not supposed to visit them and make sure they are in sync with federal laws,” said Jesse Alderman, co-chair of the cannabis practice at Foley Hoag in Boston. And given that cannabis cultivation and manufacturing involve large equipment and machinery, companies must ensure their work environments are safe and comply with state and federal workplace-safety regulations.

“Cannabis operators that are employers really need to focus on having a thoroughly documented and compliant training program for employees. And (they need to) pay attention to what’s happening at the state level—not only with cannabis regulation but with regulatory changes in general,” said attorney Cassia Furman, who manages the California office of Denver-based Vicente Sederberg. “Since we’re in the midst of this unprecedent pandemic, there’s a lot of new laws on a variety of topics that cannabis operators miss because they’re focused on keeping operations going.”

TCPA violations: An increasing number of marijuana businesses have become defendants in class action lawsuits for allegedly sending consumers unsolicited marketing texts, which is a violation of the Telephone Consumer Protection Act. Since May 2018, at least a dozen lawsuits have been filed against marijuana businesses for alleged TCPA violations.

The most obvious protection against such lawsuits is to ensure you have a consumer’s written consent to send them marketing texts or emails. However, a consumer simply leaving their contact information in a guest log or opt-in list provided by outside marketers would likely not offer sufficient protection in TCPA cases, lawyers said.

“You need to obtain proper consent from recipients prior to sending your text-message marketing. And consult with counsel to understand what that (consent) needs to include,” Furman said.