Federal civil racketeering lawsuits are proliferating against marijuana businesses, forcing companies to sometimes spend tens of thousands of dollars to cover legal costs.
Experts are divided about the risk the lawsuits pose to the industry. But the growing number of cases is proving worrisome to industry watchers.
“There is a greater risk of (racketeering) litigation at this point because of the greater publicity, and the potential for copycat litigation is heightened,” California cannabis attorney Omar Figueroa said.
The cases, filed under the Racketeer Influenced and Corrupt Organizations Act (RICO), are being waged against state-licensed and unlicensed marijuana companies on the premise such enterprises are illegal under federal law.
In summary, RICO:
- Was enacted in 1970 to target organized crime.
- Has been expanded since then to include other federally illegal activities such as drug trafficking.
- Maintains that defendants can be found liable for up to three times financial damages plus attorney fees.
A jury has yet to decide any of the many cases across the country, and a recent federal court ruling in Oregon suggests plaintiffs face a high burden of proof.
Here are five things to consider regarding RICO and the cannabis industry:
1. The threat may be low, but it’s still something to watch.
The risk to marijuana businesses “is lower than what many people believe,” Robert Mikos, a cannabis law professor at Vanderbilt Law School, said.
Michael Mayes, a Chicago cannabis consultant and CEO of Quantum 9, noted: “If you can’t prove damages – that is, property value decreasing – then it is hard for the cases to hold weight.”
While a cannabis business can do things to become less vulnerable, it can’t eliminate the possibility altogether, industry experts said.
The threat won’t go away completely unless federal marijuana reform is passed – and even that would depend on the reform, they noted.
2. Basic approaches are being used to bring suit.
Civil claims against cannabis businesses are usually cookie-cutter: The plaintiffs often claim MJ firms create a nuisance such as a skunk-like odor and hurt surrounding property values.
Lawsuits against licensed MJ businesses have been increasing in states such as Colorado, Oregon and Massachusetts since a June 2017 10th Circuit Court of Appeals ruling in Colorado that it was “reasonable to infer” that a potential buyer would be less inclined to purchase land adjacent to a marijuana grow.
The circuit court sent the Colorado case back to the district court, where a trial has been scheduled for later this year.
But a recent Oregon decision that ruled plaintiffs must prove a financial loss set a higher bar for anyone filing suit.
“It’s still just a district court decision, but if it’s upheld in the 9th Circuit then it … suggests that liability is more limited than originally thought,” Mikos said.
3. Lawsuits are costly to defend against.
It can be expensive to defend even a meritless RICO suit, with costs sometimes running in the tens of thousands of dollars, said Figueroa, the California cannabis attorney.
The suits generally list numerous “co-conspirators,” or entities that have supported a defendant’s operation, such as a landlord or property owner, mortgage company, government licensing agencies – even customers.
One lawsuit in Oregon names 200 defendants.
A Massachusetts suit filed by a group of property owners against medical marijuana dispensary Healthy Pharms even listed the consulting firm 4Front Advisors and its president, Kris Krane, as defendants for allegedly providing services to Healthy Pharms.
But the judge in the case recently indicated the conspiracy claims against 4Front and several other defendants were insufficient.
4. Being a good neighbor is the best defense.
Figueroa and Mikos suggested the best strategy against potential racketeering suits is to engage in the community and be a good neighbor.
For example, Figueroa said, a marijuana business could help form a neighborhood crime watch group or participate in community public service activities.
Mikos suggested cannabis business owners ensure they address any concerns raised by the neighborhood, such as those related to crime and traffic.
Krane agreed all these points are important but noted that a marijuana business can’t shield itself entirely – especially if there are nearby landlords “who want to make this an issue.”
Healthy Pharms does have a processing facility, but it’s about 30 miles away from where the property owners in the aforementioned suit are located. The processing facility reportedly has been regarded as a good neighbor.
The plaintiffs in the case argued the dispensary – even before it had opened its doors – had caused their properties to lose a combined $27 million in value and profits.
5. It’s important to remain aware of the current cases.
Figueroa said he is following a case in California against an unlicensed marijuana business to see what the fallout might be.
“As far as I know, no one in California has been sued when licensed,” he said. “We don’t have that situation yet, and hopefully we won’t see it.”
Many are monitoring the Colorado case that got sent back to district court and is scheduled for trial later this year.
“Now the question is, can you actually prove these damages to a jury? The plaintiffs still might lose there, so people will watch that,” Mikos said.
Federal marijuana reform could make the RICO issue moot, but it will depend on the reform – and it might not take care of pending suits.
Take a bipartisan states’ rights bill, for example, introduced earlier this year by Democratic Senator Elizabeth Warren and Republican Senator Cory Gardner.
That legislation is designed to eliminate the conflict between state-legal marijuana programs and federal drug law, thus eliminating the basis for a federal RICO suit in those states, Mikos said.
Jeff Smith can be reached at firstname.lastname@example.org