Racketeering lawsuits remain a liability for marijuana businesses, but companies can head off risks

10th Circuit Court of Appeals

The 10th Circuit Court of Appeals ruled that marijuana cultivation, processing, distribution and sales meet the definition of racketeering activity because the plant remains federally illegal. 

Federal racketeering lawsuits against state-legal marijuana businesses might be in something of a lull right now, but they remain a risk to be factored in with other business costs, experts agree.

“We still see it as a significant risk for marijuana growers—although maybe one that is slowing a bit,” said Gerald Arth, a partner in the Philadelphia law office of Fox Rothschild and an expert in civil racketeering cases.

In recent years, anti-cannabis property owners and businesses have used the federal Racketeer Influenced and Corrupt Organizations (RICO) Act in efforts to win monetary awards and shut down marijuana cultivation operations that allegedly diminish property values in their neighborhoods.

Plaintiffs bringing RICO cases generally argue that marijuana operations diminish the value of their property or business because of odors and/or security concerns.

An ongoing risk

“If you’re looking to invest in a grow facility or acquire land, it’s one of those risk factors you have to account for,” Arth said. “You have to factor it in along with the cost of employees, environmental risks and other business costs.”

RICO was enacted in 1970 to target organized crime, but it now includes drug trafficking and other federally illegal activities. Under RICO, a successful plaintiff can win triple financial damages.

“These cases come and go,” Arth said, “but the cost of defending them, the harm to one’s reputation, the potential treble damages” all can mount. Not to mention the stress and anxiety that they can cause.

A victory of sorts

Marijuana companies cheered in late 2018, when a federal court jury in Denver rejected RICO claims against a southern Colorado marijuana grower.

But as attorneys at Birmingham, Alabama-based Bradley law firm pointed out in a column after the Colorado verdict, the 10th Circuit Court of Appeals made a troubling precedent when it weighed in on the case before sending it back to the lower court for what became a trial.

The appellate court made it clear in its decision that marijuana cultivation, processing, distribution and sales meet the definition of racketeering activity under RICO because the plant remains illegal at the federal level.

“The cannabis industry obviously celebrated the jury verdict,” the three Bradley attorneys wrote. “On the other hand, the Tenth Circuit’s published decision is not at all comforting to the industry.”

Arth of Fox Rothschild said: “As a cannabis operation, you’ve already loaded the gun: It’s already a violation of RICO.”

Plaintiffs face a high bar

The U.S. Supreme Court has yet to rule on marijuana RICO cases, but it’s assumed the nation’s highest court would reach the same conclusion as the 10th Circuit, which covers Colorado, Kansas, New Mexico and Oklahoma.

Federal judges overseeing the cases have issued various rulings on the issue, but in general they have set the bar high, requiring plaintiffs to prove concrete damages.

That’s hard to do unless the plaintiffs are in the process of selling their property or can prove other properties in the area are selling at depressed prices because of the presence of a marijuana operation.

“It’s difficult to prevail, but there’s a pathway there,” said Whitt Steineker, co-chair of Bradley’s cannabis industry team. “And in all areas of the law, you tend to see entrepreneurial attorneys who find clever ways to bring lawsuits.”

Arth concurred: “Plaintiffs are going to find ways to plead the concrete harm they need to get to trial.”

And, once a case does get to trial, “Certainly you can’t guarantee the outcome” seen in the Colorado case, he said.

As a result of the potential financial risks of a case going to trial, some defendants have chosen to settle RICO lawsuits rather than fight them out in court.

“You rarely know the settlement amount,” Steineker said.

Robert Mikos, a cannabis law professor at Vanderbilt Law School, told Marijuana Business Magazine: “A plaintiff might drop a suit for anything from a few million (dollars) to, well, a coupon for Arby’s.”

The fact that the public rarely knows the terms of a settlement is what made a RICO case in Massachusetts unusual, Steineker noted. The plaintiff’s attorney bragged about the settlement being substantial, and a local newspaper later reported the settlement as exceeding
$1 million.

“Settlements (like that) will chum the water,” Steineker said.

Location is no. 1

Steineker said that one way marijuana business owners can reduce the likelihood of being sued is being cautious about where they choose to locate their operation.

“Think about what your presence is likely to do to your neighbors,” he said. “Maybe RICO is a significant enough risk to factor in your calculus on where to locate. Do you want to locate near a brand-new development? A winery?”

The owner of a vineyard in Oregon sued an adjacent marijuana processing operation under RICO, for example, claiming that it had lost sales as a result of the MJ facility. (See “RICO Suits From Across the U.S.”)

Be a good neighbor

Legal experts also stressed the importance of being a good citizen—and being as responsive as possible to neighbors’ concerns before they reach a critical point.

In some cases, that’s as simple as participating in neighborhood events ranging from barbecues to crime-watch programs.

Marijuana operations also can try to head off potential lawsuits by making sure they’ve installed the latest air-filtration systems. But even that might not be enough.

CannaCraft, the southern Colorado company that eventually prevailed in the 2018 federal jury trial, told Marijuana Business Magazine that it already had installed five $15,000 air-sanitation units in each of its flower rooms as well as a $150,000 HVAC system.

After a neighbor sued the company, CannaCraft hired an expert to conduct an odor analysis of the business. The consultant conducted tests inside the property and at the perimeter of the company’s land using a field olfactometer.

While the facility in general got a clean bill of health, CannaCraft—a small-batch marijuana cultivator—tried to further reduce odors by spending several thousand dollars installing air-purification units in its lobby.

A federal court jury found in late 2018 that CannaCraft wasn’t responsible for the alleged damages under RICO. But the ordeal still resulted in a heavy cost to the business.

“We were never able to recover any money—not even one cent—for our defense,” CannaCraft owner Parker Walton said.

He said the business incurred roughly $200,000 in legal expenses. It was a tough four years, he said, “but thankfully we’ve never been better” than the company is now.

Federal action required

Arth said the RICO risk won’t go away entirely until marijuana is removed from the federal Controlled Substances Act.

While descheduling would be needed to remove the RICO risk altogether, Arth said other marijuana legislation, such as cannabis banking reform, might help reduce the number of RICO lawsuits.

“The more federal loosening, the better,” he said.

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