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RICO Claims Against Cannabis Companies Are Evolving

By Ethan Feldman and Seth Goldberg
September 27, 2022

RICO Claims Against Cannabis Companies Are Evolving

By Ethan Feldman and Seth Goldberg
September 27, 2022

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A few years ago, a trend began to emerge — driven by the anti-cannabis lobby — of civil claims being asserted against state-licensed cannabis operators under the Racketeer Influenced and Corrupt Organizations Act.[1]

The suits were brought in an attempt to curtail operators' state-legal cannabis activities based on the allegation that such activities violated the federal Controlled Substances Act[2] and thereby satisfied the predicate act requirement under RICO.

In all such cannabis-related RICO cases, the plaintiffs' bid for a civil judgment failed, and the trend of civil RICO claims against cannabis operators seemed to vanish as quickly as it appeared.

Recently, a putative class action, Plumlee v. Steep Hill Inc.,[3] was filed in the U.S. District Court for the Eastern District of Arkansas against four state-licensed cannabis operators, asserting civil RICO claims arising out of allegations that the operators falsified the amount of THC in their cannabis products.

As discussed below, Plumlee is much different from the RICO cases filed against cannabis operators a few years ago, which generally focused on the plaintiffs' alleged loss of enjoyment of property due to the defendants' cannabis activities, because it is more like a consumer class action.

However, it serves as a good reminder to industry participants of the need to adhere closely to regulatory requirements and develop strong compliance protocols in order to increase the likelihood of warding off consumer-based as well as RICO claims.

Criminal and Civil RICO Claims

RICO was originally intended to provide the federal government with a powerful tool to prosecute enterprises such as the Mafia allegedly engaged in wide range of criminal activities, such as murder, loan-sharking and gambling.[4]

RICO provides for criminal prosecution where a pattern of racketeering by an enterprise affects interstate commerce. Criminal penalties under RICO are severe, and include, inter alia, up to 20 years in prison for an individual on a single RICO count, and a fine of $250,000, or twice the proceeds of the offense.

Famous criminal prosecutions under RICO include the Hells Angels in the late 1970s, the Mafia Commission Trial in the mid-1980s that involved the prosecution of five mafia families, and Joseph "Skinny Joey" Merlino's prosecution in the early 2000s.[5]

In addition to the sweeping criminal prohibitions and penalties under RICO, pursuant to the statute,[6] a private party may assert a civil claim for damages resulting from an injury to business or property caused by a RICO violation.

Such a plaintiff must demonstrate: (1) a violation of a RICO-prohibited act, also known as a predicate act; (2) resulting in a business or property injury; (3) caused by the defendant's RICO violation.

The RICO statute provides a long list of predicate acts that may violate RICO, including, receiving, buying or otherwise dealing in controlled substances. RICO provides for treble damages, attorney fees and costs.

Civil RICO Claims Asserted Against State-Licensed Cannabis Operators

Civil RICO was used by the anti-cannabis lobby in an attempt to curtail state-licensed cannabis activities a few years ago in a handful of different lawsuits filed in federal courts throughout the U.S.[7]

The common thread among those claims was that the state-legal cannabis activities were injuring the plaintiffs' enjoyment of their property.

All of those cases were dismissed or decided in favor of the cannabis-operator defendants, and a common theme among those dismissals was that vague claims of a loss of enjoyment of property and nonspecific claims of diminution of property value due to state-legal cannabis activities were insufficient under RICO.

Safe Streets Alliance v. Hickenlooper[8], brought by a nonprofit organization whose mission is to reduce illegal drug activity, was filed in the U.S. District Court for the District of Colorado. The suit sought relief under RICO and based the predicate act requirement on violations of the CSA. The general allegations were that cannabis odor from a neighboring cannabis operation decreased the plaintiffs' property value.

The district court dismissed the case in 2016 and noted the claims were "conjecture and hardly equate to concrete financial losses."[9]

However, on appeal, the U.S. Court of Appeals for the Tenth Circuit reversed, holding that under Colorado law, "invasion of one's property by noxious odors itself gives rise to a nuisance claim and is a direct injury to property."[10]

The court also ruled that the diminution in value of the plaintiffs' property was a RICO-cognizable injury under Colorado law.[11]

Ultimately, however, a jury returned a defense verdict and determined that cannabis odor was not enough to decrease the owners' property value, and thus the plaintiffs were unable to prove damages.[12]

The favorable Tenth Circuit precedent in Safe Streets likely led the way for four lawsuits with similar allegations that were filed in the U.S Court of Appeals for the Ninth Circuit:

  • McCart v. Beddow;[13]
  • Ainsworth v. Owenby;[14]
  • Bokaie v. Green Earth Coffee LLC;[15] and
  • Underwood v. 1450 SE Orient LLC.[16]

McCart was filed a mere six days after the Tenth Circuit decision in Safe Streets.

Rachel McCart, an attorney acting as pro se counsel, filed a suit containing similar noxious odor allegations as Safe Streets, and using violations of the CSA as the predicate act requirement under RICO.

However, the lawsuit also contained claims of intentional interference with property, including racing unmuffled off-road vehicles along the property line and blasting dump truck horns, which seemed to be the allegations driving the suit.[17] The case was settled prior to a ruling on the motion to dismiss the RICO claims based on a lack of a RICO cognizable injury.[18]

In Ainsworth, property owners represented by McCart brought a RICO action, alleging violations of the CSA as the requisite predicate acts, against neighboring cannabis operators, alleging that a persistent stench of marijuana and other cannabis-related manufacturing activities interfered with plaintiffs' enjoyment of their property.[19]

The U.S. District Court for the District of Oregon initially dismissed the action in 2018, noting that plaintiffs failed to plead concrete financial losses resulting from the loss of enjoyment of their property because plaintiffs did not allege an intent to monetize the property.[20]

Subsequently, the plaintiffs filed an amended complaint to allege diminution of property value and decreased borrowing power, but the court rejected this claim, too, noting that because plaintiffs received a smaller loan, and thus had less debt, they were actually placed in a better financial position, and thus did not allege a compensable injury under RICO.[21]

In Bokaie, property owners and those residing with the property owners asserted that a California-licensed cultivation in Sonoma County emitted a "skunk-like stench" that interfered with the plaintiffs' enjoyment of their property and devalued the property. The predicate racketeering act under RICO, claimed the plaintiffs, involved "growing, processing, distributing, and selling cannabis and cannabis products" in violation of the CSA.

In dismissing the plaintiffs' claim in Bokaie, the U.S. District Court for the Northern District of California — relying partly on Ainsworth — explained that since the defendants agreed to abate the activities that allegedly gave rise to the plaintiffs' claims for diminution of value, the cause of that depreciation was removed, and the plaintiffs did not plead a RICO cognizable injury.[22]

In Underwood, allegations — discussed in the context of the first amended complaint — similar to those in Bokaie and Ainsworth were brought against a slew of cannabis operators alleging that RICO violations based upon predicate acts that violated the CSA resulted in plaintiffs' loss of enjoyment of property, diminished market value and decreased borrowing power.

The defendants filed a motion to dismiss based on a lack of cognizable RICO injury. U.S. Magistrate Judge Jolie Russo, highlighting the fact that the plaintiff made no allegations of an attempt to monetize the property, agreed that a "RICO injury requires proof of concrete tangible financial loss."[23]

The plaintiff was granted leave to amend, and in doing so, changed her allegations to allege that the defendants' conduct was preventing the sale of her house.

The magistrate judge found this claim cognizable under RICO; however, the plaintiff's attorney withdrew as counsel, and the plaintiff dismissed the case in 2020 as the magistrate judge's report and recommendation was waiting for the U.S. District Court for the District of Oregon's ruling.

Plumlee v. Steep Hill

In Plumlee, the RICO claim arises out of a much different set of alleged facts than the RICO claims discussed above.

Here, the putative class representative asserts that Steep Hill Inc., a state-licensed cannabis testing lab, and state-licensed cannabis cultivators NSMC-OPCO LLC, Bold Team LLC and Osage Creek Cultivation LLC, formed an enterprise to cultivate and distribute cannabis products labeled as containing THC in higher potencies than they actually contained.

The class action complaint asserts the defendants overstated the potency of THC in the subject cannabis products by an average of 25%.

As the complaint alleges, and as is widely apparent in the cannabis industry, cannabis products higher in THC potency sell for more than cannabis products lower in THC potency.

Accordingly, the plaintiff claims that the defendants' fraudulent conduct, which allegedly violated the CSA because marijuana is still classified as a Schedule I controlled substance, amounts to racketeering that injured the plaintiff and putative class members by causing them to pay more for cannabis products than they would have had the actual THC potency been on the label.

The Plumlee RICO claim is clearly different from the "skunky odor" claims asserted a few years ago, and does not appear to be driven by the anti-cannabis lobby. Rather, it really appears to be a consumer class action dressed up as a RICO claim.

Thus, it is not clear how much precedential value the odor cases will have for the Plumlee court. That it asserts a more ascertainable injury than the amorphous claim that property cannot be enjoyed because of the odor of cannabis may give the Plumlee claim a better chance of surviving a motion to dismiss.[24] This is because Plumlee alleges concrete damages — the difference in value between THC reported versus THC received.

Importantly, Plumlee arises out of facts that have become a hot topic in the cannabis industry: potency fraud. In the past few years, a number of articles in cannabis-focused publications have reported on such fraud happening in a number of states.[25]

For example, in 2019, Certified Ag Labs in Nevada was suspended for 30 days and fined $70,000 for reporting false THC results. And more recently, in July and August, Florida regulators issued $16,000 in fines, spread across two testing labs, Method Testing Laboratories LLC and ACS Laboratory LLC, for allegedly reporting inflated THC percentages resulting from a lack of compliance with flower THC testing and reporting protocols.[26]

RICO Claims Against Cannabis Operators Going Forward

State-licensed cannabis operators — be they cultivators, processors, dispensaries or testing labs — are going to get sued. That is simply the nature of doing business in the U.S.

However, Plumlee does not necessarily mean that RICO claims against the cannabis supply chain are back. The politically motivated RICO claims asserted against cannabis operators a few years ago by the anti-cannabis lobby were obviously different from the types of consumer claims to be expected by the supply chain in a consumer packaged goods industry like cannabis, such as consumer fraud and product liability claims.

Given that RICO affords federal court jurisdiction and the threat of treble damages and attorney fees, plaintiffs may try to shoehorn claims into the RICO rubric.

However, product liability, consumer fraud, and other state common law and statutory claims are far more likely to be asserted against a consumer product supply chain.

Developing and implementing internal compliance protocols to comply with pertinent state cannabis regulations, and securing comprehensive general commercial and product liability insurance, are ways cannabis operators can mitigate the harm of consumer claims, including RICO claims.

Ethan R. Feldman is an associate Duane Morris LLP. 

Seth A. Goldberg is a partner and team lead of the cannabis industry group at the firm.

Reprinted with permission of Law360.