Avoiding [Un] Civil Litigation in Your Cannabis Business

Feb 07, 2018

If you’re in the cannabis business you know about the risk of federal prosecution and the risk of state action, especially if you fail to dot your i’s and cross your t’s under your state’s recreational/medicinal regulations. But have you considered the third rail—liability in civil litigation? Here are a few of the liability risks facing your cannabis business.

Government Civil Actions

In an interesting twist, some city and county authorities are foregoing criminal actions and bringing civil actions, seeking substantial penalties (up to $2,500 per day per violation) under the unfair competition law, California Business and Professions Code Section 17200. These actions are based on violations of other statutes or ordinances, so if your cannabis business violates any provision of the recently adopted Proposition 64, any building code, or other local ordinance, you could find yourself defending a civil case brought by the district attorney, code enforcement or some other local agency. Colorado has a similar statute, authorizing the Attorney General or district attorneys to seek civil penalties ($2,000 per violation) under Colorado Consumer Protection Act Section 6-1-112.

Beware of Sharks-Plaintiff’s Attorneys Using “Rinse and Repeat” Tactics

Some plaintiff’s attorneys wait for aggrieved clients to come for them; others go out looking for trouble. New businesses attempting to follow new laws are prime targets by this latter, more “entrepreneurial” type of attorney. For example, for many years certain plaintiff’s attorneys have filed cookie cutter complaints alleging violations of California’s Proposition 65 warning requirements. Prop 65 requires businesses to notify customers if their products contain chemicals that cause cancer, birth defects or other reproductive harm. Some law firms focus their practice on bringing Prop 65 actions against businesses, large and small that failed to provide the required warnings. Suppliers, distributors and retailers face potential liability. Now that California has decriminalized recreational cannabis and hundreds of new companies are open for business, these attorneys are targeting these cannabis businesses, alleging that they have failed to provide a Prop 65 warning regarding the health risks associated with smoking, or in some cases with ingesting, cannabis products. We’ve seen certain law firms filing dozens of identical Prop 65 cases against various cannabis businesses. These businesses also face the same exposure to Americans With Disabilities Act claims, wage and hour (pay) claims and other “cookie cutter” type cases faced by non-cannabis businesses.

Competitor, Partner and Co-Owner Civil Actions

Despite the popular image that cannabis people are laid back and litigation averse, some in the industry are willing to use litigation to seek competitive advantage. Many of the jurisdictions allowing cannabis cultivation or dispensaries have capped the number of permits. As a result, some competitors are filing lawsuits alleging unfair business practices, trade secret misappropriation, trademark infringement or other similar claims, seeking to disqualify competitors or, at a minimum, saddle them with costly litigation and slowing their growth. Cannabis businesses have vendors/suppliers, customers and employees, and each of these relationships has the potential for misunderstandings, disputes and ultimately litigation. Many cannabis operators historically ran their businesses on handshake deals, in part because until recently one could not enforce a contract with an illegal purpose. But in October, California adopted AB 1159, which provides that “activity relating to medicinal cannabis or adult-use cannabis conducted with California law…. shall be deemed to be … a lawful object of a contract….” In short, now you can enforce a contract relating to your otherwise legal cannabis business.

What You Can Do to Minimize Your Litigation Risk

Know Your Rights And Obligations. Ignorance of the law is no defense, so make sure to scrupulously follow the local ordinances as well as state law. Prominently post your Proposition 65 warnings today. Listen to cannabis trade groups as they track and report on the litigation trends.

Read the Whole Contract Before You Sign and Before You Act. Absent extraordinary circumstances, “I didn’t read it” and “I didn’t understand it” are also poor defenses. Consult with legal counsel if you have any doubts about the applicable cannabis laws and regulations. Make sure you use the right type of contract. Don’t try to repurpose a lease as a sales agreement, or an independent contractor agreement as an employment agreement. The result will be a Frankenstein agreement that exposes you to monster litigation.  Try to anticipate future events and make certain you understand the implications of the contract language. For example, under your packaging agreement, who bears the risk if the packaging plant is flooded ruining your entire crop?

Get It/Put It In Writing. In dealing with vendors/suppliers, customers, landlords, tenants or employees, if you spell out what you expect from one another there is less opportunity for the ambiguities that lead to disputes that result in litigation. Especially if you are forming a new business, make sure you and your partners have a heart-to-heart discussion about your “shared” vision for the company and that you draft a comprehensive agreement that spells out who owns what, how your company will make decisions and how you will resolve any disputes that may arise.

Play out various scenarios under your ownership agreement; what happens if you are super successful and Amazon wants to buy you out? What happens if the crop fails?  What happens when your company ownership changes hands? Who’s on the hook to the landlord for rent and other obligations?

An ounce of prevention can avoid the pounding headaches that come with civil litigation.


Lis Pendens, It’s Not Just for Real Estate Litigation Anymore

Feb 19, 2015

IP owners are borrowing a big hammer from the real estate industry. In real estate litigation, there is one legal device that strikes fear into the heart of the adversary—the lis pendens. A lis pendens, or notice of pendency of action, is a legal remedy that the courts describe as a “a powerful weapon.” Essentially, a lis pendens allows a party to a lawsuit asserting a claim affecting real property to record a notice upon the property giving notice to the world that there is pending litigation that may affect the title to the property. A lis pendens can grind to a halt any contemplated transfer or financing involving the property. Lis Pendens IP A lis pendens is not something oft seen in the world of intellectual property law. Nonetheless, grounds can arise for its use in conjunction with cases primarily about intellectual property. Counsel in IP cases may be able to utilize a lis pendens to good effect in certain circumstances against an infringer or wrongdoer even before an IP case is prosecuted through a final judgment.

A good example is Hunting World, Incorporated v. Superior Court. The alleged wrongdoer was sued in federal court for selling counterfeit purses, bags, fanny packs, and other goods bearing counterfeit Hunting World trademarks. Hunting World, Incorporated v. Superior Court (1994) 22 Cal.App.4th 67, 69. Shortly after the filing of the lawsuit, the wrongdoer quitclaimed his residence to his wife, which prompted a state court lawsuit by Hunting World to seek to set aside the conveyance. Hunting World also recorded a lis pendens against the property.

The defendant challenged the validity of the lis pendens, and the trial court ruled that the fraudulent transfer action did not affect title to real property because Hunting World was not seeking title to the property but only a way to reach the assets of the wrongdoer in the event of a money judgment in Home World’s federal IP case.

On appeal, the California Court of Appeal reversed the trial court’s decision and held that the lis pendens was valid. The Court of Appeal declined to “look through” the fraudulent transfer action in order to ascertain the purpose of the party seeking to maintain the lis pendens. Hunting World could still prove a fraudulent transfer claim, even though the underlying IP case primarily sought money damages on intellectual property claims, and did not affect title to real property.

The Hunting World case demonstrates that a party can bring to bear the potent remedy of a lis pendens, even when the crux of the matter is about intellectual property and not real property.  A party bringing an infringement or other IP case against a wrongdoer should utilize the power of a fraudulent transfer action and a lis pendens where there is evidence that the wrongdoer has sought to shelter real property assets from possible collection in an IP lawsuit.