Rise of the Ambulance Chasers

Features - Legal Issues

Cannabis businesses are vulnerable to an upstart assault by hostile litigators. Here’s how we got here—and how we can get out.

Subscribe
October 11, 2018
Justin Hampton
Illustration by Vinnie Neuberg

On June 21, just a day after the Canadian Senate finally voted to legalize cannabis nationwide, a different sort of consortium gathered to force their own will on America’s version of the industry.

Titled “Effectively Suing the Legal Cannabis Industry,” this telephonic seminar shared a litany of potential legal claims that enterprising civil litigators can use against the cannabis industry: from product liability suits to medical malpractice claims and the Drug Dealer Liability Act (an obscure act passed in 17 states that holds illegal drug merchants civilly liable for any damage wrought by the use of a drug—whether a DUI, death or injury—regardless of whether the seller actually sold the drug in question, according to the seminar instructors).

The opening speaker for this seminar, David Evans, reveals himself early on as a hardcore cannabis prohibitionist who presents this information as part of a larger initiative—through both Americans Against Legalized Marijuana and his own group, Cannabis Industry Victims Educating Litigators (CIVEL)—to disrupt the cannabis industry. Indicating a series of undated Colorado cannabis dispensary ads with scantily clad women and cartoon Santa Clauses on a PDF file distributed to seminar participants, Evans says: “The marijuana industry is like a spoiled child that had their way for many years. Nobody’s been telling them ‘no.’ Nobody’s been making them responsible. And they’ve been able to do outrageous things because there’s this public perception that marijuana is harmless.”

Such a statement may come as a surprise to many around the country struggling to keep up with ever-changing cannabis regulations, hostile citizen groups and fierce competition. Regardless, attorneys around the country have turned their attention toward the cannabis industry, levying a series of product liability cases and legal actions that have augmented the daily challenges cannabis dispensary owners face.

The situation is especially dismal in California. Since 2009, cannabis dispensary owners in California have been receiving Prop. 65 motions; Proposition 65 is an infamous legal attack that has been used against retail businesses—ranging from Forever 21 to Starbucks—for failing to display warning signs indicating the presence of chemicals known by the state of California to cause cancer, birth defects or other types of reproductive harm. (One of these chemicals is cannabis smoke.)

Things aren’t much better in Colorado. Since 2015, Colorado’s cannabis industry has endured a series of costly product recalls, most notably involving the use of the pesticide myclobutanil. A flurry of 688 Prop. 65 notices released in California last year levied accusations regarding the presence of malathion, carbaryl and myclobutanil in products sold by cannabis dispensaries and brands throughout the state. Most distressing, the U.S. 10th Circuit Court of Appeals found in favor of the plaintiff to reverse a Colorado district court’s dismissal of a Racketeer Influenced and Corrupt Organizations Act (RICO) lawsuit which, if successful, could signal a torrent of civil claims against state-legal businesses at large.

Despite the opportunistic nature of some of these cases, others provide a teachable moment for an industry eager to gain legitimacy. Canna Law Blog author and partner at the Harris Bricken law firm Hilary Bricken has sounded the alarm around product liability issues since her tenure in Washington during that state’s shift from a gray area medical market to its adult-use model. “I always preached that products liability was coming because a lot of the testing companies were unsophisticated. … And people were bound to get sick and/or hurt,” she recalls. “Unless people start to take a really good cold, hard look at compliance and taking consumer protection seriously, they’re going to be made an example of.”

Illustration by Vinnie Neuberg

Under Suspicion

Until recently, early cannabis industry pioneers—with their modest mom-and-pop financial stature and unique business structure on the West Coast—were shielded from many of the legal headaches often faced by traditional businesses. “Previously, you had these models where you were a collective of persons operating with a common goal, but not necessarily open to the public,” explains GianDominic Vitiello of the Los Angeles legal firm Katchko, Vitiello & Karikomi (KVK). “So, what that meant, at least as far as the argument could go, was that you were not a true retail outlet in the sense that you were inviting the public onto your premises. And liability in certain civil situations could be avoided based on that defense.”

However, Vitiello says, “The shops are losing the ability to hide behind the collective model.”

Now that dispensary owners enter into the regulated era, they by and large do so without the financial armament of liability insurance. Granted, the undercapitalization of many startup dispensaries may deter more cynical litigants from filing suit if the dispensary is underinsured, as many are. “Normally, if you start a program from scratch ... [you’re] probably not going to see products claims until you’re really up and operating,” Bricken says. “If plaintiff attorneys think you have an insurance policy that’s going to cover it, you become a bigger target.”

However, anyone who lived through the grueling product recalls in Denver—such as Green Man Cannabis founder and ONE Cannabis partner Christian Hageseth—recognizes the need for liability insurance throughout the supply chain. “The way cannabis works right now, we don’t have testing equipment in our facility. We have to use an external testing facility. And I think when the industry matures, and we get larger processors and manufacturers, we’ll see [cultivators, manufacturers and producers] have these small labs within their facilities just so they can check their own work before it becomes a problem,” Hageseth says. “[Now], when [a problem] does [occur], it takes down everyone who touches it. Everybody has liability, and nobody has insurance.”

Some states, such as California, mandate general liability insurance for cannabis business operators and have lobbied insurance companies to cover the industry. For now, Bricken creates indemnification clauses in all her Goods and Services contracts for her dispensary clients and insists that dispensary owners do the same with vendors. (Indemnification clauses protect retailers from paying for damages in a lawsuit by making the producer/manufacturer assume the risk and/or compensate for damages suffered by the retailer if s/he is sued.)

Kat Nadel, general manager of Green Valley Wellness in Southeast Oregon, says, “Because few companies are willing to ensure cannabis entities under the current federal climate, there is little selection for dispensaries and no opportunity to price shop and compare.”

Instead, Nadel notes, “retailers must be satisfied with securing the least costly of the few choices available. It comes down to being willing to do the research and legwork necessary to protect your investment.”

She suggests cannabis business owners: “Look at what's available. Call brokers and explain the unique situation of your business and its needs. Shore up your investment by ensuring that all security and safety protocols are in place and state compliant.”

Our Fate Is Largely Our Own

However, the best insurance in the world cannot save careless dispensary owners from themselves. During a recent study, Denver Health and the University of Colorado School of Medicine found that 69 percent of surveyed dispensary employees recommended cannabis for nausea stemming from morning sickness during the first eight weeks of pregnancy, which distressed Colorado’s Marijuana Enforcement Division (MED). The finding also made its way into Evans’ legal jeremiad during the telephonic seminar, and Evans quickly condemned these recommendations by citing cannabis’s purported role in a host of birth defects. As Evans and the MED quickly reminded the industry, budtenders are not medical professionals and cannot offer advice. (See the Guest Column, “No Comment!” in Cannabis Dispensary’s July/August issue for details about the legal constraints by which budtenders and patient care consultants must abide.) Such mistakes can be costly. “Oftentimes if you’re getting flagged violations by the state, you can shortly expect a plaintiff’s claim depending on the nature of the violation,” Bricken explains. “If you’re unsuccessful with the state, and you’re violating rules left and right, you can probably expect at some point you’re going to get sued by someone who’s been affected by those violations.”

As a spoiler alert, Evans ended his presentation with a prediction that the cannabis industry would meet the same fate as cigarettes, where states and cities would eventually turn on the industry they once embraced and litigate it into impotence, if not oblivion. Whether the industry meets this fate will depend on its actions going forward.

“With proper legal reform, it is my hope that we will see a marked reduction in legal claims. As we reform and refine laws—cultivators, consumers, communities, direct and ancillary businesses must rise to a legal call of action,” Nadel says. “These elements must co-create and shape the legal paradigm into which cannabis falls, defining responsibilities and boundaries for the industry as a whole, rather than catering to any one group's special interests.”

California Legal