As more and more states legalize recreational use of state-legal marijuana and intoxicating hemp, retailers and manufacturers will contend with new risks from private litigants bringing product-related claims
Amid the growing number of states legalizing recreational cannabis through state-legal marijuana programs or permissive rules allowing for intoxicating hemp — and a potential rescheduling of cannabis by the federal government — it is natural to think the risk profile of cultivating or selling cannabis in the legal marketplace is decreasing.
In reality, the risks are merely shifting, and cannabis companies need to refocus on the likely sources of future risk as the industry comes to resemble traditional (albeit, highly regulated) consumer goods businesses like food, alcohol or firearms.
A recent New York Times exposé frames the risks in stark terms: “[…] with more people consuming more potent cannabis more often, a growing number, mostly chronic users, are enduring serious health consequences.” While the overall number of people who report suffering from alleged health conditions as a result of cannabis use is relatively low, the year-over-year increase is alarming and cannot be ignored by cannabis companies seeking to manage the risks inherent in their operations. Plaintiff’s lawyers have taken notice and appear to view cannabis companies as a target ripe for product-related claims.
Understanding the Risks: A Case Study
My law firm recently represented a cannabis retailer embroiled in a Colorado state-court lawsuit (Hill v. Native Roots IPCO LLC et al) in which the plaintiff claimed that an episode of psychosis — the plaintiff shot both his two pet dogs and his girlfriend, resulting in the death of one dog — was triggered by cannabis use and that our client shouldered legal liability for his actions. The trial court ultimately granted our motion to dismiss the matter for its failure to state a justiciable claim; however, the case highlights the kinds of claims that we anticipate will only increase in frequency from this point forward.
The plaintiff’s complaint recited a litany of alleged “facts” that will likely become commonplace as the case law evolves in this area. These include the scant (but growing) epidemiological evidence that points to links between cannabis and a variety of health disorders, as well as cannabis’s current Schedule I classification, culminating in the claim that “the sale of cannabis for recreational use is an inherently dangerous activity.” These generalized “facts” were then incorporated into the specific claims of the lawsuit, which contained various counts of product liability, negligence, fraudulent misrepresentation and fraudulent nondisclosure, among other things.
The Seeds of Litigation Success
While our team secured a dismissal of this lawsuit through motion work, cannabis businesses should pay attention to the lawsuit and consider how their current practices could become the targets of future litigation. Most obviously, all cannabis-based products need to conform to the applicable codes, standards and regulations in place. This can be trickier than it seems at first blush. Foods and drugs are regulated at the federal level, but as a Schedule I substance, cannabis is classified a drug with “with no currently accepted medical use and a high potential for abuse” and is therefore federally illegal to possess, manufacture, sell or distribute. Clinical data is limited, an unsurprising circumstance given the difficulty of using cannabis for medical research, and as the aforementioned New York Times article characterized it, state-level cannabis regulations have been “inconsistent.” The regulatory framework, therefore, is riddled with gaps and holes from one jurisdiction to the next. Nevertheless, as a starting point, cannabis retailers and manufacturers should take great care to comply with all applicable laws and standards, as private litigants will use this legal framework, no matter how rickety, in making their cases.
Notably, plaintiffs’ use of communications-related claims in consumer products litigation has escalated in recent years, particularly in the food and beverage industry. The public’s increasing awareness of health-based claims — and the ubiquity of traditional and online advertising — has produced a nearly fourfold increase in false advertising lawsuits in the preceding decade, and it is hard to imagine that the nascent commercial cannabis industry will avoid these disputes.
Indeed, the stage is set for a rapid and dramatic rise in cannabis product-based litigation premised on marketing, packaging or advertising. Depending on the product at issue, disputes could take the form of private litigation or a regulatory enforcement action (or both). Manufacturers of cannabis or cannabis-derived products can get out in front of these issues by integrating regulatory compliance efforts with product design and marketing as early as possible in the product development timeline.
The federal regime that regulates the marketing of food and drugs is complex, and the web of state-level laws in the cannabis space only adds to the challenge. Even seemingly innocuous language can run afoul of existing laws, and those laws often have strict liability provisions, meaning that violators of the law can be held liable even when there was no overt intention of breaking the law.
Product packaging is an obvious area on which cannabis companies should focus. Whether the compliance function resides in-house or is tapped from outside the company, both manufacturers and retailers should make sure all packaging is vetted from a regulatory compliance perspective. It’s a relatively easy box to check off and could spare your company from costly and distracting legal trouble.
For retailers, a second area to consider is how sales associates are trained and how they interact with store clientele. Again, you can head off trouble by implementing compliant sales practices and demonstrating to regulators that training programs are well resourced, clear and compliant.
Time to Get Serious
Complying with the patchwork of federal and state law is not an impossible hurdle; however, it does require a certain degree of intentionality and foresight. As the cannabis industry continues to grow up, the consolidation process will necessarily shake out weaker hands that lack the sophistication or wherewithal to manage the risks now taking shape, and those risks are considerable.
Global economic activity related to legal cannabis and cannabis-derived products is expected to reach half a trillion dollars by 2030, and well before that point, the plaintiffs’ bar will catch the scent and follow the dank all the way to the bank. Before the inevitable flood of lawsuits, serious cannabis operators should use this time to button up compliance and future-proof their businesses.
Jeff Whitney is a Denver-based partner with Husch Blackwell LLP who routinely represents companies in state and federal court in connection with breach of contract, fraud, breach of fiduciary duty and unlawful trade practices, among other forms of litigation.