Cannabis Case Summaries

Defendants describe the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

We’ve previously discussed a RICO case that is slowly worming its way through federal court in Portland, Oregon. Styled as McCart v. Beddow et al., the case was filed by an attorney who is fed up with two neighboring cannabis grow operations next to her rural home. But rather than focusing solely on the allegedly troublesome cannabis producers, the McCart plaintiffs have filed suit against anyone even tangentially related to the producers’ business, including many dispensaries (“Dispensary Defendants”) that only purchased their product. We counted over 70 named defendants!

In our previous discussion, we suggested that the plaintiffs’ case against the Dispensary Defendants is fairly weak and our opinion hasn’t changed. Since we last checked in, the plaintiffs have filed a substantially expanded amended complaint, and numerous defendants have filed motions to dismiss. Although the Court won’t consider the motions to dismiss until January, it is worth checking in on the parties’ current positions. We are going to continue to focus on the Dispensary Defendants because there could be serious repercussions in the industry if the Dispensary Defendants are found liable even though they apparently didn’t have anything to do with the grow operation.

The Law

RICO law is complex, but as a general matter the RICO statutes allow a plaintiff to recover treble damages in a civil claim if the plaintiff can prove the following:

  • The existence of an “enterprise” affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

Of course, the devil is in the details, as the Dispensary Defendants point out in their motion to dismiss.

The Amended Complaint

The plaintiffs filed their amended complaint on September 1, which added 95 paragraphs onto their hefty original complaint. The amended complaint adds many new defendants, including employees at the farms and it alleges that nearly all of the defendants were exporting product out of Oregon.

In broad terms, the plaintiffs’ claims against the Dispensary Defendants have not changed in that they still allege the following:

  1. The cannabis grow operation (“Marijuana Operation”) is an enterprise affecting interstate commerce, as defined in the RICO statutes;
  2. All of the defendants were associated with and conducted the Marijuana Operation’s affairs through racketeering activity;
  3. Plaintiffs suffered a variety of kinds of harm as a result of the Marijuana Operation:
    1. Physical Injury to Real Property: littering, driveway damage, tire tracks, damage to some trail cameras, and unreasonable use of easements.
    2. Diminution of Property Value: noise pollution, light pollution, vibration, odors, exhaust fumes.
    3. Personal Injuries: harassment and damage to plaintiffs’ use and quiet enjoyment of their property.

The Motions to Dismiss

Eighteen Dispensary Defendants joined together in a single motion asking the Court to throw out plaintiff’s entire case against them. Their motion is well worth the read, not least for its colorful language, such as the lipstick-on-a-pig quote below the pig picture above. The arguments in this motion fit into two general categories:

The Dispensary Defendants are not part of a racketeering enterprise.

To establish an “enterprise” exists for RICO purposes, plaintiffs must show there was an ongoing organization with a common purpose. Both of these elements get to the same idea: a criminal enterprise is a group of people all working together to enrich themselves. Courts have found “ongoing organizations” among disparate businesses when there are legitimate interconnections between the entities, such as similar ownership and overlap in personnel. Similarly, courts have found a common purpose where the alleged members are working to promote a single economic interest, and not where they are simply pursuing individual economic interests. There don’t appear to be any of these kinds of links in this case. The Dispensary Defendants appear to be owned, operated, and staffed by distinct individuals working towards their own individual business purposes. This ties back to our initial read of this case: mere supplier-purchaser relationships like these do not rise to the level of RICO enterprises.

In any event, plaintiffs need to establish that the Dispensary Defendants were associated with and conducted or participated in the enterprise. Yet plaintiffs have not alleged that the Dispensary Defendants had any say over the operation of the farms. Their case against the Dispensary Defendants will likely die here.

Plaintiffs’ alleged harms cannot be recovered as a matter of law.

Even assuming plaintiffs can get over the hurdle of establishing that the Dispensary Defendants directed the farms, plaintiffs still must establish that their specific harms are actionable. The Dispensary Defendants also seem to be on the right side of the law here, arguing that the alleged harms and the speculative claim that the value of plaintiffs’ home has decreased cannot form the basis of a RICO claim against any of the defendants and cannot form the basis of a state-law claim nuisance claim against the Dispensary Defendants, in particular.

The plaintiffs face a number of legal obstacles that seem insurmountable. First and foremost, Oregon has long since decided that it is in the best interests of the state to protect farming uses and it has decided to treat cannabis the same as any other farm crop. Accordingly, Oregon’s Right to Farm Act likely bars plaintiffs’ nuisance and trespass claims for damages based on odors, noise pollution, light pollution, vibrations, and smoke fumes. The Dispensary Defendants rely on ORS 30.936(1), which provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims “based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.” Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.

In any event, plaintiffs’ specific diminution of value claims are likely too speculative. The Dispensary Defendants argue that a RICO plaintiff must plead and prove that plaintiff has suffered a “concrete financial loss” but that plaintiffs’ complaint only contains pure guesswork that the odors, etc. diminished the value of plaintiffs’ property. Even if the plaintiffs could plead a specific dollar amount of diminished value, Oregon law bars claims for diminution of property value if the nuisance can be stopped. In other words, if the harm would disappear if the grow operations shut down, plaintiffs cannot recover damages for loss of value. Instead, plaintiffs should be asking the court to shut down the grow operations, which would have little to no effect on the Dispensary Defendants.

Plaintiffs will also likely fail on their claims for loss of quiet enjoyment and harassment because personal injuries like these are not compensable under RICO.

We will have to wait until next year to find out if the Court agrees with the Dispensary Defendants but we predict vindication for the dispensaries. In fact, we predict the claims against all of the defendants will get tossed, except possibly some small state-law claims. It seems that if you are a good neighbor and you don’t set up your operations next door to property owned by a lawyer, then you’ll likely never be drawn into a mess like this.

Oregon cannabis Filing this in the odd news section: The Portland Tribune has reported that an Oregon dispensary owner has been fined $3,000 by Wood Village, Oregon for the mannequins he sets up on the sidewalk to advertise his cannabis. These blonde cannequins mannequins are animated and brandish “Got Chronic” signs at potential clients.

The town recently revised its sign code to prohibit Portable Signs, defined as “signs not permanently affixed to a building structure or the ground and designed to move from place to place except garage sale signs, special event signs, political signs, real estate signs or as otherwise provided in this Code . . .”

The owner sees the long list of exceptions as a clear sign that this ban is specifically targeted at his mannequins. After all, his dispensary is the only cannabusiness in town. He has also been fined under the new code for having a sign on the roof of his neighboring cupcake business.

Even if the ordinance isn’t specifically targeted at the mannequins, the ordinance is likely unconstitutional. Under first amendment jurisprudence, content-based regulation of speech is subject to “strict scrutiny,” that is, to survive, content-based regulations must 1) be passed to further a compelling government interest, and 2) be narrowly tailored to achieve that interest. In practice, strict scrutiny is a difficult hurdle to overcome.

In a recent case, the US Supreme Court struck down a similar city code governing outdoor signs. The offending ordinance identified various categories of signs “based on the type of information they convey, then subjects each category to different restrictions.” Sound familiar? The Supreme Court continues: “[A] municipal government vested with state authority, ‘has no power to restrict expression because of its message, its ideas, its subject matter, or its content . . . Content-based laws–those that target speech based on its communicative content–are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”

In one passage, the Supreme Court states “The restrictions in the Sign Code that apply to any given sign thus depend entirely on the communicative content of the sign. If a sign informs its reader of the time and place a book club will discuss John Locke’s Two Treatises of Government, that sign will be treated differently from a sign expressing the view that one should vote for one of Locke’s followers in an upcoming election . . . On its face, the Sign Code is a content-based regulation of speech.”

Let’s rewrite that passage with the facts at issue here: “The restrictions in the [Wood Village sign code] that apply to any given sign thus depend entirely on the communicative content of the sign. If a [portable] sign informs its reader [that a mannequin has “got chronic”], that sign will be treated differently from a sign [advertising a nearby garage sale] . . . On its face, the [Wood Village sign code] is a content-based regulation of speech.”

In this light, it is easy to see that the Wood Village ordinance will likely be struck down if the owner decides to take it up with the courts. We will have to see if the owner decides it is worth it.

Setting aside the specter of unconstitutionality, it is worth looking at whether state law prohibits the mannequins. The state is subject to the same restrictions on content-based regulations, so the Oregon Liquor Control Commission (“OLCC”) has issued loose cannabis advertising restrictions that seem designed to survive strict scrutiny. The OLCC’s stated goal is to prevent cannabis advertising that is attractive to minors, promotes excessive use, promotes illegal activity, or presents a significant risk to public health and safety. More specifically, cannabusinesses cannot advertise cannabis in any way.

  • That contains deceptive, false, or misleading statements;
  • That contains any content that targets minors, such as images of minors, cartoons, toys, etc.;
  • That encourages the transportation of cannabis across state lines;
  • That asserts that cannabis items are safe because they are regulated by the OLCC and have been tested by a lab;
  • That claims recreational cannabis has curative or therapeutic effects;
  • That displays the consumption of marijuana items;
  • That contains material that encourages excessive or rapid consumption; or
  • That contains material that encourages the use of marijuana because of its intoxicating effect.

These blonde got-chronic-bots don’t seem to fit neatly into any of these categories, so the mannequins are likely legal under state law. Accordingly, the owner may very well decide it is worth taking this dispute to the courtroom.

New York CannabisFormer NFL player Marvin Washington is one of five plaintiffs that have filed suit against Attorney General Jeff Sessions, the DOJ and the DEA. The lawsuit alleges that classifying cannabis as a schedule 1 controlled substance under the 1970 Controlled Substances Act (CSA) is so absurd as to be unconstitutional.

The plaintiffs have a point. Currently, cannabis is listed alongside heroin, ecstasy, and LSD as Schedule I drugs, which are defined as “drugs with no currently accepted medical use and a high potential for abuse.” When it comes to cannabis, no part of this definition is supported by the evidence. Currently, 29 states and the District of Columbia have legalized some form of medical cannabis use, and recent studies suggest cannabis actually helps get people off dangerous drugs, like cocaine, meth, and opioids (which are listed as less dangerous than cannabis).

Jeff Sessions and his drug zealot friends may honestly believe it when they say things like “[heroin is] only slightly less awful [than cannabis]” but believing in a fantasy doesn’t make it true. In any event, though it will be interesting to watch this lawsuit proceed, it seems unlikely it will be the vehicle that finally ends federal prohibition. Cannabis will eventually be legalized nationwide (we see that happening within five years), but it is a lot more likely to occur in voting booths than in a court.

Our Oregon lawyers have been fielding many questions regarding a recent civil RICO complaint filed in the federal court in Portland, Oregon styled as McCart v. Beddow et al. This case was filed on the heels of the Safe Streets decision out of Colorado that we discussed recently, and was clearly heavily influenced by that decision. You will recall that in Safe Streets, the Tenth Circuit allowed a private civil RICO action by a neighbor of a cannabis grow operation to survive a motion to dismiss.

As a reminder, RICO is a federal statute that provides for a civil cause of action for acts performed as part of an ongoing criminal organization (in addition to criminal penalties). It has become fashionable for meddlesome neighbors to bring these lawsuits against cannabis operators and their business affiliates. Because RICO complaints sound in federal law and implicate supply chain defendants, these cases differ from your ordinary nuisance-and-tresspass actions, which pursue only the marijuana grower itself, and also have been recently brought against Oregon marijuana growers.

Though McCart shares many similarities to the facts in Safe Streets, it is the differences that make things interesting. These differences let us tease out a couple of lessons for other cannabis companies seeking to avoid a similar lawsuit.

Oregon Cannabis First the similarities: Plaintiffs in both suits are bringing RICO claims against neighboring cannabis grow operations and alleging direct injuries to plaintiffs’ properties in the form of noxious odors that allegedly reduce property values. They also allege the mere presence of a “criminal enterprise” next door decreases property values.

But McCart is not Safe Streets. Taking the McCart complaint on its face, the direct operators of the neighboring grow operation are alleged to have gone out of their way to intentionally provoke the Plaintiffs at every turn. This isn’t just a case about noxious odors and neighboring criminal enterprises (although it is that); rather, the Plaintiffs are asserting this case is the culmination of a bitter dispute between neighbors in which cannabis is more of an extra than a star.

Specifically, the McCart Plaintiffs allege that:

  • The defendant cannabis growers menaced Plaintiffs and “made obscene gestures” and “screamed obscenities” at Plaintiffs;
  • The grow operation increased traffic on a shared driveway by an excessive amount;
  • The Defendants caused direct injuries to the property by leaving tire tracks on Plaintiffs’ property;
  • The Defendants revved their car engines when they saw Plaintiffs outside;
  • The Defendants “discharge firearms for extended periods”;
  • The Defendants frequently “blast the air horn of their dump truck”;
  • The Defendants damaged the shared driveway and at times blocked it; and
  • The Defendants littered on Plaintiffs’ property.

Whether these allegations are true will be Plaintiffs’ burden to prove. However, two immediate lessons come to mind:

Lesson 1: To paraphrase Wil Wheaton: don’t be a jerk. Be a good neighbor. If the McCart allegations are true, the behavior of these growers reflects poorly on the entire industry. If you want to be treated like a serious business, act like one. Recognize the precarious legal situation afforded by inane prohibition policies, and strive to be ideal neighbors.

Lesson 2: Control the odors. The Safe Street court found that the cannabis smell released by the Colorado grow op was enough to assert a claim for RICO damages. You should do everything you can to minimize odors on your businesses.

But what about the other McCart defendants?

Like in Safe Streets, the McCart plaintiffs seem to have sued everyone even tangentially related to their hated neighbors, including cannabis dispensaries that just happened to stock the neighbors’ products. These “Dispensary Defendants” are probably in much better shape than the growers.

A civil RICO claim under 18 U.S.C. Section 1962(c) (at issue in both Safe Streets and McCart) requires a plaintiff prove:

  • The existence of an enterprise affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

In Reves v. Ernst & Young, the US Supreme Court held that the language of 1962(c) requires the defendant have “participated in the operation or management of the enterprise itself.” (page 183). There are a few out of jurisdiction cases that have held that mere business relationships and supplier-purchaser relationships are insufficient to establish RICO liability, even with knowledge of the illegal activity. If you are curious, take a look at In re Mastercard Intl. Inc., (page 487) and Arenson v. Whitehall Convalescent & Nursing Home, Inc. It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.

Though there is a dispensary defendant in Safe Streets, the Tenth Circuit appears to have found the conduct requirement was met because the Safe Streets defendants admitted they all “‘agreed to grow marijuana for sale’ at the facility adjacent to the [plaintiffs’] property.” The Safe Streets dispensary defendant was directly involved in operating the specific grow operation at issue. This is not the same thing as an innocent dispensary accepting product from a third-party farm.

We will be watching this case and reporting back if anything of importance breaks, but in the meantime, it never hurts to be a good neighbor, and to take steps to minimize odors.

Cannabis attorneysIn Joe Hemp’s First Hemp Bank and Distribution Network v. City of Oaklanda federal judge ruled against a cannabis business that had sued the city of Oakland for putting it out of business for having failed to obtain proper permits.

The plaintiffs in this lawsuit were Joe’s Hemp and its founder David Clancy. The plaintiffs claimed they operated a “warehouse” to store medical marijuana for members using a “closed distribution network.” According to plaintiffs, members could pay a fee to store marijuana in the warehouse and then remove it from the warehouse when necessary.

Oakland requires any dispensary operating within the city have a cannabis dispensary permit and pay necessary fees and it deemed Joe’s Hemp to be a dispensary.  When Joe’s Hemp refused to apply for the required Oakland city dispensary permit, Oakland imposed fines against Joe’s Hemp and mandated Joe’s Hemp vacate the premises. Joe’s Hemp then sued the City of Oakland in federal court claiming it was not operating a dispensary, but rather a warehouse.

Joe’s Hemp contended that it was operating legally under federal law under the “warehousemen exemption” to the Federal Controlled Substances Act (CSA) which exempts common carriers and warehousemen from criminal liability for possessing Schedule I substances. Joe’s Hemp also claimed this exemption removed it from Oakland’s cannabis dispensary permit scheme. The court was not impressed, calling the alleged warehouse arrangement “a sham” that involved nothing more than its purported members paying fee to get marijuana. The court found this transaction to be a sale of cannabis and held that Joe’s Hemp sat squarely outside any purported warehouseman exemption.

Joe’s Hemp argued the CSA preempted Oakland’s cannabis permitting scheme. The court held the CSA did not preempt Oakland’s ability to permit marijuana business because there was no “positive conflict” between the City of Oakland’s cannabis permit scheme and federal law. The CSA did not preempt Oakland’s permitting scheme “because the permit scheme itself does not violate the Controlled Substances Act, but rather regulates certain entities that do.” The court also ruled that Oakland’s cannabis permitting scheme did not create obstacles to CSA execution because the federal government was free to enforce federal law and the permitting scheme did nothing to prevent that.

Plaintiffs also claimed Oakland’s permitting scheme required they forfeit their Fifth Amendment rights against self incrimination by requiring those running Joe’s Hemp to admit they operate a cannabis dispensary, pushing them outside the warehouseman exemption. The court ruled that even if Joe’s Hemp was only storing cannabis, it would fit Oakland’s definition of a dispensary because the city defines an entity that “stores” or “makes available” marijuana as a dispensary. In other words, an Oakland “dispensary” could — in theory — be a warehouse. The court also found that the permit itself did not require that the business actually admit to cultivating or selling marijuana.

In considering the self incrimination issues the court concluded as follows:

In any case, plaintiffs can simply stop their activity and avoid having to admit anything, i.e., get out of the [cannabis] business and avoid any penalties and admissions. If they choose to continue in an activity that is on the borderline of illegal under federal law, then they cannot escape compliance with local police regulation by saying compliance would constitute an admission under the Fifth Amendment.

The court granted the City of Oakland a motion to dismiss and terminated the case. However, Clancy and Joe’s Hemp have appealed the decision to the Ninth Circuit Court of Appeals and we will provide an update if and when the Ninth Circuit issues an opinion on appeal.

 

NOTE: The above is part of our plan to summarize all cannabis civil cases with a published court decision. By civil case, we mean any case that involves cannabis or the cannabis industry that is not a strictly criminal law matter. These cannabis case summaries are intended both to keep you up to date on cannabis laws as interpreted by the courts and also to serve as a resource for anyone conducting cannabis law research. We also will seek to provide key unpublished cannabis law decisions as well, when available.

Cannabis attorneysCan your neighbors file a civil RICO suit against you in federal court and allege that your state-legal cannabis business is an organized crime operation? A decision from the Tenth Circuit of Appeals handed down this month suggests they can.

The case, Safe Streets Alliance v. John Hickenlooper, concerned a dispute between neighbors that own adjacent plots of open land in rural Colorado. Though neither party lived on their respective properties, one of the defendants used his to house a state-legal commercial cannabis grow operation on his. The plaintiffs, on the other hand, preferred to use their land to ride horses and recreate with their children. The plaintiffs alleged that the odor of cannabis prevented them from enjoying their land and diminished its value; they also alleged that they were harmed by the indignity of having to see a “criminal operation” from their land.

So far this story sounds like a fairly garden-variety nuisance lawsuit with which many other cannabis growers have had to deal. See California Cannabis NIMBYs and Land Use Disputes and How To Handle A Neighbor Who Wants To Shut Down Your Cannabis Business. But what makes this case so important is that one of plaintiffs’ causes of action was a RICO claim. RICO, which stands for Racketeer Influenced and Corrupt Organizations Act, is a law originally intended to thwart conventional organized crime and it brings down the hammer: losing a RICO suit can mean the plaintiff is awarded three times its actual money damages as well as attorney’s fees. By its very design, RICO is intended to be ruinous to organizations caught in its crosshairs.

The Tenth Circuit addressed the RICO claim with the same basic federal supremacy arguments with which all cannabis litigants struggle. The court stated that the organization with the cannabis grow operation was indeed a “criminal organization” as defined under federal law and sided with the plaintiffs’ contention that it is reasonable to infer that property owners do not want their land to be adjacent to a criminal enterprise. Note, however, that as an appellate court the Tenth Circuit decides issues of law and ultimately sent this case back to the trial court for a factual determination. Indeed, the panel speculated that it might be true that the plaintiffs’ land was in fact, more valuable because of its suitability for the cultivation of marijuana. Stay tuned to see how the district court resolves this issue.

The takeaway from this case for the cannabis industry is this that state legality probably will not shield you from civil RICO suits in federal court. Cannabis businesses should consider their business operations and risk exposure in light of this and, if possible, avoid alienating their neighbors. This case does not, however, mean that cannabis businesses are now at increased risk of criminal RICO exposure. Federal criminal RICO enforcement is subject to the same measures and enforcement priorities that have kept the federal government from enforcing the Controlled Substances Act.

As NORML attorney Keith Stroup notes, there is some good news to be found in the decision. The Tenth Circuit rejected a handful of other arguments that the court should void and enjoin the enforcement of Colorado’s Amendment 64 – a ruling that would have dealt a serious blow to state legal cannabis programs.

Cannabis attorneysToday’s Cannabis Case Summary looks at an Arizona case that held against making post-traumatic stress disorders a qualifying medical condition for medical cannabis and the lessons that can be learned from it.

Arizona voters approved Proposition 203 in 2010 to create a medical marijuana program to facilitate access to cannabis for patients afflicted with a “debilitating medical condition” defined by the law. The law as passed included a number of qualifying conditions, but also included a mechanism for adding conditions. A petition receiving the required amount of support triggers consideration for inclusion by the Arizona Department of Health Services (DHS).

It was against this legal backdrop that the Arizona Cannabis Nurses Association (AZCNA) petitioned DHS to add post-traumatic stress disorder (PTSD) to the list of qualifying debilitating medical conditions eligible for medical cannabis. The petition met all procedural and substantive requirements and it appropriately explained “the availability of conventional medical treatments” and summarized “the evidence that marijuana will provide a therapeutic … or palliative … benefit.” DHS denied the petition following a public hearing and an opportunity for public comment.

AZCNA appealed to an Administrative Law Judge (ALJ) appointed by the DHS Office of Administrative Hearings to evaluate appeals and recommend a decision to DHS. After an extensive evidentiary hearing, the ALJ found that, based on the preponderance of the evidence, “marijuana use provides a palliative benefit to those suffering from PTSD” and recommended that DHS adopt PTSD as a debilitating medical condition.

DHS largely accepted the ALJ’s recommendation, but with two conditions. First, marijuana could be prescribed for palliative care but not for therapeutic purposes. In other words, marijuana could be recommended for symptom relief, but not to cure or treat any disease. Second, the physician recommending marijuana was required to attest that the patient was also pursuing a “conventional” course of treatment for PTSD.

AZCNA was unsatisfied and challenged the DHS rule in the Superior Court of Maricopa County on the basis that DHS exceeded its statutory authority and that the rule violated PTSD patients’ Constitutional right to equal protection under the law. That court rejected AZCNA’s argument, and they subsequently appealed to the Arizona Court of Appeals. The appeals court’s decision is where today’s Cannabis Case Study begins.

AZCNA was not legally “aggrieved.” The Court of Appeals found AZCNA’s DHS authority arguments to be a non-starter. The gist of AZCNA’s position was that DHS erred by distinguishing between a therapeutic or palliative benefit of cannabis because it lacked authority to do so. However, their brief conceded that there is “no significant evidence” that marijuana is “therapeutic” for PTSD. They also stated in a later brief that there is “no cure” for PTSD, which the court read as conceding that cannabis could not be “therapeutic” because it did not actually “treat” the disease itself. Accordingly, they were not aggrieved by the “palliative” condition because there was no basis for any other medical application for cannabis in their own petition.

Neither the physician certification nor “conventional treatment” conditions violated Arizona law. The court quickly dispensed with AZCNA’s argument that the physician requirement violated or exceeded the law. AZCNA argued that the conditions violated Arizona law that limits the ability of the governor or legislature to amend or veto voter initiatives. The court reasoned that this did not preclude reasonable conditions or restrictions on the use of medical marijuana. A parallel challenge that alleged the DHS rule unlawfully forced a “conventional treatment” on a patient similarly failed.

The DHS rule did not violate the Equal Protection clause of the Constitution. AZCNA alleged that the conditions violated PTSD patients’ rights to equal protection under the law by “transparently discriminat[ing] against a PTSD patient versus any other patient suffering from another listed debilitating condition.” The court found that AZCNA did not overcome the common law presumption in favor of agency decisions and concluded that because all PTSD patients were treated similarly under the rule it did not violate equal protection rights because “all persons within a class are treated alike.”

The Court of Appeals ruled against AZCNA and upheld the lower court’s decision.

There are a couple of takeaways from this case:

  • Learn your local administrative and legislative procedures. AZCNA may have lost in this case, but they succeeded in availing themselves of the administrative mechanism provided for citizens to influence change in marijuana policy. All cannabis stakeholders should familiarize themselves with the procedures for doing so such that they can effectively work within the system through petitions, initiatives, and lobbying.
  • Equal protection to expand qualifying conditions lists? Here AZCNA failed because the court found that all PTSD patients were treated similarly under the law. However, their argument raises the interesting possibility of using equal protection grounds to challenge laws that permit medical marijuana for patients with some conditions but not for analogous unlisted ones. Such litigation would be a long-shot, unfortunately, underscoring the importance of activism and lobbying.

 

Cannabis attorneysMarijuana is a valuable asset and insurance can be a necessary tool in protecting that investment. We have written about how marijuana inventory can be covered under a general liability insurance policy. However, not all courts are willing to hold that an insurance policy covers cannabis.

In USAA v. Tracy (D. Haw. Mar. 16, 2012), a US District court in Hawaii ruled that a homeowner’s insurance policy does not cover medical marijuana. On May 18, 2010, USAA Casualty Insurance Company issued Barbara Tracy a homeowners’ insurance policy. Tracy was a medical marijuana patient who was permitted under Hawaiian state law to possess and grow marijuana. A thief stole 12 of Ms. Tracy’s marijuana plants, valued at $45,600, from Tracy’s property and she submitted a claim to USAA. USAA made an initial payment on the claim but Tracy argued that the amount was insufficient. USAA informed Tracy it would not make any further payment on the policy. Tracy sued USAA for breach of contract, seeking additional funds for the stolen cannabis plants. USAA moved for summary judgment to have Tracy’s claim dismissed, arguing that her marijuana was not covered under her policy.

USAA’s policy covered theft of “trees, shrubs, and other plants” and Tracy argued that this should include her marijuana plants. USAA first contended that Tracy did not have an insurable interest in medical marijuana. Hawaiian Law defines an insurable interest to be any “lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.” USAA argued that an interest in medical marijuana is not “lawful” because Hawaii’s medical marijuana law “does not legalize the medical use of marijuana, but provides an affirmative defense to marijuana-related state law crimes for the medical use of marijuana.” USAA also pointed to the fact that Hawaii’s medical marijuana law states that “this part shall not be construed to require insurance coverage for the medical use of marijuana.” The court rejected both arguments by determining that Hawaii does permit the use of medical marijuana, making it lawful, and that although Hawaii’s medical marijuana law did not require insurance coverage, it does not prohibit insurance coverage. The court determined that Tracy did have an insurable interest in marijuana as legally compliant medical marijuana user.

However, the court was persuaded by USAA’s second argument that it could not purchase medical marijuana using insurance proceeds as that would violate federal law. The court cited to cases that established that Hawaiian courts can refuse to enforce contracts that violate federal law. The court ruled Tracy’s possession and use of marijuana violated federal law because it directly conflicted with the federal Controlled Substances Act, even though she was compliant with state law.  The court concluded that the insurance policy purportedly covering her marijuana plants was an illegal contract that could not be enforced and that USAA had no obligation to provide her insurance proceeds for the plants. As a result, it granted USAA summary judgment, holding that it did not owe Ms. Tracy anything more.

For more on insurance and marijuana, please see the following:

NOTE: The above is part of our plan to summarize all cannabis civil cases with a published court decision. By civil case, we mean any case that involves cannabis or the cannabis industry that is not a strictly criminal law matter. These cannabis case summaries are intended both to keep you up to date on cannabis laws as interpreted by the courts and also to serve as a resource for anyone conducting cannabis law research. We also will seek to provide key unpublished cannabis law decisions as well, when available.

Cannabis attorneysToday’s Cannabis Case Summary looks at a novel example of the intersection between state-legal  cannabis and employment law. The plaintiff, Bobbie Henry, worked at an Outback Steakhouse in Flint, Michigan, from 1997 to 2014 when she was fired along with four other employees because of drug-related activities. Henry, a registered medical marijuana caregiver under Michigan law, sued Outback, alleging her medical marijuana activities were used as a pretext for age discrimination and her termination on that basis was defamatory. Unfortunately for Henry, a federal judge disagreed and the U.S. District Court for the Eastern District of Michigan granted Outback’s motion for summary judgment.

The meat (pun intended) of this case is in its facts, which involve two different groups of Outback employees involved in two very different kinds of “drug activity.”

One was made up of Henry and a second Outback employee who was a registered medical marijuana cardholder and a patient of Henry’s. Henry transferred cannabis to the co-worker patient in her role as a registered medical marijuana caregiver permitted by state law.

The second was a group of four employees the kitchen manager had observed exchanging a “small black object” he suspected was an illegal substance for cash. The employees claimed it was a “bridge card,” but after an investigation and a conference call with management the four employees were terminated for cause. The four employees did not go quietly, however, and in exit interviews alleged Henry was “selling drugs” and “dealing dope” at the restaurant. When confronted, Henry claimed that though she did sell medical marijuana to her co-worker patient she did not sell medical marijuana to her co-worker patient on company property. She was terminated the same day for behavior “unbecoming” of the company.

Henry sued Outback, first alleging that her medical marijuana-related activities were used as a pretext for age based discrimination. Henry’s claim was based on the fact that she was the longest-tenured member of the team and had been there for fourteen years before being terminated, despite winning service awards for “Top Performing Bar Team.” She also pointed to an unlitigated situation where a second employee had been terminated for what he felt was age-based discrimination.

The court looked at the pretext issue and was unsympathetic towards Henry, pointing out that she admitted to having a medical marijuana card and to selling drugs to a co-worker. Based on these two things, the court concluded there was a legitimate, non-pretextual reason for Outback to terminate Henry. The court secondarily found that Outback, as Henry’s employer, had a qualified privilege to discuss allegations that she sold medical marijuana to co-workers, which she did not dispute.

This case is just another example of how a state’s permissiveness of medical marijuana or adult-use cannabis will usually not impose a duty on an employer to tolerate marijuana use or override other legal doctrines that give power to employers. Even though Henry was apparently correct that she was in compliance with Michigan law, a little discretion could still have gone a long way. We cannot resist noting the foolishness of an employer terminating a good employee for helping a co-worker.

NOTE: The above is part of our plan to summarize all cannabis civil cases with a published court decision. By civil case, we mean any case that involves cannabis or the cannabis industry that is not a strictly criminal law matter. These cannabis case summaries are intended both to keep you up to date on cannabis laws as interpreted by the courts and also to serve as a resource for anyone conducting cannabis law research. We also will seek to provide key unpublished cannabis law decisions as well, when available.

Cannabis attorneysCommercial leases for cannabis businesses are a major concern for many of our clients largely because cannabis businesses operate in an industry prohibited under federal law. Generally, contracts that are illegal are unenforceable and there is an argument to be made that any and all cannabis contracts are illegal, at least at the federal level. But a recent Arizona state court shows that state courts are not always receptive to that argument and that a contract that violates federal law is not necessarily unenforceable.

Green Cross Medical, Inc. v. Gally (April 18, 2017) addressed whether a commercial lease with a medical marijuana grow operation in Arizona was enforceable. John Gally owned commercial property in Winslow, Arizona that he leased to Green Cross Medical to operate a medical marijuana dispensary. Two weeks later, Gally sent a letter to Green Cross revoking the lease. At the time Gally terminated the lease, Green Cross had not received the necessary license to operate a dispensary. However, the lease permitted Green Cross to sublease the property and nothing in the lease stated the lease would be terminated if Green Cross did not receive a license to run a dispensary.

Green Cross sued Gally for breach of contract and attempted to obtain a temporary restraining order to prevent Gally from revoking the lease. Gally argued that the lease was illegal and therefore unenforceable because it involved cannabis distribution. The trial court was persuaded by Gally’s argument and ruled that the lease agreement was indeed unenforceable because violated both federal and state law. Based on this, the trial court did not grant Green Cross the restraining order and it denied Green Cross damages for Gally’s having revoked the lease.

Green Cross appealed the trial court’s decision.  First, the appeals court determined that Green Cross could seek damages against Gally even though Green Cross did not receive a license to operate a dispensary on the leased property because the right to sublease was a valuable property right. As a result, Green Cross was permitted to seek damages for the loss of the lease.

The appeals court also held that the lease was not illegal on under Arizona law. The court stated that the Arizona Medical Marijuana Act (AMMA) protects rights of dispensaries to enter into commercial leases and that dispensaries have a contractual right to enter into lease agreements with landlords. The appeals court concluded that “[g]iven the language of the AMMA, a court may not void or refuse to enforce a dispensary’s lease with a landlord simply because the dispensary would be supplying marijuana in compliance with the AMMA.”

The appeals court also rejected Gally’s arguments that he as the landlord could face criminal liability under state law because he was facilitating marijuana distribution by leasing property to a cannabis dispensary. The appeals court pointed to the fact that Gally agreed to execute the lease understanding that Green Cross intended to operate in Arizona’s medical market:

We emphasize that nothing in the AMMA requires a landlord to rent a property to a proposed dispensary. Gally was free not to enter into the lease if he was uncomfortable with the proposed use of the Property. But once he chose to do so, he was not free to rescind his contractual commitments without facing potential monetary liability. Accordingly, leasing property to a medical marijuana dispensary that is in compliance with the AMMA is not illegal under Arizona law. Thus, the superior court erred when it found the lease was void and dismissed the complaint seeking damages for the breach.

The appeals court then acknowledged that federal law prohibits distribution of marijuana under the Controlled Substances Act (CSA) and that it is, therefore, illegal under federal law for an Arizona landlord to lease property to a marijuana business. However, the appeals court went on to state this federal illegality “does not render the contract in this case unenforceable under all circumstances.” The court cited to several cases where contracts involving medical marijuana businesses were upheld by courts despite being prohibited under federal law, showing that courts balance the federal government’s interest in enforcing the CSA with states’ interest in permitting the medical use of marijuana.

The appeals court weighed the interests of the federal government and the state of Arizona and held that the lease was not unenforceable simply because it violated the federal CSA. The appeals court explained that federal government enforcement of the CSA against state-compliant marijuana operators had been in flux for years and that the Department of Justice (DOJ) had instructed US Attorneys not to prosecute individuals acting in compliance with the Cole Memo. The court also noted that Congress has prohibited the DOJ from using funds to prosecute people distributing marijuana in compliance with state law. As a side note, that spending provision was recently extended.

The Arizona Appeals Court sent the case back to the trial court to reconsider the facts of the case in light of the appeals court having held that the lease was not unenforceable and that Green Cross may recover damages for Gally’s terminating the lease.

You can find more on cannabis leases here: