CBD product recall litigationWe counsel our cannabis (and non-cannabis) clients extensively on product liability issues, and have warned them that the federal illegality of their products will not shield them from the same products liability risks faced by companies in other industries. We extend the same warnings to our cannabidiol (CBD) clients, who, if they are operating outside of a state-run cannabis licensing regime, are actually in a position of even greater risk. Lack of regulation in the CBD space is to the detriment of consumers, who often cannot be certain what ingredients the products they purchase actually contain, or whether those products are safe and free of contaminants.

It’s only a matter of time before harmed consumers start suing CBD companies alleging defective, dangerous, or mislabeled products (and Proposition 65 violations). Here are some posts we’ve written about product liability in the cannabis industry, which are highly relevant to CBD companies as well:

Recently, Vice published an alarming article about a new study that detected synthetic marijuana and a compound in cough syrup in one CBD company’s vape products. The article summarizes the findings of Michelle Peace, a toxicologist and vaping expert at Virginia Commonwealth University who evaluates how electronic cigarettes are being used for substances other than nicotine. Peace received a tip that a product supposedly containing only CBD had psychedelic effects for a consumer. Upon further testing, she discovered that out of nine products tested, four contained synthetic marijuana (5-fluoro MDMB-PINACA (5F-ADB)) and one contained dextromethorphan, an ingredient in cough syrup.

Unfortunately, these findings do not surprise us. We’ve long been wary of the proliferation of CBD products with very little regulation from federal or state governments. Some states have taken steps to combat these unregulated products. In July of this year, the California Department of Public Health’s Food and Drug Branch (CDPH) issued an FAQ on CBD in food products stating:

“[A]lthough California currently allows the manufacturing and sales of cannabis products (including edibles), the use of industrial hemp as the source of CBD to be added to food products is prohibited. Until the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.”

In California, CBD products derived from marijuana and produced by licensed cannabis manufacturers may be sold, but unregulated, industrial-hemp-derived products intended for consumption may not.

So, what should CBD companies be doing to protect themselves from consumer product liability claims? Of course, we recommend implementing robust testing protocols that are in line with those required by state agencies of cannabis manufacturers. The first step in protecting your company is ensuring that your products are safe. In the same vein, be sure that everything you state about your product is accurate.

And oftentimes, one of the best ways to mitigate against product liability claims is to institute a product recall, and having a product recall plan in place will facilitate this. In crafting that plan, below are some recommendations we’ve made before, which bear repeating:

  1. Create an overall recall strategy.
  2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for cannabis businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.
  3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is important to learn about product problems as early as possible.
  4. Develop a complaint receipt and evaluation method to ensure your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.
  5. Truly ponder what your product complaint investigation will entail. What facts should your recall committee be gathering when seeking to determine if a product complaint is valid or if a recall is warranted? What should your recall look like, as based on the facts and circumstances and the threat your product may pose to consumers and vendors?
  6. Create a distribution list so your product recall committee can quickly and easily identify all affected products and product lots for disposition and potential destruction. The distribution list should — at minimum — include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here. Our firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s failure to notify this one supermarket company and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.
  7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.
  8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. For this you absolutely need attorney help.
  9. Make sure to as quickly as possible (preferably in advance) alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.
  10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so you are not scrambling to try to figure out your possible options later, when you have no time to do so.
  11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to the foregoing, we also recommend regular compliance audits to ensure that your procedures are safe, legal and effective. It is only a matter of time before CBD product liability claims start to proliferate, and CBD companies should prepare for that reality now.

california cannabis litigation
We see litigation in the California industry’s future.

Because California’s cannabis regulatory scheme is still in relative infancy, 2018 has looked the same for most operators: applying for annual licenses and waiting (and then continuing to wait) for them to issue or fighting to get temporary license applications submitted before they can no longer be issued. But what happens in two or three years after hundreds or thousands of commercial cannabis licenses have been issued? A host of administrative and civil litigation, probably.

California’s cannabis regulators have immense power that’s not just going to disappear after they issue licenses. The Bureau of Cannabis Control, which regulates a number of different license types, arguably has more police power than the actual police. Section 5800 of the BCC’s readopted emergency regulations, for example, gives the BCC “full and immediate access”, without prior notice, to enter premises, inspect cannabis or vehicles, and copy books and records, and failure of a party to comply with a BCC investigation can be subject to discipline.

Not only do the agencies have broad investigative power, but the subject matter of what they can investigate—all the various regulations that companies have to comply with—is immense. The regulators are not going to sit around and assume that licensees are following the law, the regulations, or even their own operational plans submitted with their applications—they are almost certainly going to use their investigative power to root out non-compliant operators. This should come as no surprise as the BCC, for example, has already taken some action against allegedly unlicensed cannabis operators. Our cannabis lawyers in other states with older licensing schemes have already seen targeted agency investigations and enforcement actions.

There are really endless ways that the agencies may choose to investigate or enforce their regulations, but it’s safe to say that they will prioritize enforcement against unlicensed operators. They may also go after some other easy targets—selling to underage persons, violations of advertising or delivery regulations, track-and-trace non-compliance, and so on. Rest assured, too, that administrative rules will continue to evolve, and licensed businesses that do not keep up on compliance will also be vulnerable.

Not only are the next few years likely to see an increase in administrative actions, but they are also likely to see a swath of civil litigation between licensees and internally. With the development of so much new technology and other intellectual property, we expect to see a good deal of trade secret and other IP litigation. Prop 65 and other forms of false advertising litigation are likely to continue as well. And internally, members of cannabis companies may start to bring lawsuits against each other or their companies for a number of reasons—from simple things like alleged mismanagement of company assets to fraud in soliciting investors.

The future of the California cannabis industry isn’t entirely certain, but it’s likely going to involve a lot of time before arbitrators, judges and other dispute resolution officiants.

asset forfeiture fine cannabis marijuana

We have handled a number of excessive fines cases on behalf of clients who’ve had their property seized, or threatened to be seized by the government. For some background on this, see our blog posts here and here.

The United States Constitution provides that excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. U.S. Const., Amdt. 8. The Excessive Fines Clause “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” Austin v. United States, 509 U.S. 602, 609-10 (1993). That constitutional protection applies in cannabis cases, just like everywhere else.

On Wednesday, the United States Supreme Court heard oral arguments in the case of Timbs v. Indiana regarding whether the Eighth Amendment’s Excessive Fines Clause is incorporated against the States under the Fourteenth Amendment. The case involves the forfeiture of petitioner’s land rover as punishment for selling heroin. The Indiana Court of Appeal held that the forfeiture of the land rover was grossly disproportionate to the gravity of the offense. The Indiana Supreme Court reversed and concluded that because states are not subject to the Excessive Fines Clause, the forfeiture was not unconstitutional.

The predicted outcome is that the United States Supreme Court will apply the Excessive Fines Clause against the states. The Timbs decision will have nationwide impacts for those accused of drug crimes and other offenses, and will be an important check on the government’s power to interfere with private property. That would be great news for the cannabis industry.

As stated in the petitioner’s opening brief:

“The right to be free from excessive fines is fundamental and applies to the States. The power to fine is—and has always been—a formidable one. And unlike every other form of punishment, fines and forfeitures are a source of revenue for the government, making them uniquely prone to abuse. The accompanying risk to life, liberty, and property is very real. “[I]n a free government,” after all, “almost all other rights would become utterly worthless, if the government possessed an uncontrollable power over the private fortune of every citizen.” 3 Joseph Story, Commentaries on the Constitution of the United States § 1784, 661 (1833).”

It’s a compelling argument, and you can read the full brief here.

We will be monitoring this case and will provide an update once the decision is published.

cannabis marijuana RICO litigation
Time for some of these plaintiffs’ lawyers to pack it up.

We’ve been writing about RICO lawsuits on this blog for a while. These lawsuits are typically brought by neighbors of state-licensed cannabis farms, who allege they are bothered by noise and smells associated with cannabis production, and that their property values have been damaged by extension. Generally speaking, these plaintiffs tend to have strong prohibitionist beliefs. Filing RICO lawsuits has also become a cottage industry for certain lawyers, and there are even educational courses for attorneys who want to spend their time on this sort of thing.

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). Because RICO complaints sound in federal law and implicate supply chain and vendor defendants, these cases differ from your ordinary nuisance-and-trespass actions, which pursue only the marijuana grower itself, and are also occasionally brought against cannabis farms.

The first RICO lawsuits started popping up a few years ago, and some of them are backed by prohibitionist groups attempting to rattle the industry. One common strategy of RICO plaintiffs, particularly in the early litigations, was to name every vendor doing business with the cannabis farm, including those that never touched the plant itself: e.g., banks, insurance vendors and equipment providers. The RICO plaintiffs would then dismiss these defendants one by one, as each defendant cut ties with the defendant farm— which seems like a racket if there ever was one.

Although pot-neighbor litigation is probably not what Congress had in mind back when it wrote the Racketeer Influenced and Corrupt Organizations Act, RICO litigants have found some success with their approach, most notably in a 10th Circuit case called Safe Streets v. Hickenlooper, which allowed a RICO lawsuit to proceed in Colorado. More recently, however, the U.S. District Court for the District of Oregon dismissed a RICO lawsuit brought by a different marijuana farm neighbor for “failure to state a claim.” That case is known as Ainsworth v. Owenby and Judge McShane’s well-reasoned decision tees up a potential circuit split.

Like most leading business law firms who specialize in the cannabis industry, we have had quite a few clients ensnared in RICO lawsuits. These client defendants have included everyone from the property owners themselves, to far-off dispensaries that were unaware the cannabis they sold came from a defendant farm. Fortunately, these lawsuits aren’t really panning out for plaintiffs and we expect to see the RICO trend wind down. Recent case law developments in both Oregon and Colorado show why.

Oregon

Last month, a case known as Rice v. Ambrocio settled relatively quickly, having been filed only five months before. Rice was a waste of time and money, and it’s a good example of why people don’t like lawyers. The 56-page complaint named almost 50 defendants, although not all of them “appeared” in the case and a few were never served. The parties ultimately settled for a $60,000 collective payment to the plaintiffs (a guy who runs an anti-cannabis website, and his partner), which pencils out to a measly $1,200 per defendant on average. Most importantly for defendants, the settlement agreement is non-confidential.

This unimpressive plaintiffs’ outcome should make potential RICO litigants think twice about filing a lawsuit—especially one where it appears that the marijuana activity has all but ended on the defendant property before papers are even filed. Ultimately, if you want to file a complaint in federal court and take on 50 defendants, you are going to burn a LOT of cash just getting the thing filed and served. And, even if you battle your way through months or even years of motion practice, counterclaims, appeals, etc., the likelihood of success may not be great. Which brings us to Colorado.

Colorado

Earlier this week, we had what may have been the first jury verdict in a cannabis RICO case, and it came down in favor of the cannabis grower defendant. The plaintiffs were represented by a Washington, D.C. law firm with ties to Jeff Sessions, and apparently backed by a national anti-cannabis group known as Safe Streets Alliance. For all of that firepower, however, the plaintiffs could not prove their property value had been damaged by the cannabis grow they despised. The jury believed the defendants’ real estate expert, and reached a verdict relatively quickly in favor of the cannabis business. This case had been going for three years or so, and the plaintiffs had previously had the larger portion of their lawsuit—which sought to invalidate Colorado’s marijuana program entirely—thrown out.

The “no damages” finding by this jury is an extraordinary end to a protracted piece of litigation. When my law firm has potential clients come to us who are interested in filing litigation, we always look at a couple of things right away in addition to whether the claims seem viable. One of those is whether the potential plaintiff has been damaged. If the answer is “yes” (and the possibility of collection seems reasonable) we can usually proceed. But if the answer is “no”, bringing a lawsuit is probably a bad idea, regardless of whether the other side has breached a contract, done something “illegal”, etc.

If juries in cannabis RICO cases are going to find that cannabis production does not diminish the value of nearby properties, and that grower activity does not damage neighbor plaintiffs, these wasteful lawsuits may finally disappear altogether.

For more on RICO marijuana litigation, check out the following posts in our series:

marijuana business litigation damages

When people have been wronged, they naturally want to get justice and want the party that wronged them to pay enough money to make them whole. The law generally holds that when someone commits a tort or breaches a contract against you, they owe you an amount of money equal to the value of your damages suffered because of the tort or contract breach. Unfortunately, getting justice isn’t so simple. The general order of events is as follows. The defendant breaches its contract with you, and you make a personal demand to the defendant to either cure the breach or pay you for the breach. The defendant ignores you, so you hire an attorney to send a demand letter. The defendant either ignores the letter or has its attorney send a response back disclaiming liability. You then must decide whether to continue making demands or whether to pursue more aggressive action, including filing a lawsuit.

This is a challenging time, as emotions run high. In the cannabis industry, so many entrepreneurs are working on a shoe-string budget and have significant portions of their savings tied up in an already risky industry. Of course you don’t want to ignore the contract breach or tort and let the defendant get away with its actions. But you also don’t want to throw good money after bad money in a quest for vengeance. Just because you have been wronged doesn’t mean that you have a legally actionable claim, or that the defendant’s bad acts proximately caused your damages, or that the defendant doesn’t have counterclaims against you.

Instead, you have to remove yourself sufficiently from the emotions of the situation to determine what to do in an unbiased way. Here is a simplified formula that can help guide that decision-making process:

(W% * D * AP%) — ((DCW% * CD) + AF + IC)

Here’s how we break that down:

W%: Chance of winning litigation

D: Realistic damages estimate, based on provable verifiable damages

AP%: Percentage of award defendant could pay based on defendant’s cash holdings and other assets

DCW%: Chance of defendant winning a counterclaim

CD: Damages estimate of defendant’s counterclaim

AF: Your expected attorney fees, expert witness fees, and other costs related to litigation.

IC: Your indirect litigation costs (stress, time missed from your business, negative effect on business relationships, etc.)

If the equation equals a positive number, it probably makes sense to file a claim. If the equation equals a negative number, it is probably better to let the matter go, or seek alternative claim resolution.

The hard part, of course, is filling in the details. This is where it pays off to have good attorneys that have the experience necessary to come up with smart and reasonable answers for these variables, and the integrity to answer them honestly instead of in a way that leads to them generating fees with your losing case. If your lawyer tells you that you have a 100% chance of winning any case, fire that lawyer immediately. There are no guarantees in litigation. If your lawyer tells you that you have a 0% chance of winning the case, your attorney is either overly cautious, or your case is really that bad (suing a pedestrian that you ran over in a crosswalk for your tire damage bad). On the damages side, you really are looking for measurable, provable damages that have some basis in objectivity.

We often go through this process with our clients, and it doesn’t always feel good for the clients. You’re paying your attorney a lot of money for personal service, and it can feel like your attorney is doubting everything you say. If you’re going to make smart decisions about litigation, though, you have to go through the exercise. You want to see all the holes in your case before you file that first complaint. All cases are different, but even small cases that look relatively simple can generate well over six figure in legal fees and costs, and turn on a point of law that seemed insignificant at first. If your attorney is pushing you into litigation without communicating the inherent chance involved, be cautious.

Finally, for marijuana businesses specifically, the indirect litigation costs variable has to include any potential losses you can face from your dispute going public. This comes up all the time when we have ownership disputes. These disputes often stem from one or more owners causing the business to commit regulatory violations. Sometimes these regulatory violations have not been uncovered and could lead to large fines or license cancellation. In cases like that, you absolutely need to quantify your risk exposure before pulling the trigger.

For more on cannabis business litigation, see our archive here.

This is the second post in a series on various aspects of cannabis litigation. The title is admittedly a bit misleading, as arbitration isn’t really the same thing as litigation. That said, the two can intersect, and so understanding what arbitration is and is not, is important for cannabis businesses. After all, many contracts in the cannabis industry can include arbitration clauses.

Arbitration is, essentially, a trial before a private entity (this post only describes private arbitration and not judicial arbitration, which is different). Typically, arbitration cannot occur unless the parties have agreed to it in a contract; for example, an LLC operating agreement, sales contract, distributor agreement, intellectual property license, or any other kind of contract. The parties can use this contract to dictate the terms of the arbitration and how it will proceed. That said, below are a few of the features that are common to almost any arbitration:

cannabis litigation arbitration marijuana

Who Presides: In private arbitration, there are no juries. Instead, the parties pay a private arbitrator or arbitration company. Arbitrations are presided over by at least one arbitrator, who is generally a former judge or attorney. In some cases, there can be a panel of arbitrators who decide a dispute. Arbitrators are almost always neutral, meaning that the parties cannot communicate with them outside the presence of the other parties (there are some cases in which some of the arbitrators can be “party” arbitrators).

Anyone who has spent significant time in a court room knows that judges have intense caseloads—sometimes hundreds of active cases at any given time. On the other hand, arbitrators typically have less-intensive caseloads. This means both that arbitration can proceed more quickly and that the arbitrator(s) can devote more time to and gain more understanding of each case.

Arbitration Setting: In private arbitration, there is no court room. Instead, arbitration hearings take place in private facilities provided by the arbitrator or arbitration company. It’s not uncommon for an arbitration to occur in something that looks more like a classroom or board room than a court room. While an arbitration can feel a bit less formal, it is key to remember that arbitration is still an adjudicative and adversarial proceeding.

Private Nature: Arbitration is, again, private. This is very different from litigation, where almost every facet of a case is published or can be made public unless there is an order of the court to “seal” certain records. Parties to arbitrations don’t necessarily need to keep things confidential—it’s just that way by design. That said, they certainly can agree to strict confidentiality provisions above and beyond the non-public nature of arbitration.

Procedural and Evidentiary Rules: In court litigation, there are rules of procedure and evidence set forth in a number of different places. For example, in federal litigation, the process is governed by the Federal Rules of Civil Procedure, a district court’s local rules, and rules set forth by the individual judge. Evidence is received according to the Federal Rules of Evidence. In state court, there are typically a number of different evidentiary and procedural rules that will govern any proceeding.

Unlike in court proceedings, the procedural rules and rules of evidence are slimmer. Arbitration forums often have their own rules, which will generally apply by default unless the parties elect to follow the federal or state rules in their arbitration contract. Arbitration rules are generally much more compact than federal or state rules, and based on the private nature of arbitration, there are usually no cases discussing how those rules are to be applied. The result of this process is that arbitration proceedings can seem less formal.

Arbitration is not Mediation: One common misconception is that arbitration is or is similar to mediation, when the two are in fact very different. Mediation is a typically non-binding process in which parties come together in front of a third-party neutral (the mediator) to discuss their case with the intention of settling it. Arbitration is similar to a trial, and if it proceeds to the end, will result in an award to one party (which can be filed in court), rather than a settlement. The only important similarities are the presence of a neutral, and the fact that many arbitration companies employ arbitrators and mediators (often, the same people do both kinds of work).

This all sounds great, right? You may be asking why would someone would ever want to litigate, when they could just arbitrate faster, with less-intense rules, in front of a focused neutral who could devote more time to the dispute? It may come as a surprise that parties in a dispute often seek to avoid arbitration. One of the chief concerns is cost—because arbitration is private, parties need to pay the arbitrators, on top of their attorneys. This additional cost can be overly burdensome for some private litigants and is likely a major concern for smaller businesses. Another concern may be the private nature of arbitration. There may be a host of reasons why one party to an arbitration wants the dispute to not be kept private. And finally, there are generally no options for appealing an unfavorable arbitration decision. These are just a few of the reasons that parties may want to avoid arbitration.

As mentioned in the beginning of this post, arbitration and litigation can overlap. Parties to disputes sometimes file cases in court in spite of arbitration provisions. In such circumstances, the other party may file what’s called a “motion to compel arbitration”, and the other party could resist arbitration by arguing that the arbitration agreement is void, or that the dispute at issue is outside the scope of the arbitration clause. In California, for example, we have an additional law that permits a court to delay or even avoid arbitration if there are parties to a court case and a separate arbitration, if there would be a risk of an inconsistent outcome or factual finding. This is a very powerful tool for a party who wants to resist arbitration in multi-party disputes and, in many cases, it is available unless disclaimed in the arbitration clause.

In sum, what an arbitration clause says is powerful and will dictate how any dispute is resolved. When negotiating any contract, the dispute resolution procedures may be an afterthought for some, which can end up costing the parties later down the road. That’s why its critical to put serious thought into arbitration clauses and engage counsel who is experienced in drafting and reviewing such clauses.

For more on cannabis litigation, see our series here.

cannabis litigation trade secrets
Protect them at all costs!

Over the course of the next few weeks and months, we intend to write a number of blog posts about various forms of civil litigation that could arise in future in the cannabis industry. This is the first, and is focused on trade secret litigation.

For those of you who haven’t read some of our earlier posts on trade secret law, here’s a short recap of what trade secrets even are. A trade secret is virtually any form of information, formula, device, method, etc. that is kept secret, and that derives an independent economic value from being kept secret. For example, a cannabis cultivator invents a new process to cultivate cannabis more quickly. That process is valuable not only intrinsically (i.e., because the cultivator can now work faster), but also because it’s secret (because competitors will still be producing cannabis more slowly without the new process). Trade secrets are not limited to technical inventions—they can also include run-of-the-mill confidential information such as customer lists, preferred vendor pricing lists, and so on. The key is secrecy.

Trade secret protection can often be more valuable than patent protection, as trade secrets are kept secret for so long as their owners choose to keep them secret (or until they get released to the public through other means). Patented inventions, on the other hand, are immediately disclosed to the government and anyone with a computer. To boot, a patent owner loses protections after a fixed period of time.

In short, trade secret protection is a great system—if you can keep your secrets secret. But as you can imagine, that can be difficult and expensive to do—and in some cases third parties take your secrets. Thus, litigation is sometimes necessary.

There are a number of ways in which trade secret cases play out, but there are essentially two common fact patterns in the cannabis industry and elsewhere. First, an employee or group of employees leave one company for a competitor and are alleged to take its trade secrets.  Second, a company who comes out with a similar product/device/set of information, and is alleged to have stolen the idea from its competitor.

In the legal world, the theft of a trade secret by any source is referred to as “misappropriation”, and the party from whom the secret was taken can assert civil claims for misappropriation (we won’t address any criminal issues in this post). Until relatively recently, parties were forced to litigate disputes pursuant to various state laws, which are mostly relatively similar. In 2016, the federal Defend Trade Secrets Act (“DTSA”) was passed, which opened up the doors to the federal court system for many plaintiffs who otherwise would have been stuck in state court.

The remedies available under the various trade secret laws vary, but generally include, among other things, damages, injunctions (orders by a court to do or stop doing something), and in some cases, a requirement that the losing party pay the attorneys’ fees of the winning party. The DTSA also allows, in certain circumstances, a plaintiff to obtain an order to seize property that would assist with continued misappropriation of trade secrets.

Why is trade secret law important or applicable to the state-legal cannabis industry? The answer is that the industry is in its infancy, which necessarily means that it will experience great innovation and invention in the coming years—anyone with experience in the industry can attest to that. Unfortunately, and like in any other growth-phase industry, this also means that there may be an abundance of misconduct and theft. Even companies that take steps to prevent misappropriation could be the victims of it in the near future.

Navigating the trade secret landscape may be tough—especially for new cannabis businesses. Spending time and resources up-front to develop safeguards to protect from misappropriation and train employees is critical, even though it may be costly. But by that same token, litigating trade secret disputes can be even more difficult and costly. Consulting with trade secret counsel, both during the normal course of business and after any potential dispute arises, is always a good approach.

oregon hemp nuisance litigation
Nuisance pollination can cause a row.

In recent posts, we’ve discussed cases where a neighbor to a cannabis grow sued the grower for nuisance, claiming that growing cannabis interfered with the neighbor’s use of their land. See here, here, here, here, here, and here. These lawsuits relied on the non-cannabis landowner’s claims that the federally illegal cannabis business caused harm because of odor, disruptive activity, and diminution of property values.

As of last week, we have another variation on the nuisance theme. On August 31, 2018, Jack Hempicine LLC (“Hempicine”), a Polk County hemp grower, sued fellow hemp farmers for nuisance and other torts. Unlike the previous cases, this case claims that the harm to the property was caused when the other farms cross-pollinated the Hempicine farms and ruined its crops. Jack Hempicine LLC v. Leo Mulkey Inc., Case No. 18CV38712, Polk Cty. Sup. Ct.

In this case, Hempicine alleges:

Cross-pollination is a significant risk in the hemp growing industry. There are two specific risks. First, male plants that contain higher THC levels can pollinate female hemp plants that originally contain low THC levels. The resulting seeds produce plants with highest levels than the original female plant, which means the resulting plants also have lower amounts of CBD and CBG. Second, pollinated female plants may produce both male and female seeds. Female seeds are more desirable because female plants are grown to full maturity and harvested at the end of the season, whereas male plants die off shortly after pollination… The risk associated with cross-pollination is well known in the hemp and cannabis growing industries.”

According to the complaint, Hempicine began producing hemp and hemp seed in Polk County in 2015 and 2016. In 2016, Hempicine allegedly told defendants that Hempicine only produced feminized seed, warning the defendants of the risks from cross-pollination from male plants. Hempicine says that after this meeting, the defendants grew male hemp plants that cross-pollinated Hempicine’s female plants, giving them high levels of THC and making them unmarketable. The Hempicine complaint calculates its damages for loss to the 2016 and 2017 crops to exceed $8 million, and says that it will amend its complaint to include damages from the lost 2018 crop later.

Hempicine’s complaint seeks recovery under four separate legal theories. First, it alleges that the defendants breached a duty of care to Hempicine and was thus negligent. Second and third, it alleges that the defendants acted negligently or recklessly in growing male hemp plants on their property, and thus are liable for trespass or nuisance. Fourth, the complaint alleges that defendants grew male plants in the vicinity of the Hempicine farms that they knew would likely result in cross-pollination, and thus have intentionally interfered with Hempicine’s economic relations.

This is not the first time this issue has arisen. During the Oregon Legislature’s efforts to pass hemp legislation, cannabis producers noted the risk of cross pollination between cannabis and hemp, which of course are just two varietals of the cannabis sativa plant. Among other things, some cannabis producers urged the legislature to create separate agricultural zones for hemp and cannabis (which didn’t happen). There are also a number of lawsuits involving similar claims of cross-pollination by GMO crops. Hopefully this industry can find a way for hemp and marijuana farms alike to be neighbors.

Josephine County marijuana cannabis litigation
…another Josephine County setback.

Poor Josephine County.

We have been writing on this blog about the southern Oregon county’s mounting frustrations with cannabis, its successive losses in litigation, and its most recent attempt in federal district court to submarine Oregon’s cannabis programs. We immediately identified this lawsuit as a “stunning overreach” and we predicted the county would lose. To that end, and just before the holiday weekend, a U.S. magistrate judge issued a Report and Recommendation (“Report”) that Josephine county’s case should be dismissed. That will almost certainly occur.

By way of background, we explained back in April that Josephine County wanted the federal court to:

  1. Declare that cannabis production cannot qualify as a pre-existing “lawful use” because of federal prohibition;
  2. Declare that counties can place any restrictions they want, including a full ban, on cannabis businesses because state legal regimes are pre-empted by federal law;
  3. Declare that Oregon’s medical and recreational regimes unlawfully restrict the county’s police powers in light of federal prohibition; and
  4. Enjoin the State from bringing official misconduct charges against any local or county official that ignores their duties under state law.

Well, none of that is happening. The magistrate judge issued a thoughtful, eight-page opinion (no public link available– email me if you want a copy) which rested on two points of law: 1) Josephine County, as a political subdivision of the State of Oregon, lacks standing to sue the state in Federal District Court; and 2) no justiciable case or controversy exists between the parties. Let’s take a quick look at each finding.

Standing. For one party to sue another, it must convince a court of a sufficient connection to, and harm from, the law or action challenged. Here, the Report cited a mountain of Ninth Circuit precedent to the effect that a state cannot be sued by its political subdivisions. In apparent anticipation of this, Josephine County had argued that its “home rule” status creates an exception, but the Report swatted that argument away in two brisk paragraphs. When a party has no standing, the merits of its claims don’t matter.

No Justiciable Case or Controversy. The Report covered this argument almost as an afterthought. The judge found that even if the court could find an exception to the fatal standing issue, the case should be dismissed because Oregon has not prohibited Josephine County from enacting the regulations it wants to enact (restricting marijuana grows on rural residential land). Instead, the county erred by not providing landowners required notice, and that deficiency (rather than any substantive deficiency) was the sole reason a lower court iced the county’s restrictive ordinance. The judge had fun in this section of this Report. He notes that:

On a practical rather than legal note, the Court is unpersuaded by Josephine County’s argument that the State is ‘requiring’ it to ‘aid and abet a federal felony.’ The County has provided no evidence to the Court that it has attempted to ban any and all marijuana use and production, as would be theoretically required by full compliance with the [Controlled Substances Act]. Instead, the County merely seeks to limit the use and production in rural residential zones, while continuing to allow marijuana use and production in other instances. Apparently the County is only worried about aiding and abetting federal felonies on certain kinds of land and not others.”

Indeed! So what happens next? The Report will be referred to a district court judge. The county’s objections, if any, are due within 14 days. After that, the state would have 14 days to respond. Once those windows close, the judge will issue a final opinion, which is almost certain to agree with the Report. Theoretically that ruling could be appealed to the Ninth Circuit Court of Appeals, and ultimately the U.S. Supreme Court. In our opinion, though, it’s unlikely either of those courts would take up the case. We also believe that Josephine County should stop wasting taxpayer funds on ill-conceived litigation and bad press. Who knows if that will actually happen, though.

For more on the Josephine County saga, check out the following posts:

oregon marijuana OLCC cannabis
OLCC may be getting strict.

A violation of the Oregon Liquor Control Commission (“OLCC”) recreational marijuana rules can land you in hot water. I’ve previously written about rule violations and the administrative process, including settlements. It’s been our experience that the OLCC is open to settlement agreements for licensees who violate rules, and we regularly help settle these cases. Some are easier than others.

Settlement agreements generally save time and money related to administrative litigation costs for both licensee and the OLCC. Based on our review of the OLCC News Releases, the OLCC has approved settlement agreements with approximately 20 licensees and had never rejected a settlement agreement proposed by its staff. That all changed last week.

The OLCC alleges Black Market Distribution LLC (“Black Market”) violated 10 OLCC rules. On August 23, 2016, the OLCC was presented with a settlement agreement that would have allowed Black Market to pay a $16,335 civil penalty or serve a 99 day license suspension. The OLCC rejected the proposed settlement agreement because it determined the violations were egregious enough that a suspension or fine would not result in the licensee taking the necessary corrective action to come into compliance. Black Market will not automatically lose its license but instead will now proceed to an administrative hearing to fight to keep its license.

How does this compare to past settlement agreements? Here are the three most relevant examples:

  • Queen Bee Distribution was able to reach a settlement agreement with the OLCC after it was charged with 12 violations. Queen Bee Distribution’s violations included exporting marijuana out of state and having a large quantity of marijuana go missing under suspicious circumstances. Queen Bee Distribution surrendered its license only after transferring ownership of the business. Meaning, while Queen Bee Distribution no longer has a license it was allowed to transfer its business to another party.
  • CBD Oil agreed to let its processor license expire and accepted a Letter of Reprimand for four violations. CBD Oil’s violations included transferring marijuana other than as allowed by its license, including to non-licensed retailers.
  • Medigreen Collective agreed to surrender its retail license upon the transfer of ownership after suffering three Category I violations in three years.

What do these settlement agreements tell us? In the past, for egregious violations, the OLCC had agreed to settlements that resulted in license forfeiture in some form. In the Black Market case, maybe the OLCC is or was looking for license forfeiture given the number of violations Black Market is accused of. Alternatively, the OLCC may be shifting to stricter enforcement of its rules in general.

In the August 23, 2018 News Release, the OLCC made it clear that the agency expects licensee to be compliant and law-abiding and intends to strengthen its action against rule breakers. Only time will tell if the OLCC intends to move away from settlement agreements with licensees. In the meantime, the best way to avoid a civil penalty, suspension, or license revocation is to ensure you and all of your employees are compliant with all the OLCC rules. Because there are so many rules, and because those rules continue to evolve, that can be a tall order. If you are unsure about anything, one of our talented Oregon cannabis attorneys can assist with compliance questions. And if you find yourself in the OLCC’s cross-hairs, we may be able to help with that too.