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.

olcc violation marijuana cannabis
Settling alleged OLCC violations is often possible.

Back in February, I discussed administrative litigation in Oregon and the types of violations Oregon cannabis businesses can be hit with. But what about settlement? Like in civil litigation, administrative litigation can be settled with the right tools and right team of lawyers on your side.

As a quick refresher, the Oregon Liquor Control Commission (OLCC) is the agency tasked with implementing and enforcing the recreational marijuana rules. The OLCC can and does conduct random inspections of marijuana licensees. These inspections sometimes lead citations for rule violations. These rule violations may then lead to a charging document outlining potential penalties– sometimes several months after the problematic inspection occurred.

A charging document is only the beginning. Depending on the category of the violation(s) assessed, and whether they are grouped together as single violation or listed as separate infractions, the charging document will allow the licensee to either: 1) waive its right for a hearing and pay a reduced fine or serve a reduced suspension, 2) request an administrative hearing, or 3) pay the full fine or serve the full suspension. If the licensee receives a Category I violation, the licensee will only have the option to request a hearing or surrender the license. You can view a table of violations and their categories here.

In order to enter settlement negotiations with the OLCC, you must request an administrative hearing prior to the relevant deadline. After an administrative hearing is requested, the matter will be referred to the OLCC “Administrative Policy and Process Division” and a staff member will be assigned to the case. Typically the staff member will reach out to the licensee (or their representative) but the licensee can also contact the OLCC and find out who is the assigned staff member. The OLCC staff member is the person the licensee will enter into settlement negotiations with.

According to my latest communications with OLCC staff, the agency has standard settlement agreements they enter into for Category II through V violations. Whether the OLCC will agree to a standard settlement is dependent on the number of violations cited and the number of violations the licensee has committed in the last two years. This means the staff member has the power to enter into the settlement agreements without approval from higher-ups. However, the OLCC does not have standard settlements for Category I violations. If a Category I violation is to be settled, it will take a lot of finesse, and ultimately, any Category I settlement must be approved by the OLCC director. We have settled all categories of violations on behalf of licensees.

Once a settlement agreement is reached, it has to be approved by the OLCC Board of Commissioners. The Board meets once a month and the pending settlement agreements are offered to them at the meeting. The Board then votes on the agreement and if approved, the licensee will then have to adhere to the terms of the settlement through either a penalty payment or temporary license suspension.

Administrative settlement is similar to civil litigation settlement. It involves the negotiation of two parties to reach a mutual agreement. One of the key differences with administrative litigation and settlement is that typically, the administrative body–in this case, the OLCC–holds most of the power. This is especially true with Category I violations. The fact that OLCC has leverage does not mean, however, that the OLCC will not enter settlement; it just means some more work and skill is necessary to reach an agreement.

Because an OLCC license is the lifeblood of an Oregon cannabis business, it is always best to adopt a compliance program and avoid alleged violations entirely (and remember– you are on the hook even for unauthorized actions of employees). If you do find yourself on the other side of a charging order, make sure you work with someone familiar with system and OLCC personnel, in order to give yourself the best possible shot at saving your license.

cannabis marijuana patent litigation

In previous posts, we’ve puzzled about why no one has filed a cannabis patent infringement case, despite the large number of patents granted for cannabis plants and compounds. See here, here, here, and here.

That all changed last week. United Cannabis Corporation (“UCANN”) has now filed what is believed to be the first cannabis patent infringement complaint. The case is United Cannabis Corporation v. Pure Hemp Collective, Inc., case no. 1:18-cv-01922-NYW, in the United States District Court for the District of Colorado.

The patent asserted is U.S.P. 9,730,911, “cannabis extracts and methods of preparing and using same.” The claims in the patent generally cover liquid cannabinol formulations using tetrahydrocannabinol (THC), cannabidiol (CBD), and various terpenes. See, for example, claim 10: “A liquid cannabinoid formulation, wherein at least 95% of the total cannabinoids is cannabidiol (CBD).”

Although the UCANN complaint does not specify which claims are being asserted, it appears that the plaintiff may focus on CBD-related claims, e.g., claims 10-15, rather than claims for THC. The complaint devotes several paragraphs to discussing FDA’s recent approval of Epidiolex, a CBD-based drug, as we discuss here and here. The complaint suggests that FDA will reclassify CBDs generally as Schedule II or Schedule III drugs. While it is clear that FDA will do a reclassification, it is not clear that it will reclassify all CBDs, rather than just the Epidiolex compound.

In any event, we expect to see more cannabis patent litigation soon, perhaps in Colorado, California, Oregon or elsewhere. Whether it will be a trickle or a flood remains to be seen, but we will be following the UCANN case closely and providing regular updates.

For more on cannabis patents, see our series here:

cannabis marijuana cyber attack security
Be prepared!

As I discussed last week, hacked devices, breached networks, and stolen proprietary information have become commonplace in the cannabis industry. Because cybercrime variants are continually emerging, no company can achieve totally assured cybersecurity. Consequently, we strongly encourage all our clients to adopt a cyber incident plan for responding to attacks before they occur. Developing a vetted, comprehensive plan of action is the best way to effectively respond to an attack and to reduce the amount of damage to your company.

This post highlights some of the best practices for preparing and responding to a cyberattack.

Before falling prey to a cyberattack, your company should:

  1. Identify Valuable Assets. Depending on your needs, it may be cost prohibitive to protect your entire business. Therefore, before creating a cyber incident plan, you should determine which data, assets, and device warrant the most protection.
  2. Develop a Plan of Action. Cyber incident plans will differ in size and structure, but at a minimum, your plan should:
    (i) Name those who have lead responsibility for different aspects of the response;
    (ii) determine ways to contact critical personnel at all times;
    (iii) identify how to preserve your most valuable assets, data, and device in a forensically sound manner; and
    (iv) develop notification plan for customers and data owners whose data would be compromised during an intrusion.
  3. Adopt Appropriate Technology and Services. Adopting off-site data back-up, intrusion detection capabilities, and data loss prevention technology will help you detect intrusions soon after they occur and help minimize the loss of valuable information.
  4. Implement Internal Preventative Policies. You must assist your employees with recognizing internal and external vulnerabilities to prevent security breaches but also to effectively react to attacks. Employee training should address issues such as safe password management, cryptographic communications, secure browsing practices and proper system configuration.

Following a breach, you will need to focus on mitigating damages and working with law enforcement. Specifically, you will need to:

  1. Assess the Nature and the Scope of the Incident. You will first need to determine whether your company is faced with a malicious act or a technical glitch.
  2. Capture the Extent of the Damage. If you detect a cyberattack, you should immediately make a forensic image—an image or exact, sector by sector, copy of a hard disk—of the affected computer(s), which will be used for later analysis and may possibly serve as evidence at trial.
  3. Implement Measures to Minimize Damage. To contain the attack and prevent it from spreading, you will need to stop ongoing traffic caused by the attacker. Some measures include rerouting network traffic and isolating all or parts of the compromised network.
    Regardless of the option you select, be sure to keep detailed records of all steps taken. This information may be relevant for recovering damages from responsible parties.
  4. Notify. The notification list includes:
    (i) Relevant Personnel: You should inform the relevant personnel (i.e., managers, IT department, security department, and legal department) of the attack and keep them informed of the preliminary analysis.
    (ii) Law enforcement: Generally, you will need to contact law enforcement authorities to assist with investigating the intrusion. Law enforcement can also help coordinate statements to the news media concerning the incident, ensuring that information harmful to the company’s interest won’t unnecessarily be disclosed.
    (iii) Customers: All 50 states have now enacted breach notification laws that require companies faced with a cyberattack to inform customers whose data was compromised by the intrusion. Accordingly, soon after the attack, you should prepare a statement that explains to the customers the scope of the breach of security and which remedial efforts were adopted.

Cyberattacks can raise unique legal questions. Therefore, you should consult with attorneys who are accustomed to addressing these types of issues to assist you with decisions, such as how to interact with government agents, the types of preventative technologies you can lawfully use, your obligations to report the loss of customer information, and your potential liability for taking specific remedial measures when faced with a cyberattack.

cannabis lawCannabis has remained federally illegal at the same time states continue to legalize cannabis in one form or another. As a result of legalization, private parties enter and perform contracts, loan and borrow money, and convey leasehold property rights in ways that involve cannabis. These contracts affect and depend upon millions of dollars in assets, including real estate, thereby interweaving the cannabis industry into the economic systems that allow our free market economy to function. Courts, and especially federal district courts and courts of appeal, often must wrestle with whether and how to enforce such contracts where one body of law says they are void as illegal and another says they are perfectly valid.

Courts have generally been willing to enforce these contracts and have come up with some pretty creative arguments for doing so, perhaps because of the economic disruption that would occur if parties were suddenly permitted to walk away from contractual obligations and the consequences to city and county governments that have issued property entitlements and licenses to cannabis businesses. However, a recent appellate court decision illustrates how there are still limits on the ability to indulge, even when done in compliance with state law.

In U.S. v. Schostag, a defendant had pleaded guilty to felony possession of a firearm and attempted possession of methamphetamine and was sentenced to 120 months in prison and 5 years of supervised release. One of the conditions of his release set by a federal district court in Minnesota was that he not possess or use any controlled substance “except as prescribed by a physician.” Minnesota law allows physicians to prescribe certain forms of medical marijuana and the defendant notified his probation officer that his doctor had prescribed medical marijuana for chronic pain. The probation officer advised the defendant that, cannabis prescription or not, defendant’s consuming cannabis would violate the terms of his release because it was prohibited by federal law.

The defendant tested positive for marijuana and his probation officer reported the violation. Defendant argued he was simply following the terms of his release conditions, which allowed for him to use prescribed controlled substances. The district court, apparently acknowledging the awkwardness of the language, modified his release conditions to explicitly forbid defendant from using or even possessing marijuana with a medical marijuana prescription and gave defendant two weeks to find a legal form of pain management. Defendant appealed this decision, arguing that the court should have exercised its discretion in setting his release conditions and should have allowed him to use medical marijuana under Minnesota law.

The Eighth Circuit Court of Appeals rejected defendant’s argument, noting that under federal sentencing law, federal courts can modify release conditions but cannot do so in a way that violates federal law, including the CSA, which outlaws marijuana in all forms. The court also declined to engage in any nuanced discussion of the interplay between federal and state laws on cannabis, instead simply declaring, “the state’s law conflicts with federal law.” Though this decision seems harsh, consider the alternative: if the court had allowed the defendant to use marijuana while on federally supervised release — the conditions of which a federal court is itself responsible for setting — this would have amounted to a federal entity (the court) directly allowing for a violation of federal law. This wasn’t a contract between private parties; it was the federal government deciding whether to allow a releasee under its supervision to use a substance that is unquestionably prohibited by federal law.

Though the court in Schostag found Minnesota’s medical marijuana law to conflict with federal law, there is a colorable argument that this case is an outlier from the general trend of federal courts being unwilling to get in the way of state-legal cannabis. The federal government and its court system cannot be expected to ignore federal controlled substances law when applying federal sentencing law to those under federal custody or supervision simply because the court happens to be located in a state with contrary laws on cannabis.

An example of a similar approach occurred in Forest City Residential Management, Inc. v. Beasley where a federal district court in Michigan held that tenants in a federally subsidized housing project were not entitled to a reasonable accommodation under the federal Fair Housing Act to use medical marijuana at their rental units. Though closer to a private contract than federal sentencing guidelines, allowing marijuana use in federally subsidized housing as a legal accommodation is akin to the federal government sanctioning a clear violation of federal law within the confines of its own program.

Though the general trend is that federal courts are reluctant to interfere with state legal cannabis activity, that tolerance typically stops at the doorstep of federal programs operating under federal law. This is something Congress can and should change, not the judiciary. Unless and until cannabis becomes federally legal, we will continue to see courtroom manifestations of the cannabis federalism fight.

california cannabis lien assessmentCannabis regulation in California is heavily focused on local control. We write and speak about this constantly. (See here, herehere, and here). As predicted, new lawsuits are cropping up all over the state challenging the authority of local governments to take certain actions as they pertain to cannabis. Our firm has generally discouraged clients from taking a litigious approach toward government regulation of cannabis, because the often meritless lawsuits we saw in the pre-MAUCRSA era rarely resulted in victory for cannabis entities, were largely detrimental to property owners, and turned the majority of local legislative bodies in California against the cannabis industry.

However, there are constitutional and statutory limits to what governments can do, and it is a fundamental part of our duty as attorneys to ensure that the rights of voters, property owners and tax-paying citizens are protected. This post focuses on one troubling practice we are seeing in California involving cities recording excessive fines and penalties against property owners who lease (knowingly or unknowingly) to cannabis tenants.

Local Governments Are Charging Property Owners Excessive Fines And Penalties And Recording Them Against The Property As A Lien Or Special Assessment

Cities generally have two goals when it comes to code enforcement: (1) compliance and (2) cost recovery. State law provides the vehicle for local governments to achieve these goals via Government Code sections 53069.4, 38773.1 and 38773.5, which enable cities to declare activity in contravention of the municipal code a public nuisance, take action to abate that nuisance, and then recover the cost of abating the nuisance via a lien or special assessment against the property. However, this practice is frequently abused. A staggering number of cities misinterpret these laws to mean that they are entitled to impose fines (sometimes up to $10,000 or $20,000 per day!) for municipal code violations against both businesses and property owners. If these fines go unpaid, the cities record them as a lien or special assessment against the subject property. The result is a massive fee, sometimes upwards of $1 million, tacked on to an owner’s property tax bill. If that goes unpaid for three years, the local government can seize and sell the property.

This is a nightmare for property owners leasing to cannabis businesses. We have spoken to many owners in this scenario who were either unaware that cannabis activity violated the local code, or unaware that their tenants were cannabis businesses. Upon receiving a notice of violation, these owners instituted unlawful detainer proceedings, and diligently pursued eviction of cannabis tenants. Despite this, cities continued to assess fines against the property owners until the cannabis activity was completely eradicated from the property. In the end, despite immediately acting to remove their tenants, these property owners were hit with hundreds of thousands to millions of dollars in unpaid fines and penalties. Most owners in this scenario are unable to pay, and are forced to give up their properties.

This practice, in most cases, is unlawful under our analysis. The Government Code does not authorize cities to attach liens or impose special assessments to collect outstanding nuisance fines or penalties. We are actively fighting for our clients who have been wrongly assessed excessive fines and penalties and are in jeopardy of losing their properties, and we will provide updates as these cases progress. Stay tuned.

cannabis litigation mediationIn Part 1 of this series we discussed how mediation works in most cannabis disputes. Today, we discuss some strategic considerations to increase the likelihood of success in cannabis mediation.

     Know your audience(s): Unlike in litigation or arbitration, where your audience is a disinterested third party judge, jury, or arbitrator, your primary audience in mediation is the other side. After all, mediation will not result in settlement unless both sides agree. But consider the other audiences, i.e., those on your own side. Many cannabis businesses have multiple owners or decision makers. Mediation can be an excellent way for your management team to fully understand the dispute, so that the team itself can decide on a resolution that will best satisfy all the stake holders.

     Look for a resolution, not a victory: The goal in most mediation is for all parties to resolve the dispute, not for one party to emerge victorious at the other’s expense. It is the rare case where a party in mediation will find it in its best interests to completely capitulate. If you expect to get all or most of what you might get at trial, you are unlikely to succeed in mediation.

     Don’t just trade offers: Even when the principal issue between parties seems to be how much money will change hands, just exchanging numbers is not always effective in mediation. The concept of “principled negotiation,” developed by Roger Fisher and Bill Ury in the book Getting to Yes, involves considering the parties’ underlying motivations and interests, rather than just their negotiating positions. Seeking to address each party’s interests can change the dispute from a zero-sum game to one where both parties will benefit. For example, if one marijuana business is suing another for intellectual property (IP) infringement, a possible resolution could involve a cross-license agreement where each party agrees to license its IP to the other party.

     Mediation is a process: It is not uncommon for parties to engage in two or more rounds of mediation before reaching a settlement. During litigation, there are several critical points at which mediation might take place. Early mediations are attractive, because the parties will not have spent time and money litigating. But the parties will be handicapped because they will not have the documents and other information that becomes available during discovery. For this reason, some parties choose to voluntarily exchange critical information, e.g., sales data, very early in a case to enable a more informed mediation. In general, as the parties spend more time and money on litigation they will be less likely to settle. However, certain expensive litigation events, such as expert discovery, summary judgment, and especially trial, may encourage parties to mediate later. Consider your mediation strategy at the beginning of a dispute, and be ready to reconsider your strategy as the case develops.

     Get Authority: Each party must bring to the mediation the person or people who have actual power to decide the case that day, preferably in person. This often include a representative from any insurer who might contribute to a settlement. Most experienced mediators will insist upon this.

     Get it in writing: If a settlement is reached, even if it is partial, that agreement should be reduced to writing and signed by all parties before they leave the mediation session. It is essential that this writing capture the agreed-upon terms, even if the parties contemplate drafting a more detailed agreement later on. It is also essential that this writing be enforceable. An oral agreement, while potentially enforceable, is likely to lead to more litigation, thereby undermining the objective of settling the case.

The majority of cannabis disputes are likely to go to mediation at some point. Making the most out of your mediation can help you get, at least some, satisfaction.