Operating a cannabis business is not child's play. (photo by Olga, http://bit.ly/1Z6TZ35)
Operating a cannabis business is not child’s play. (photo by Olga, http://bit.ly/1Z6TZ35)

One of the frequent themes on this blog is that state-legal cannabis businesses must adhere to the rules and norms that apply to all other kinds of businesses. We have issued warnings that ganjapreneurs must memorialize their business agreements in written contracts, treat their employees fairly, keep thorough and accurate business and accounting records, and, of interest this week, sell a safe (and accurately labeled) product, lest ye be the subject of a consumer safety or products liability lawsuit. For a quick review of our advice about product safety, labeling, and liability, check out these prior posts:

As we’ve long argued, in this industry, which lacks uniform dosing and potency standards and operates without the scrutiny (or benefit, depending on how you look at it) of federal regulators such as the FDA and EPA, consumer products safety litigation has always been a question of when, not if. We hate to say it, but we’re going to say it: we told you so.

A discerning recreational patron and MMJ patient of LivWell, one of Colorado’s largest chain of marijuana shops (and also a massive grower), are now hauling LivWell into Denver district court to answer for its alleged use of Eagle 20, a petroleum-based fungicide. The lawsuit contends that Eagle 20 emits poisonous hydrogen cyanide gas when a product that has been treated with it is burned. Though neither of the plaintiffs claim to have been physically harmed by LivWell’s products, they do allege that they would not have patronized LivWell had they known about the fungicide. The case is touted as the first marijuana-related class action suit, and the attorneys behind it claim that there could be thousands of similar plaintiffs. (Note, however, that the class action designation may only be a threat; plaintiffs in these sort of cases often say they will bring class claims, but may never get around to requesting class status, let alone convince the court to grant such status.) In other words, this is only the beginning of consumer safety litigation, not only for Colorado, but also for growers and dispensaries in other states with developed markets like Washington, Oregon, and Nevada.

This case also highlights another important issue: the indisputable need for states to robustly regulate pesticide, fungicide and other chemical applications, and to strictly enforce testing and safety standards, as pointed out by our Alison Malsbury in the LA Times. Colorado has made efforts in this direction, quarantining tens of thousands of LivWell plants earlier this year to check for Eagle 20. The quarantine was ultimately lifted because only low levels were found, despite Eagle 20 not being on Colorado’s approved list (granted, the list is only a draft). Now LivWell says it has stopped using the fungicide. This backstory simply begs the question – what is the point of having a list if enforcement is lax, particularly where the grower admits to having used a non-approved substance? Is Colorado taking consumer safety seriously? More on this in a future post.

With legalization comes normalization. If you are in the cannabis industry, you have to realize that you will (for the most part) be treated like other legal businesses, and this includes lawsuits. Cannabis businesses are not immune from consumer protection and other lawsuits, and they need to prepare and act accordingly. At minimum, this means you must:

  1. Know and vet the companies with which you do business as everyone in the chain of distribution is potentially liable for bad product and consumer injuries. Will that company be around if you get sued one year from now? Does that company have the funds or the insurance to help pay for your lawsuit?
  2. Have a written contract with the companies with which you do business that dictates what happens in the event of a consumer safety lawsuit. This contract should clearly set forth what happens between the parties in the event of litigation. This includes indemnification and, oftentimes, requirements that each party maintain a certain level of insurance protection to help fend off such lawsuits and claims.
  3. Have contracts with your employees, along with an employee manual, that clearly sets out your expectations of your employees when it comes to product quality, safety, and handling. If you get sued, you are going to want to be able to put these contracts and/or manual in front of a jury to bolster your argument that you really did try to do all you could to prevent bad or tainted product from hitting the marketplace.
  4. Develop product safety and packaging standards that exceed, not merely meet, current state requirements. Simply meeting existing product testing requirements (if there are any in your state), may not be enough to protect your business from liability. Make your company the industry example, and set the product safety bar high.
  5. Consider having someone who knows the industry and the law periodically audit your facility. Is your packaging going to help or hurt you if you get sued? What about your product labelling? What about your recall procedures? Are you making representations to your buyers that could come back and bite you in a lawsuit? Are you keeping proper records that you can use if and when you are sued? These are just a few of the literally hundreds of issues our cannabis business lawyers address in a typical cannabis compliance audit.

Lawsuit prevention is way, way cheaper than lawsuit defense, and far better for your reputation as well. The road to prevention starts with preparation. If you find yourself as a defendant in one of these lawsuits, it’s already too late. So, prepare now!

  • DC

    This is such a great post! I hope these businesses are taking notes…

  • Rex Powers

    All of the issues /concerns stated in this article are valid. The solution is quite simple…MANDATED STANDARDS!

    FOCUS…* Foundation of Cannabis Unified Standards is a non profit organization that is currently developing a Cannabis Industry SPECIFIC Standards platform that will provide a pathway for businesses (Grows, Dispensaries, Extraction Operations and Product Manufacturing) to be accredited and audited for compliance.

  • Rex Powers

    The lack of accredited industry standards is a significant contributor to some the “issues” that are beginning to be brought the “public”..Remember this is a young industry that is being driven by bright…aggressive entrepreneurs. In many cases the states have been forced to adopt a industry that is very akin to a newborn that is 3-6 months old and expected to live 200 years….