Matthew J. Smith of Saul Ewing Arnstein & Lehr.

With a growing number of states legalizing medical and adult-use marijuana, anti-cannabis plaintiffs have turned to innovative legal theories, including RICO racketeering and conspiracy claims, aimed at disrupting cannabis businesses. Over the past few years, RICO (the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961 et seq.) has become a novel tool for plaintiffs in civil actions against cannabis businesses in states including Oregon, Colorado, California, Massachusetts and New York. Because marijuana remains illegal under the federal Controlled Substances Act, state-legal marijuana businesses, by definition, involve racketeering activity in violation of RICO. Fortunately for the industry, plaintiffs have not seen much success in court so far. However, their failures have not deterred other plaintiffs from pursuing these claims, and the decisions disposing of many of these cases have simultaneously created blueprints on how new plaintiffs might succeed. Notably, the risks in these cases are high, with cannabis businesses and those associated with them facing mandatory treble damages and attorney fees. Until legalization takes place at the federal level, these claims will likely keep coming, and it is probably only a matter of time before the first succeeds.

Background

Perhaps most well known for its use prosecuting members of organized crime, RICO has broad applications to various enterprises that allegedly engage in racketeering and criminal activity. In recent marijuana-related RICO cases, the plaintiffs—often backed by, or associated with, anti-cannabis legalization groups—are typically property owners situated near a marijuana grower or dispensary, who allege that the value and use and enjoyment of their property have decreased due to the nearby operation of marijuana businesses. To succeed on civil RICO claims, plaintiffs must prove that: the defendant engaged in a pattern of racketeering activity under RICO; the plaintiff's business or property was injured; and the defendant's violation caused the injury.

Civil RICO claims are particularly attractive to plaintiffs because the statute provides for mandatory treble damages and attorney fees. Additionally, RICO permit claims against anyone "employed by or associated with" an enterprise engaged in a pattern of racketeering activity. As a result, in addition to suing marijuana producers, plaintiffs have named as defendants any individuals involved with the business, such as banks, insurers or the property owners. The strategy behind such lawsuits often appears to be forcing the cannabis producer or seller out of business, by suing all those with whom they have business relationships and causing those relationships to sever while simultaneously incurring mounting legal fees. Indeed, some marijuana businesses have reportedly been forced to close their doors in light of mounting legal fees from these cases, while others, including businesses sued in Oregon and Massachusetts, have paid settlements to resolve RICO claims.

Colorado Jury Verdict

Industry members were relieved late last year when the reportedly first anti-cannabis RICO case to reach trial, Safe Streets Alliance v. Alternative Holistic Healing, No. 15-349 (D. Colo.), resulted in a jury verdict in favor of a marijuana grower in the District of Colorado.  In Safe Streets, property owners (who were also members of the anti-cannabis organization Safe Streets Alliance) filed a RICO lawsuit against a neighboring marijuana grower operation. The plaintiffs alleged that their use and enjoyment of their property, and its value, were reduced because the marijuana facility omitted a "noxious odor" and "marred the mountain views" from the plaintiffs' property. They also claimed that their property value was diminished by the simple fact that a marijuana grow was operating nearby. The district court dismissed the RICO claims on the basis that the plaintiffs had not pleaded a plausible injury to their property that was proximately caused by the growers' activities.

However, on appeal, the U.S. Court of Appeals for the Tenth Circuit held that the property owners plausibly alleged RICO claims. First, the court ruled that the operation clearly constituted "racketeering activity" under RICO because the statute defined "racketeering activity" to include "dealing in a controlled substance or listed chemical" as defined in the Controlled Substances Act. Additionally, the court ruled that the district court erred by requiring the plaintiffs to submit evidence of a "concrete financial loss" at the pleading stage.

On remand, the district court instructed the jurors that the defendants' operation violated RICO as a matter of law. Thus, the sole issues for trial were whether the defendants' operation of the marijuana facility proximately caused injury to the plaintiffs' property, and, if so, the amount of damages. The jury returned unanimous verdicts in favor of the defendants after concluding they did not cause any injury to the plaintiffs' property. Although the verdict was a significant win for the cannabis industry, it was a fact-specific victory, and left the door open for other plaintiffs who might prove injury to their property.

Recent RICO Cases in Oregon, California and New York

Unlike Safe Streets, RICO cases within the U.S. Court of Appeals for the Ninth Circuit have struggled to make it past the pleadings stage. Indeed, in just the past three months, the U.S. District Court for the District of Oregon dismissed two similar RICO actions against marijuana growers for failure to allege compensable injuries in Ainsworth v. Owenby, No. 6:17-CV-01935-MC (D. Or. Mar. 27, 2019) and Shoultz v. Derrick, No. 3:18-CV-01445-HZ (D. Or. Feb. 22, 2019). In both cases, the court held the marijuana operations were associations-in-fact engaged in patterns of racketeering in violation of RICO. Both cases instead hinged on the plaintiffs' failure to allege compensable "concrete financial losses." Additionally, both cases expressly rejected the Tenth Circuit's holding in Safe Streets and held that the plaintiffs were required to provide concrete evidence to quantify their financial loss at the pleading stage.

In both Shoultz and Ainsworth, the court dismissed the allegations that noise and odor from the marijuana operations interfered with the use and enjoyment of the properties because such allegations were personal damages, rather than proprietary, and therefore not compensable under applicable law. With regard to the plaintiffs' claims that the marijuana operations decreased the values of their properties and made them harder to sell, the court held that the plaintiffs failed to plausibly allege a concrete financial loss because they failed to "make good faith allegations that they attempted or currently desire to convert those property interests into a pecuniary form." In Ainsworth, the plaintiffs went so far as to amend their complaint to allege that the marijuana business had lessened the value of their property and, as a result, prevented them from obtaining a larger home equity loan to finance the construction of a perimeter fence. Nonetheless, the court again dismissed the RICO claim and held that the plaintiffs' allegations were not enough to plead a concrete financial loss.

In a similar recent case out of the Northern District of California, Bokaie v. Green Earth Coffee, No. 18-CV-05244-JST, (N.D. Cal. Dec. 27, 2018), the court held that, although the plaintiff landowners' allegation of diminished present market value of their property could constitute a cognizable injury under RICO, the marijuana grower had ceased operations and the nuisance was abated, and thus the plaintiffs had "not sufficiently pleaded an injury to property."

Despite the bad luck suffered by plaintiffs, RICO claims against cannabis businesses have not ceased. Indeed, two recent cases in the District of Oregon, Underwood v. 1450 SE Orient, No. 3:18-cv-01366 (D. Or.) and Momtazi Family v. Yamhill Naturals, No. 3-19-cv-00476-BR (D. Or.)—the latter of which was just filed in April—remain at the pleadings stage at the time of this writing. Additionally, a somewhat unique RICO claim in the Western District of New York recently survived summary judgment and may be proceeding to trial after nearly four years of litigation.  In Horn v. Medical Marijuana, No. 1:15-cv-00701 (W.D.N.Y.),  a trucker who was fired after failing a drug test brought RICO, among other, claims against a company from which he purchased a CBD product that allegedly had improperly high levels of THC.

Key Takeaways

Because marijuana remains illegal under the Controlled Substances Act, marijuana businesses, and those associated with them, are essentially per se engaged in racketeering activity in violation of RICO, even if they are legally licensed by the state. Until legalization takes place at the federal level, plaintiffs will likely continue to file RICO claims against cannabis businesses in hopes of derailing the industry and obtaining large payouts. Although unsuccessful in court thus far, the threat remains very real and the stakes are high with the prospect of mandatory treble damages and attorney fees.

The crux in these cases generally comes down to proving injury and damages, and the burden plaintiffs face varies by jurisdiction. However, it seems inevitable that some plaintiffs will be able to prove a concrete financial injury to business or property and eventually succeed on RICO claims against industry participants. Even if plaintiffs are only successful in surviving motions to dismiss, that alone would permit costly discovery and fees that may be enough to force expensive settlements or some companies out of business.

Matthew J. Smith, as associate at Saul Ewing Arnstein & Lehr, represents clients facing complex commercial litigation, particularly institutions of higher education and businesses facing allegations of white-collar crime and government enforcement actions. He also has experience defending disputes involving both ERISA and non-ERISA governed insurance policies.