May 24, 2016 Articles

Litigation Update—Legal Recreational Marijuana

By Lauren P. Carboni

Two recent rulings, in federal cases challenging Colorado’s Amendment 64, which legalized recreational marijuana in Colorado, will have an important impact on future challenges to marijuana laws in Colorado and beyond. Nebraska v. Colorado, No. 144, Orig., 136 S. Ct. 1034 (2016), and Safe Streets Alliance v. Alternative Holistic Healing, LLC, No. 15-cv-00349, 2016 WL 1084372, at *1 (D. Colo. Mar. 21, 2016), both challenged Colorado’s Amendment 64 on the grounds that it violates federal drug law and that a state cannot authorize the violation of federal drug law. Further, the Safe Streets case addressed one of the first racketeering claims related to a legal marijuana facility since the introduction of legal marijuana in Colorado.

Overview of Marijuana Laws at the State and Federal Level
In 2012, Colorado voters adopted Amendment 64 to the state constitution to legalize, regulate, and facilitate the recreational use of marijuana. See Colo. Const., art. XVIII, § 16. Among other things, Amendment 64 exempted from Colorado’s criminal prohibitions certain uses of marijuana for persons 21 years of age or older. The Colorado Department of Revenue, Marijuana Enforcement Division, is responsible for regulating and enforcing the recreational marijuana industry.

At the federal level, the Controlled Substances Act (CSA) continues to classify marijuana as a Schedule I drug, which makes the manufacture, distribution, or possession of marijuana a crime under federal law. 21 U.S.C. §§ 801–904. The position of the U.S. Department of Justice (DOJ) on marijuana enforcement plays a vital role in the competing state and federal regulatory regimes. To that end, on August 29, 2013, Deputy Attorney General James Cole issued guidance to federal prosecutors concerning marijuana enforcement under the CSA (the Cole memo), highlighting eight enforcement priorities, regardless of state law. In particular, the Cole memo emphasizes that “in jurisdictions that have enacted laws legalizing marijuana and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities.” This language suggests that where a state like Colorado has a robust regulatory and enforcement system in place, the DOJ is less inclined to prosecute any marijuana-related conduct, unless such conduct interferes with federal enforcement priorities.

However, the Cole memo is merely guidance. It does not make marijuana-related conduct permitted by state law legal under the CSA. The DOJ may, in its discretion, prosecute under the CSA anyone engaged in marijuana-related conduct. Accordingly, while the Cole memo suggests that it is less likely the DOJ will prosecute businesses operating legally under Colorado’s marijuana laws, the risk still exists.

Another risk for businesses, and for local and state government entities engaged in Colorado’s marijuana business, is the threat of lawsuits alleging violation of federal laws. Such lawsuits potentially expose individuals and businesses to penalties, and the cost to defend against such lawsuits may force business closures. In light of recent rulings in the cases discussed below, Colorado’s commercial marijuana industry can breathe easy, but this may be a short-lived victory.

Nebraska v. Colorado—The Supreme Court Declines to Hear Interstate Marijuana Case
In December 2014, Nebraska and Oklahoma (the “state plaintiffs”) sought leave from the Supreme Court to file a complaint against Colorado, alleging that Amendment 64 affirmatively facilitates the violation and frustration of federal drug laws. The state plaintiffs sought to invoke the Court’s nearly elusive original jurisdiction, which, if granted, would allow them to file a lawsuit against another state directly with the Supreme Court. See 28 U.S.C. § 1251(a). As neighboring states of Colorado, the state plaintiffs claim that Amendment 64 increased trafficking and transportation of Colorado-sourced marijuana, forcing them to expend significant law enforcement and judicial resources to combat the surge of Colorado-based marijuana within their borders.

The Supreme Court’s original jurisdiction is rarely invoked and is appropriate in cases of a very serious nature where no alternative forums exist for the parties. The Court spent more than a year determining whether to take the case. On March 21, 2016, by a 6–2 vote, it ultimately declined to hear it. The majority offered no opinion to accompany its decision, leaving more questions than answers; however, Justice Alito joined Justice Thomas in dissenting. The dissent stated that because this case involved a suit brought by two states, alleging significant harms to their sovereign interests caused by another state, the Court should have allowed the case to proceed before the Supreme Court. Nebraska v. Colorado, No. 144, Orig., 2016 WL 1079468, at *2 (U.S. Mar. 21, 2016) (Thomas, J., dissenting).

Declining to hear this case means that the Court is unwilling to take sides in this legal battle, leaving the lower courts to wrestle with these issues.

Safe Streets Alliance v. Alternative Holistic Healing—Racketeering Lawsuits May Be Viable
On February 19, 2015, Safe Streets Alliance, an anti-marijuana organization based in Washington, D.C., and property owners Phillis and Michael Reilly initiated a lawsuit in the U.S. District Court for the District of Colorado against nine private entities, three state officials in their official capacity, and two local government entities engaged in Colorado’s marijuana business, alleging six counts of Racketeer Influenced and Corrupt Organization Act (RICO) violations and arguing that issuance of recreational marijuana licenses at the state and local levels is preempted by the CSA under the Supremacy Clause of the U.S. Constitution.

The Reillys own some 100 acres of ranch land adjacent to the future site of a cannabis cultivation facility. The plaintiffs sued to stop construction and operation of this facility, claiming that the activities surrounding the construction and operation of the facility amounted to racketeering and would cause injury to the Reillys’ property “by causing noxious smells to travel onto that property, interfering with its use and enjoyment, diminishing its market value, and making it more difficult to sell.” Second Amended Complaint, Safe Streets All. v. Alt. Holistic Healing, LLC, No. 15-cv-000349 (D. Colo.).

Under RICO, it is illegal for any person to conspire to violate any of the provisions of 18 U.S.C. § 1962 and “for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate commerce or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c) & (d). “Racketeering activity” is defined to include “dealing in a controlled substance or listed chemical (as defined in section 102 of the [CSA]) which is chargeable under State law and punishable by imprisonment for more than one year” or “the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance or listed chemical (as defined in section 102 of the [CSA]).” 18 U.S.C. § 1961(1).

The plaintiffs alleged that the defendants formed an association-in-fact enterprise within the meaning of RICO and engaged in a pattern of racketeering activity by, inter alia, establishing contractual and other relationships, collaborating to develop the marijuana cultivation facility, and agreeing to sell marijuana at Alternative Holistic Healing’s store. The plaintiffs further alleged that the defendants’ actions injured the plaintiffs because the marijuana operations “marred the mountain views from the Reillys’ property, thus making it less suitable for hiking and horseback riding”; “the building’s purpose—the manufacture of illegal drugs . . . remind[s them] of the racketeering enterprise next door every time they look to the west”; and the marijuana operations “repeatedly caused a distinctive and unpleasant marijuana smell to waft onto the Reillys’ property,” “interfer[ing] with the Reillys’ use and enjoyment of the property and diminish[ing] the property’s value.” Second Amended Complaint, Safe Sts. All., No. 15-cv-000349.

On January 19, 2016, the court dismissed all claims against the government officials and entities, finding that the plaintiffs failed to state a viable claim for relief because there is no private right of action under the Supremacy Clause itself and there is no private right of action for legal or equitable relief under the CSA. Safe Sts. All., No 15-cv-00349, 2016 WL 223815, at *3 (D. Colo. Jan. 19, 2016). The court also held that the plaintiffs’ RICO claims did not state viable claims against the local government entities because these entities are either incapable of forming a specific criminal intent or because exemplary damages are not available against municipal corporations. Id. at *7. The case proceeded solely against the nine private defendants; however, that was short-lived.

On March 21, 2016, the same day the Supreme Court declined to hear Nebraska v. Colorado, the district court adopted the magistrate judge’s February 8, 2016, Recommendation Regarding Defendants’ Motion to Dismiss, dismissing all remaining claims against the nine private defendants, finding that the plaintiffs did not have statutory standing under RICO because the pleadings failed to demonstrate that any plaintiff suffered “business or property” injuries as a result of defendants’ marijuana-related activities. See Safe Sts. All. v. Alt. Holistic Healing, LLC, No. 15-cv-00349 (Feb. 8, 2016), ECF No. 128, at 17–24 (Recommendation Regarding Defendants’ Motions to Dismiss). In dismissing the case, the court found that the plaintiffs failed to meet their pleading burden to state a claim because they “provide[d] no factual support to quantify or otherwise substantiate their inchoate concerns as to the diminution in value of their property.”

Tellingly, however, the court opened the door for future RICO claims, stating that its holding in the Safe Streets case does not preclude the possibility that a plaintiff could assert a fact-based, plausible RICO claim against a Colorado marijuana business based on violations of the CSA. The court also hinted that a conceivable claim that might confer RICO standing is one based on an allegation that the market value of a plaintiff’s property has declined as a result of marijuana-related conduct. Of course, any such claim would need to assert fact-based evidence of a diminution of property value in order to survive a motion to dismiss.

The Impact of the Rulings on Future Challenges to Legal Recreational Marijuana Laws
In light of these recent rulings, for now, those engaged in Colorado’s budding commercial marijuana industry can breathe a sigh of relief. However, it is clear that the battle over marijuana laws is far from over. If anything, these cases demonstrate that the courts will not provide a quick solution for those challenging a state’s marijuana laws, but courts are, under certain circumstances, willing to entertain such claims.

The Supreme Court’s declining to hear Nebraska v. Colorado demonstrates to other neighboring states that may be contemplating bringing a lawsuit against Colorado, Oregon, Washington, or Alaska—all states with a legal marijuana market—that the Court is unwilling to pick sides in this legal battle. As Justice Brandeis famously once wrote in dissent, states serve as laboratories of democracy, free to try novel social and economic experiments without risk to the rest of the country. At the present moment, the Court is not willing to interfere with Colorado’s right to enact such “experimental” laws.

Safe Streets demonstrates the difficulties in asserting a claim challenging legal recreational marijuana laws against state and local government officials and entities. Indeed, RICO claims against government entities are not likely to be successful based on a lack of specific criminal intent. More generally, in light of Safe Streets, any claim challenging marijuana laws under the Supremacy Clause and CSA faces an uphill battle because of precedent that no private right of action exists under either law. Accordingly, to make it past a motion to dismiss, a plaintiff must allege that a state’s marijuana laws violate a federal law that provides for a private right of action. Thus, it remains to be seen how creative lawyering may further develop this area to support such a cause of action.

Perhaps the most important takeaway from the Safe Streets case is that a RICO charge against private entities engaged in a marijuana-related business is a potentially viable claim. The Safe Streets court did not strike down the use of RICO to challenge Colorado’s marijuana laws; rather, it held that a plaintiff may allege a RICO claim, so long as it pleads facts demonstrating concrete financial loss to either its business or property. While this case represents a win, for now, for the marijuana business community, it provides guidance to those opposing marijuana laws that a RICO claim may be the key to successfully challenging such law. Consequently, the federal courts may see a marked increase in RICO lawsuits challenging marijuana laws.

In summary, the holdings of Nebraska and Safe Streets establish that despite the Supreme Court’s unwillingness to entertain claims challenging a state’s marijuana laws at this time, there is nothing preventing parties from challenging the legalization of marijuana in federal court. Parties challenging Colorado’s marijuana laws to date have largely been unsuccessful, but the door is now open for potential future RICO challenges that may well be the avenue to pursue such claims on the merits.

Notably, the current political climate may also affect state marijuana laws and those seeking to challenge them. The recent Supreme Court vacancy and upcoming presidential election create uncertainty for the future of state marijuana laws. When a new administration settles in office in January 2017, the DOJ’s enforcement priorities and the Supreme Court’s prior unwillingness to hear a state case challenging a neighboring state’s marijuana laws could swiftly change, affecting how these issues are shaped prospectively. In addition, the Drug Enforcement Administration (DEA) recently announced that it will soon decide whether to remove marijuana as Schedule I drug under the CSA. If the DEA reclassifies marijuana to either a Schedule II or a Schedule III drug, it would certainly be a game changer. However, it remains to be seen what the DEA will decide. No doubt, there is more to come as Colorado’s legalization of marijuana continues to develop and both sides of the debate refuse to acquiesce to the status quo.

Keywords: litigation, woman advocate, marijuana, RICO, Amendment 64, racketeering, recreational marijuana, Controlled Substances Act, CSA, Drug Enforcement Administration, DEA, Cole memo, original jurisdiction

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).