September 02, 2020 Feature

Attempts to Weed Out Cannabis Businesses through Civil RICO Lawsuits

By Lisa L. Pittman
Esther Kelleter/iStock via Getty Images Plus

Esther Kelleter/iStock via Getty Images Plus

Cannabis industry participants face exposure on all fronts to legal attacks and challenges, including civil RICO.

Around 2015, Colorado landowners enraged by the growing legal cannabis industry—as cannabis is now authorized for medical use in 34 states and adult use in 11 states and Washington, D.C.—creatively devised a strategy to dismantle the state’s entire regulated cannabis regime, and thus the industry itself, through the use of the RICO statute. Instead of alleging odor or nuisance claims against their neighbors, these plaintiffs crafted detailed private civil RICO allegations not only against the unwanted cannabis business neighbor but also against every person who had ever done business with the cannabis business, including the banks, insurance companies, landowners, construction companies and contractors, and John Does, in an effort to cause these defendants to sever ties with the target cannabis business defendant.

In addition to all persons participating in the construction or operation of the cannabis business in any way, the plaintiffs sued the governors and the state and local officials in charge of the regulatory programs that issue licenses to cannabis businesses, alleging that the governing officials were all part of an ongoing conspiratorial criminal enterprise that encouraged drug trafficking in contravention of the Controlled Substances Act (CSA). Cannabis, or “marihuana” as it is defined by the CSA, is a federally illegal Schedule I controlled substance.1 A Schedule I designation means that a substance has no accepted medical use and a high potential for abuse—cannabis is listed alongside heroin and LSD. The relief these plaintiffs were requesting—that states be enjoined from continuing state cannabis programs—demonstrates their true motivation for filing these lawsuits: to force cessation of the state-legal cannabis programs.

Civil RICO

The Racketeer Influenced and Corrupt Organizations Act (RICO) prohibits certain activities of organized criminal groups in relation to an enterprise.2 RICO also provides a civil cause of action for “[a]ny person injured in his business or property by reason of a violation” of those prohibitions.3

To maintain a cause of action under 18 U.S.C. § 1964(c)—colloquially referred to as “civil RICO”—a plaintiff must plead and ultimately prove that (1) the defendant violated § 1962, (2) the plaintiff’s business or property was injured, and (3) the defendant’s violation was the cause of that injury. Under § 1962(c), it is “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.”4 An “enterprise” for purposes of RICO “includes any . . . partnership, corporation, association, or other legal entity.”5 As relevant here, “racketeering activity” includes “dealing in a controlled substance or listed chemical (as defined in [the CSA]).”6 Racketeering activity also includes “any offense involving . . . the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance or listed chemical (as defined in [the CSA]), punishable under any law of the United States.”7

Courts have held that RICO is to be read broadly. In civil RICO lawsuits against cannabis businesses, the plaintiffs allege that the businesses are “RICO enterprises” because they are federally illegal, and that those who participate in any manner to fulfill the purpose of selling cannabis to the public form an association-in-fact for purposes of the RICO statute. Further, according to these plaintiffs, all those who understood that the business was selling cannabis and assisted the RICO enterprise formed an ongoing pattern of criminal racketeering activity.

The remainder of this article analyzes several of the most important cases in which RICO claims have been brought against cannabis businesses.

Colorado

The civil RICO tactic began in Colorado in 2015 with Safe Streets Alliance v. Alternative Holistic Healing, LLC.8 Plaintiff Safe Streets Alliance claimed to be a nonprofit organization devoted to reducing crime and illegal drug dealing, but Phillis and Michael Reilly were the only members of the organization. The Reillys owned 105 acres of land in rural Pueblo, Colorado, on which they did not live but used for horseback riding.9 One of Alternative Holistic Healing’s (AHH’s) owners bought a 40-acre tract next door and built a cannabis cultivation and manufacturing facility with extensive HVAC and odor control systems to prevent odors from escaping the facility. AHH sold the cannabis at a dispensary in Black Hawk, Colorado. No members of the public could visit or access the Pueblo grow facility.10

In their second amended complaint, the plaintiffs named as defendants then governor John Hickenlooper of Colorado, the executive directors of both the state and local cannabis licensing agencies, the Board of Commissioners of Pueblo County, the Pueblo County Liquor & Marijuana Licensing Board, all of the holding companies related to AHH as well as its owners individually, the development corporation serving as AHH’s landlord, the bank that issued AHH a surety bond, and even a John Doe contractor who worked on the manufacturing facility.11 The plaintiffs proclaimed outright that they filed the suit

to vindicate the federal laws prohibiting the cultivation and sale of recreational marijuana and their rights under [RICO]. . . . Plaintiffs also seek an injunction under RICO directing the marijuana operations affecting their land to stop violating the federal drug laws. In addition to their RICO claims, Plaintiffs are also suing the state and local officials who are facilitating and encouraging Colorado’s recreational marijuana trade, including the racketeering activity that is injuring their property, through a licensing regime that purports to authorize federal drug crimes.12

Shortly thereafter, much like former attorney general Jeff Sessions declared that “good people don’t smoke marijuana,”13 the plaintiffs asserted that “[m]arijuana businesses make bad neighbors.”14 The plaintiffs requested that AHH be forced to cease its operations, that all of the alleged conspiring racketeering defendants be held liable for treble damages and fees to the plaintiffs, and that the state officials be enjoined from engaging in or permitting the cannabis programs to continue in the state.

First, the plaintiffs argued that Colorado’s adoption of its Retail Marijuana Code to regulate the growth, distribution, and sale of cannabis impermissibly violates the CSA. The plaintiffs further asserted that the code facilitates and promotes the sale of recreational (or retail) marijuana and that Colorado and the local licensing entities were all enriching themselves from the proceeds of drug money by the licensing fees charged and taxes derived from the sale of cannabis to the public. The state officials were thereby alleged to be profiting from and conspiring in racketeering activity to justify their inclusion in the lawsuit. The plaintiffs even claimed that Colorado’s public service announcements to tourists as to the dangers and dosing of cannabis constituted “marketing efforts [that] are a transparent attempt to promote the commercial recreational marijuana industry.”15 The plaintiffs likewise characterized Pueblo County as having “a policy . . . to promote and profit from federal drug crimes.”16

Next, the plaintiffs alleged that all the individuals and entities involved in deciding to purchase the property to grow cannabis conspired in racketeering activity to commit a federal crime. The plaintiffs even claimed that their John Doe defendant, who worked on the construction of the facility, was “clearly aware of the purpose of this building” due to “the many specialized features that are necessary to make a building suitable for growing marijuana.”17 Moreover, the plaintiffs alleged that the “telephone, email, or other communication facilities” were used by the defendants “to take steps in furtherance of their efforts to unlawfully lease . . . and develop” the cannabis business facility, further bolstering their RICO claim.18

Finally, despite expert testimony at trial demonstrating that the cannabis cultivation facility did not vent to the outdoors, the Reillys claimed that the facility emitted noxious odors, interfered with their vista of the mountains, and caused the value of their property to decline.19 The Reillys’ property is in a high-acreage master-planned community, but the cannabis facility next door was outside of that community’s boundaries. Nonetheless, the Reillys also complained that AHH’s activities broke the covenants of their community.20 The Reillys additionally asserted an increased risk of crime in the area because of the cannabis facility, even though the cannabis was only grown but not sold there.21

The trial court initially dismissed the RICO claims,22 but the Tenth Circuit Court of Appeals reversed and remanded.23 The court held that the Reillys had plausibly alleged a RICO claim as well as three possible property damages recognized by the statute based on interference with the use and enjoyment of their property from alleged odors, diminution in value from the odors, and diminution in value based on an adjacent, ongoing criminal enterprise.24 The Tenth Circuit remanded Safe Streets Alliance’s RICO claims to the district court “for further proceedings on the Reillys’ three plausibly alleged property injuries.”25

On remand, the plaintiffs were not required to prove any elements of their RICO claims, merely their alleged damages. The jury rendered its verdict on October 31, 2018, after a half-day deliberation, as to the remaining parties in the remanded litigation. The first question on the verdict form asked the jurors whether the plaintiffs proved all three elements of their claims of injuries to their real property caused by the defendants. The jury answered, “No.”26 The third question was repetitive of the first but asked if the defendants’ actions “in conjunction with other persons” caused the plaintiffs’ alleged real property injuries. The jury answered, “No.”27 The jury also was asked to assess an amount of damages, if any, to certain categories of damages alleged by the plaintiffs: (1) loss of use and enjoyment due to noxious odors, noise, and/or obstruction of view; (2) diminution in value of property due to noxious odors; and (3) diminution in value of property due to operation of a marijuana cultivation facility adjacent to the plaintiffs’ property.28 The jury awarded no damages for any of these categories.29

Apart from the defendants, who said their business would have been bankrupted by an adverse ruling, the effects of this ruling have been celebrated as a victory in the cannabis community. Until the final disposition of this lawsuit, cannabis businesses in multiple states had to defend themselves against numerous copycat lawsuits across the country, some going out of business in the process—all because the Tenth Circuit’s initial Safe Streets Alliance ruling held that the plaintiffs had alleged enough colorable RICO allegations for their private citizen claims to be pursued against cannabis businesses. The jury’s final opinion that such lawsuits are without merit spoke volumes by removing the leverage that the initial Tenth Circuit ruling provided to green-light similar lawsuits.

Massachusetts

A second important case arose in Cambridge, Massachusetts. Neighbors of the medical cannabis dispensary Healthy Pharms sued the dispensary, its top officials, a real estate company, advisers, and insurers, as well as the state, the city of Cambridge, and the town of Georgetown, which licensed Healthy Pharms, in federal court.30 The neighbors argued that federal law, under which cannabis is illegal, should preempt state law, which allows it. The plaintiffs used the RICO statute to argue that Healthy Pharms and the businesses that support it are involved in illegal cannabis crimes, which lower neighborhood property values.31 The neighbors alleged that their properties would lose $29 million in value due to Healthy Pharms’ operations.32

The Massachusetts lawsuit originally listed the consulting firm 4Front Advisors and its president, Kris Krane, as defendants for allegedly providing consulting services to Healthy Pharms.33 But the judge in the case found that the conspiracy claims against 4Front and several other defendants were insufficiently pleaded.34 The court held that the claims against the governmental agencies and officials would be dismissed, but that the plaintiffs’ claims against the other defendants could proceed to allow them to prove their alleged damages, without commenting on whether the RICO claims had merit.35

As with the Colorado case, the bank that serviced this cannabis business was pulled into the lawsuit, forced to defend itself, and not granted a dismissal, so the plaintiffs could have an opportunity to prove their conspiracy claims.36 In a cash-only industry where banks are already reticent to work with cannabis businesses, such moves discourage other institutions and industries from doing business with cannabis entities.

Oregon

In Oregon, Laura Underwood joined forces with Rachel McCart, a lawyer who once specialized in equine law but now has become known for suing legal cannabis businesses for racketeering.37 In their lawsuit, Underwood and McCart named as defendants more than 200 businesses—every company that had ever done business with Oregon Candy Farm, the cannabis business neighbor of Underwood. The suit, filed in the U.S. District Court for the District of Oregon, alleged that every grower and dispensary that ever did business with Underwood’s neighbor conspired to commit crimes that damaged the value of her Sandy home.38

Similar to the plaintiffs in Safe Streets Alliance, Underwood worked with a group called Unwanted Pot Grows, which is based in Clackamas County and “rallies around efforts to combat the expanding legal marijuana market. Its complaints mostly center on disputes between cannabis companies and their angry neighbors.”39 Underwood’s suit claimed that the cannabis businesses “directly and proximately injured Plaintiff’s Property by interfering with Plaintiff’s use and enjoyment of Plaintiff’s Property, burdening it with noxious odors, diminishing its market value and making it more difficult to sell.”40 This lawsuit settled after negative rulings by the court.

California

In California, nine neighbors of Sonoma-area Green Earth Coffee sued it, its proprietor, the property owner, and the bank deed of trust holder for alleged violations of racketeering and state and local laws in the U.S. District Court for the Northern District of California, seeking treble damages on the racketeering claims as well as punitive damages, an order stopping the growing, attorney fees, and legal costs.41 Due to legal fees and costs, Green Earth Coffee was forced to settle and shut down.

However, on December 27, 2018, the court dismissed the case in its entirety, holding that the alleged noises and noxious odors were personal injuries—insufficient bases for a civil RICO claim, as well as an improper use of the statute.42 This well-reasoned opinion, which refused to entertain the legal stretch of applying a private RICO statute against a state-legal and authorized business, finally put a damper on the groundswell of RICO suits for a short time.

New York

The recent RICO lawsuit in Horn v. Medical Marijuana, Inc.43 is interesting because it involves a hemp-based cannabidiol (CBD) product, which is no longer a Schedule I controlled substance under the CSA. Under the 2014 Farm Bill, hemp could be grown in a state in conjunction with a research pilot program or under a state’s industrial hemp program. However, these state-specific permissions to grow 0.3 percent tetrahydrocannabinol (THC) cannabis were not intended to allow the hemp to be marketed or sold in other states. But the products became so popular that by December 2018, the 2018 Farm Bill was signed. The 2018 Farm Bill, effective January 1, 2019, created an exception in the definition of “marijuana” under the CSA for 0.3 percent THC cannabis cultivated in conjunction with a U.S. Department of Agriculture–approved state hemp plan, and permitted interstate commerce of the now federally legal agricultural commodity.

In Horn, a trucker who had suffered a motor vehicle accident purchased CBD oil advertised as THC-free in 2012. Shortly after consuming the product, the trucker tested positive for THC and was fired. Testing confirmed the CBD oil contained THC. The trucker filed a complaint against the companies involved in the manufacture and distribution of the CBD oil alleging, in addition to false advertising and other consumer protection claims, violations of civil RICO. The U.S. District Court for the Western District of New York found the evidence that the companies engaged in fraudulent inducement by advertising a THC-free product sufficient enough for the suit to move forward under RICO.44

The court specifically held that the manufacturer’s claim that the CBD oil contained no THC “was not one-off promotional puffery; it was a fundamental selling point of the product,”45 based on labeling and YouTube videos by the defendant company’s founder. The court further held that the trucker provided sufficient evidence to show that the CBD sellers and manufacturers committed a pattern of racketeering by marketing a CBD oil mixture that contained a resin extract from the Cannabis sativa plant, which in 2012 fell within the definition of “marijuana” under the CSA.46

The last ruling from the court on the defendants’ motion for reconsideration acknowledged that a CBD product does not become, by definition, a controlled substance if it happens to contain a trace amount of THC, as the plaintiff alleged.47 But because this case arose from a 2012 product, the company selling it was ahead of the law and thus trapped in the RICO conundrum even though the products were not intended to contain any THC or cause any kind of a high.

Conclusion

Practicing law in this arena, and participating as a business, is complicated with the backdrop of federal prohibition of marijuana, the 2014 Farm Bill’s partial permission to grow hemp, and the 2018 Farm Bill’s complete legalization of hemp as an agricultural commodity. Although support for cannabis legalization is widespread, not everyone agrees with it, as illustrated in the recounting of these lawsuits. In addition, plaintiffs are finding new uses of the RICO statute. These are the uncertain times we are in with the growing pains of this rapidly developing industry governed by ever-evolving laws—and the participants face exposure on all fronts to legal attacks and challenges.

Notes

1. 21 U.S.C. § 812.

2. 18 U.S.C. § 1962; see Home Orthopedics Corp. v. Rodríguez, 781 F.3d 521, 527 (1st Cir. 2015) (noting that Congress enacted RICO “as a tool in the federal government’s ‘war against organized crime’” (quoting United States v. Turkette, 452 U.S. 576 (1981); Libertad v. Welch, 53 F.3d 428, 445 (1st Cir. 1995)).

3. 18 U.S.C. § 1964(c); RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2096–97 (2016).

4. 18 U.S.C. § 1962(c).

5. Id. § 1961(4).

6. Id. § 1961(1)(A).

7. Id. § 1961(1)(D).

8. See Second Amended Complaint, Safe Streets All. v. Alt. Holistic Healing, LLC, No. 1:15-cv-00349 (D. Colo. Feb. 1, 2016), ECF No. 126 [hereinafter Safe Streets All. Complaint].

9. Id. at 5.

10. Id. at 21.

11. Id. at 5–7.

12. Id. at 1.

13. See Christopher Ingraham, Senators Held a Hearing to Remind You That “Good People Don’t Smoke Marijuana” (Yes, Really), Wash. Post (Apr. 5, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/04/05/senators-one-sided-marijuana-hearing-is-heavy-on-anecdote-light-on-data.

14. Safe Streets All. Complaint, supra note 8, at 2.

15. Id. at 16.

16. Id. at 20.

17. Id. at 22.

18. Id. at 23.

19. Id. at 33.

20. Id.

21. Id.

22. Safe Streets All. v. Alt. Holistic Healing, LLC, No. 1:15-cv-00349, 2016 U.S. Dist. LEXIS 36113 (D. Colo. Mar. 21, 2016).

23. Safe Streets All. v. Hickenlooper, 859 F.3d 865 (10th Cir. 2017).

24. Id. at 884–85, 888–89.

25. Id. at 891.

26. Verdict Form at 1, Reilly v. 6480 Pickney, LLC, No. 1:15-cv-00349 (D. Colo. Oct. 31, 2018).

27. Id. at 2.

28. Id. at 3.

29. Id.

30. Complaint, Crimson Galeria Ltd. P’ship v. Healthy Pharms, Inc., No. 1:17-cv-11696-ADB (D. Mass. Sept. 7, 2017), ECF No. 1 [hereinafter Crimson Galeria Complaint].

31. First Amended Complaint at 8, Crimson Galeria, No. 1:17-cv-11696-ADB (D. Mass. Oct. 5, 2018), ECF No. 82.

32. Id. at 4.

33. Crimson Galeria Complaint, supra note 30, at 14.

34. Memorandum and Order on Motions to Dismiss at 31, Crimson Galeria, No. 1:17-cv-11696-ADB (D. Mass. Aug. 21, 2018), ECF No. 78.

35. Crimson Galeria Ltd. P’ship v. Healthy Pharms, Inc., 337 F. Supp. 3d 20, 27 (D. Mass. 2018).

36. Id.

37. See Complaint, Underwood v. 1450 SE Orient, LLC, No. 3:18-cv-01366 (D. Or. July 20, 2018), ECF No. 1 [hereinafter Underwood Complaint].

38. Id.

39. Katie Shepherd, A Racketeering Lawsuit Brought by an Oregon Equine Lawyer Is Part of a National Strategy to Upend Legal Weed, Willamette Wk. (Aug. 22, 2018), https://www.wweek.com/news/courts/2018/08/22/a-racketeering-lawsuit-brought-by-an-oregon-equine-lawyer-is-part-of-a-national-strategy-to-upend-legal-weed.

40. Underwood Complaint, supra note 37, at 172.

41. Verified Complaint, Bokaie v. Green Earth Coffee LLC, No. 3:18-cv-05244 (N.D. Cal. Aug. 27, 2018).

42. Bokaie v. Green Earth Coffee LLC, No. 3:18-cv-05244, 2018 U.S. Dist. LEXIS 216960 (N.D. Cal. Dec. 27, 2018).

43. 383 F. Supp. 3d 114 (W.D.N.Y. 2019).

44. Id. at 132–33.

45. Horn v. Med. Marijuana, Inc., No. 1:15-cv-00701, 2019 U.S. Dist. LEXIS 203209 (W.D.N.Y. Nov. 21, 2019).

46. See Horn, 383 F. Supp. 3d at 122–23 (quoting 21 U.S.C. § 802(16) (2012)).

47. Horn, 2019 U.S. Dist. LEXIS 203209, at *7–8.

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Lisa L. Pittman

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Lisa L. Pittman is cochair of the cannabis business law group at Coats Rose, P.C., in the firm’s Austin, Texas, office. She has served in numerous TIPS leadership positions, including as chair-elect of the TIPS Cannabis Law and Policy Committee.