How Pot Businesses Can Fend Off RICO Cases

How Pot Businesses Can Fend Off RICO Cases

In a bittersweet victory for the legalized marijuana industry, a jury found in favor of a Colorado marijuana grower who was being sued by neighbors complaining about the smell. It could have been pretty scary for him, as well as other weed businesses if he lost. The neighbors, ranch owners Hope and Michael Reilly, were asserting civil racketeering claims – an option under RICO for people who are “injured” in some fashion by illegal drug operations.

Although recreational marijuana sales are now legal in Colorado, the fact that pot is still an illicit substance under federal law keeps the door open for lawsuits under RICO. It also helps discourage financial firms, such as banks or insurance companies, from taking on marijuana-related business, lest they face claims as members of the “conspiracy.”

Hundreds of RICO lawsuits have been filed against cannabis-related businesses. According to the Willamette Week, many the lawsuits are part of a calculated strategy to attack the legalized marijuana industry. One woman has used it to sue more than 200 businesses affiliated with a THC oil processor located next door to her property, the publication reported. The company squeezed the oil from flowers to create cannabis-infused candies.

In another case, two Beavercreek, Oregon homeowners sued more than two dozen individuals and corporate entities that did business with their neighbors, marijuana growers Clifford and Carol Beddow. Those defendants included Bank of America, for providing the Beddows with a mortgage for their property.

The plaintiffs claimed that the bank “knowingly allowed the Beddow property to be used for the production and processing of marijuana, and profited from such use.”

The possibility of being targeted in RICO suits is one reason banks and insurance companies have cited for avoiding doing business with the industry. Without those services, cannabis-related firms remain open to more financial risks, and must rely on cash-based systems for handling finances.

“These criminal prohibitions on virtually every aspect of the marijuana business make the federal policy unmistakably clear,” the plaintiffs said in their complaint. “Marijuana is a dangerous drug banned 21 throughout the United States. RICO defines most Controlled Substances Act violations as ‘racketeering activity,’ any business engaged in the production and sale of marijuana is a criminal enterprise for the purposes of federal law.”

Until federal law changes, or there is a decisive Supreme Court ruling in the industry’s favor – neither of which seems particularly likely in the near future –  it’s probably a given that marijuana business owners will continue to face these sorts of claims from parties who are hostile to legalized weed.

NIMBY-ism is also a rampant problem for the legalized weed industry. While most people in the country approve of legalizing pot, they are not always so friendly to such establishments operating in their vicinity. Sixty-one percent of Americans reported that they believed marijuana should be legal, according to an October 2017 study by the Pew Research Center.

Nonetheless, when pot businesses show up, neighbors view them as on par with pornography shops, liquor stores, and other unwanted purveyors of vice, according to the New York Times.  

Even though voters often approve marijuana legalization initiatives, cities and towns also are banning marijuana-related businesses. In Massachusetts, where marijuana was legalized in 2016, more than 60 towns have banned cannabis businesses, and as many as 120 have moratoriums in place, according to the Times.

All of this means ammunition is continuing to build for RICO suits.

What can you do to avoid getting targeted? Or to fight back if it happens? Here are a few tips:

Draft escape hatches into agreements: You can control the damage by allowing parties to walk away in the event of a third-party lawsuit. This can be especially helpful for landlords who might otherwise be wary of allowing for a potential cannabis-related business to operate on their property. Wherever possible, provide opportunities for other businesses to end their partnerships in the event of certain cannabis-related events. You may not save yourself that way, but you’ll make yourself a less attractive lawsuit target.

Get a feel for the neighbors: You do not want to invest your savings and sweat equity into launching a business, only to find out months later that your neighbors are plotting to sue you over it. Do as much as you can to find out about the neighborhood, and local property owners before choosing the location for your business.

While you’re at it, get to know local law enforcement. They may help you understand what you’re getting into, and having a good relationship with them is key. Approach with caution, of course, but the police can be surprisingly in favor of legalized marijuana. (Do NOT, however, engage in any activity that can be construed as bribery. That could open a new can of worms you want no part of.)

Make sure you follow local laws and regulations: Don’t be the “problem” business in the neighborhood. Observe local regulations about business hours and control of nuisances, i.e. odors. Neighbors have to be able to prove you harmed them in some way to win a RICO case against you. If you were a model business owner in all respects, they would have very little to go on.

If all of that fails, and you still get sued: It may be worth fighting it out in court rather than trying to settle immediately. Though it can be used by just about anybody to gin up a lawsuit, a civil RICO claim can be exceedingly difficult to prove. Most judges see them as requiring high hurdles of proof. Many RICO cases get thrown out before getting very far in litigation.  

If settlement discussions do emerge, your willingness to take the battle before a judge and a jury could ultimately help you put the matter to rest on reasonably favorable terms. The Beddows eventually settled their case with their angry neighbors. Although the terms were not disclosed, one can assume it was probably for less than the massive damages one could potentially win in federal court.

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David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
To connect with David: [hidden email] or 714-907-0697.

To learn more about Hochfelsen & Kani LLP: hockani.com
To learn more about David's book Pot Inc.: suttonhart.com
For media inquiries or speaking engagements: [hidden email]



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