By Jana Weltzin
An alarming trend of private citizens filing RICO claims targeting business owners, state public servants, accountants and landlords has emerged within the cannabis industry.
The Racketeer Influenced and Corrupt Organizations Act (RICO) is the 1970 federal statute aimed at eliminating the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce.
The use of a RICO complaint is not a new scare tactic. It’s been used before to target the tobacco industry and clinics performing abortions, as well as a form of protest against health care fraud and police misconduct.
RICO was designed as a powerful and broad-reaching umbrella. It is easily one of the broadest federal acts on the books, which has led the U.S. Supreme Court to rule that RICO may be applied to legitimate businesses and enterprises that operate without a profit motive.
The first place to start when assessing potential RICO liability is to identify what is considered “racketeering activity.” Part of the definition includes a federal offense that involves bankruptcy, securities fraud, or controlled drugs and acts that are indictable under the Currency and Foreign Transactions Reporting Act. A cannabis business typically has numerous investors and equity owners, and perhaps consultants to facilitate business connections in exchange for a piece of the company. Arrangements such as multiple investors and various equity transactions are common in the cannabis world. However, when structuring these types of deals, a savvy business person will engage a competent securities counsel to make sure the deal is not running afoul of any federal and state securities laws.
Keep in mind the targets of RICO actions are not limited to the direct owners of cannabis businesses. It extends to spouses, lawyers, accountants, landlords and more. In order to violate RICO, a person must — directly or indirectly — either acquire an interest in or administer the business of the enterprise. A person may be liable under RICO even if that person does not have a stake in the operation of the enterprise, but instead assists the enterprise in attaining its “illegal” aspirations.
All of the above may sound pretty scary, but there are solid defenses against RICO claims when asserted against legitimate, state-sanctioned cannabis businesses. Based on my research of RICO actions filed this year against cannabis businesses and related professionals, I have not seen these defenses asserted by defendants.
– Horizontal preemption/primary jurisdiction defense: RICO claims often involve conduct that is subjected to intense administrative regulation, leading some defendants to claim a horizontal preemption or primary jurisdictional defense. The theory of this defense is that the claims are outside the reviewing court’s purview due to an existing administrative body that is charged with the duty of regulating the challenged conduct.
The heart of the defense theory is that any relief or redress should first be obtained from the administrative body. However, this strategy has some weaknesses when presented as the only defense, as a federal court usually will not apply primary jurisdiction to defer to a state agency. The defendant would likely need to assert there is a federal regulatory agency the court should defer to. Depending on the federal political climate, this may or may not be helpful.
Therefore, one may want to consider raising a defense called reverse vertical preemption.
– Reverse vertical preemption: The U.S. Supreme Court has established that there are certain applicable doctrines that require a federal court with proper jurisdiction to refrain from adjudicating an action in order to promote an overriding public policy. Two doctrines dominate this line of thought – the Pullman abstention doctrine and the Burford abstention doctrine. The Pullman doctrine requires a federal court to refrain from deciding a case that raises a question of serious, unsettled state law on which a state decision may render the merits of federal dispute unnecessary. The Burford doctrine instructs a federal court to refrain from deciding a case if the focal point of the dispute is the subject of extensive state administrative regulation and a federal decision would risk serious disruption of a state administrative scheme. The Burford doctrine is the strongest defense one may assert when targeted by an anti-cannabis group.
There are several constitutional challenges one may assert as well. However, constitutional challenges are difficult to win. Any defense asserted needs to be carefully crafted depending on the facts and the parties involved. If faced with a RICO attack, one should immediately contact a lawyer with this specific expertise.
As an industry, we cannot submit to the demands and whims of prohibitionists who seek to destroy what we have built. The next time a cannabis business or related professional is targeted by a RICO claim, the industry must join forces in fighting the claim and destroying the merits of any RICO assertion against a legitimate, state-sanctioned enterprise. If we allow prohibitionists to use the threat of RICO to hinder our efforts in one state or community, you can be sure the same threat will be repeated to negatively impact the industry on a national level.
Jana Weltzin is a member of Rose Law Group’s medical marijuana and zoning/land use departments. She advises clients in the cannabis industry in Arizona and Alaska. Rose Law Group assists clients with business structure, compliance with state and local laws, zoning approval, site selection and product regulations.