Jury rejects RICO case over ‘foul’ odors, other complaints
Cannabis operators across the United States collectively, but cautiously, breathed a sigh of relief in early November, as in the first federal trial of its kind a jury refused to award damages to plaintiffs alleging that a neighboring cannabis facility violated the Racketeer Influenced and Corrupt Organizations (RICO) Act. Essentially, the jury determined that the plaintiffs had suffered no compensable injury.
The cannabis facility, located in Pueblo County, Colorado, was sued nearly three years ago by its neighbors, Phillis and Michael Reilley (represented by a Washington, D.C. law firm with ties to former U.S. Attorney General Jeff Sessions) and an anti-cannabis organization known as Safe Streets Alliance. In their original complaint, the plaintiffs alleged, among other things, that they were the victims of an unlawful conspiracy to cultivate adult-use cannabis near their property and that cannabis businesses make “bad neighbors,” since they allegedly “emit pungent, foul odors, attract undesirable visitors, increase criminal activity, increase traffic, and drive down property values.”
This was not the first cannabis-related RICO case that had been brought to court, but similar lawsuits filed in both Oregon and Massachusetts did not proceede to trial.
RICO plaintiffs are required to meet high burdens of proof, making the cases difficult to maintain and prove. However, RICO cases can be quite valuable, and therefore attractive for plaintiffs (and plaintiffs’ lawyers) to pursue. Those found to be in violation of RICO may be liable for three times the economic harm caused, plus costs and attorneys’ fees. Furthermore, state RICO statutes may allow for civil liability, criminal liability and the potential for property forfeiture.
Under RICO, plaintiffs must prove conduct of an enterprise through a pattern of racketeering activity resulting in economic harm to the plaintiff (or a conspiracy to do the same). It has been alleged that cannabis operators continuously violate the Controlled Substances Act, establishing a pattern of racketeering activity. Acts of racketeering may also include mail and wire fraud (utilizing the U.S. mail and the internet to further the enterprise) or interstate transportation of drug paraphernalia.
The Reilleys, however, lost because they could not prove any economic damages in court; in fact, since the lawsuit was filed, they actually acquired an additional lot in the same subdivision, and property values in Colorado were (and still are) reportedly skyrocketing.
Anti-cannabis RICO plaintiffs must have standing to assert a RICO claim — that is, that they have suffered compensable damage under the RICO statute, which is specific with respect to the type of injury for which relief may properly be granted. As part of any civil RICO case, plaintiffs must plead and prove: (a) an injury to their “business or property”; and (b) that the defendants’ racketeering activity proximately caused that injury. In the anti-cannabis context, RICO plaintiffs tend to assert some sort of reduction in the fair market value of their land.
The standard by which courts determine whether there has been a business-related injury varies somewhat among the federal courts and is determined by reference to state law. Generally, there must be a concrete, measurable financial loss, which cannot be purely speculative or contingent. For example, in Ainsworth v. Owenby, a cannabis-related RICO case that was dismissed well before trial in an Oregon District Court, the court made clear that an asserted loss in value was insufficient. Rather, for the case to have proceeded, the plaintiffs would have had to allege either specific prior attempts to monetize the property interest (such as failed efforts to sell), or at least a present intent or desire to sell/sublet.
Cannabis operators who find themselves sued under RICO may be able to assert a variety of defenses. Clearly, establishing the lack of injury to business or property — defeating the standing requirement — could be a cause for dismissal. Standing may also be defeated if the plaintiffs cannot sufficiently allege or prove that they were an intended target of the cannabis operator’s conduct. There must be a clear mechanism by which it may be determined that the RICO defendant caused the injury, as opposed to some other independent factor, and how to measure and apportion damages among multiple plaintiffs, while avoiding multiple recoveries.
In addition, RICO defendants may, among other things, attack the existence of “proximate cause” — whether the alleged injuries were proximately caused by the pattern of racketeering activity. While “proximate cause” generally refers to whether the injury was “reasonably foreseeable,” in the RICO context, courts have ruled that there must be some “direct relation” between the injury asserted and the injurious conduct, transcending foreseeability. Links that are remote, purely contingent or indirect will not suffice.
RICO cases are, by nature, highly fact-specific, so those cases already decided in favor of cannabis operators will not necessarily stifle future actions. However, they may serve as a reminder that RICO cases are notoriously difficult and expensive to plead and prove, which may serve as a useful deterrent.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a white-shoe boutique firm with a track record for success and handling sophisticated legal matters that include business and corporate law.