The legal cannabis industry continues to grow at a remarkable pace, both in the medicinal and the recreational sectors. From retailers to growers to the distribution chain, and everything in between, this means new and exciting opportunities. Companies have invested large amounts of money to develop new cannabis products, new methods to make those products and new ways to get those products from the plant to the customer.
With the recent legalization of hemp in the United States, this trend is almost certain to continue through 2019 and beyond. And while many hurdles remain for the legal cannabis industry, including the continued classification of marijuana as a Schedule I substance by the DEA, another headwind is building around the cannabis industry: product liability claims.
Product liability claims can come in a number of forms, whether based on inadequate warnings, faulty design or other risks related to the product. Any of these can turn some of the excitement of this rapidly expanding cannabis industry into a real headache for companies involved in the chain of distribution of cannabis products.
To clarify how this might work, let’s give an example: “Stet” is a fictitious business that makes a vape pen called the Puff Special at its factory in Florida and sells them across the country both in retail stores and online. Joe Customer, who lives in California, buys a Puff Special from his favorite local retail shop. When Joe takes the vape pen home and uses it, the vape pen malfunctions and overheats, burning Joe’s mouth. On his way home from the emergency room, Joe stops to see his local lawyer to discuss this situation. He is surprised when the lawyer tells him that, not only can Joe go after Stet for his injuries, but he can also go after the retailer that sold Joe the Puff Special vape pen, the distributor that the retailer purchased the vape pen from and the company that assembles the vape pens in Arkansas for Stet. Because all these other companies are in the chain of distribution of the faulty product that harmed Joe, they are all potentially liable for his injuries.
Because the cannabis industry has largely operated as an illegal market for so long, many of these issues have never come to light. But as cannabis is legalized by more and more states, and the federal government’s stance on marijuana enforcement becomes less and less hostile, we are seeing the legal market for cannabis thrive. But as this becomes a real industry, many of the challenges faced by all successful businesses in profitable industries will soon face those in the cannabis industry. This means that litigation in all forms, including product liability, will grow as the cannabis industry grows. Where there is opportunity and success, litigation will surely follow.
Is there a way for a cannabis company, or any company in the chain of distribution for cannabis products, to keep themselves out of the crosshairs of this type of litigation? In short, no. However, there are many steps these companies can take to minimize their risk. The first step to consider is providing warnings on products. Had Stet included a warning on its product, telling the user that the pen might overheat if used for more than 10 minutes, and if it could show that Joe used it in a way that showed he ignored those warnings, the company may have a solid defense against his claims. Similarly, if Stet had detailed the intended uses for the Puff Special vape pen and could show that Joe used it for some other, unintended purpose, the company may be able to use that as a defense against Joe’s lawsuit.
The second step would apply to those in the chain of distribution, such as the distributor that actually sold the vape pen to the retailer, as well as the retailer itself. The distributor could have written its agreement with Stet to include indemnification, which essentially means that if someone goes after the distributor for something related to the Puff Special vape pen, Stet would be required to defend the distributor and handle that matter on behalf of the distributor. So when Joe sues everyone in the chain of distribution for his injuries, the distributor is going to pass the lawsuit over to Stet so it can defend the distributor.
The same would be true of the retail shop that actually sold the vape pen to Joe. When Joe sues the retailer for his injuries, if its agreement has an indemnification clause, the company may be able to just let either the distributor or Stet handle the lawsuit, and likely be responsible for any award that Joe may eventually be awarded.
A third step to consider is the design of the product. If Stet knows the Puff Special pen overheats after 10 minutes of use, in addition to adding a warning about this, can the company design it in such a way that the pen turns itself off after 10 minutes? Or make it beep when it starts getting hot? How can the product be designed in such a way that it reduces the risk of injury to the user?
The cannabis industry continues to evolve. While the transition from an underground industry to a legitimate one has provided great opportunity to many in this industry, these opportunities come at a cost. One such cost is product liability litigation. With more cannabis products hitting the market every day, and more people using those products, cannabis becomes a more profitable and attractive industry. This means that product liability litigation will follow. Companies in this industry, even those only peripherally involved (the chain of distribution) need to plan for how they will operate in this industry, and how they will minimize their risk and their liability when something happens with one of the products they are involved with. This takes planning and careful thought, including at the stage of designing the product, creating warnings for the product and for getting that product to the actual user.
Tom Zuber is the managing partner of Zuber Lawler & Del Duca LLP, which represents clients throughout the world from offices in Los Angeles, Silicon Valley, Chicago and New York. He holds a law degree from Columbia Law School, a master’s degree in public policy from Harvard University and a biomedical engineering degree from Rutgers University, where he graduated with highest honors. He can be reached at firstname.lastname@example.org.