As government and public perception of commercial cannabis normalizes, society is slowly beginning to treat cannabis companies like other highly regulated industries. Unfortunately, that means litigation is on the rise.
Like the alcohol, tobacco and gaming industries, interlocking networks of various state and federal laws and evolving case law — often conflicting — provide ample opportunity to find your name or the name of your business at the top of unwanted legal documents. However, lessons learned from litigation in other industries may offer insight into strategies that can be useful in the cannabis space.
Be wary of lawsuits
Various government entities oversee the regulation of commercial cannabis. In California, these entities include the Bureau of Cannabis Control, the Department of Food and Agriculture and the Department of Public Health. These agencies are not, however, the only potential sources of regulation-related litigation.
Utilizing certain statutes, private citizens in many states may bring civil suits to enforce regulation. Attorneys often refer to these parties as “private attorneys general.” One of these statutes is the California Unfair Competition Law. Under this law, people with standing may sue a business that participates in an “unfair business practice,” a purposely broad term. For example, the consistent failure of a business to pay certain regulatory taxes may be an unfair business practice that causes a competitor recoverable harm, if that competitor can demonstrate that the violator’s failure to pay taxes led to a loss of income or other benefits.
Private parties may also use regulatory schemes to bolster negligence claims. One element of negligence is the failure to use the same level of care that a reasonably prudent person in a similar situation would use. While this element is often amorphous and fact-dependent, a robust regulatory scheme may provide a plaintiff with clear, quick and easy benchmarks by which to measure a regulated business’ practices. For example, a statute prohibiting a licensee from selling or transporting cannabis goods that are labeled as beer, wine, liquor or spirits, such as California Code of Regulations Section 5040.1, likely sets an industry-wide standard of conduct. If a business were to violate that regulation, and that violation were to cause personal injury to a customer, the customer may rely on the statute to establish the defendant’s owed duty of care. There are, of course, other elements to a claim of negligence, and the existence and alleged violation of a statute does not necessarily spell doom for a defendant. An experienced attorney may help find other ways to challenge a plaintiff’s claim.
To prepare for litigation by private parties and mitigate risk, it behooves business owners to comply strictly with regulatory measures. As much as possible, parties should stay up to date with recent developments regarding licensing, as well as the laws generally applicable to a business, such as labor and employment. The risk of regulatory enforcement does not lie solely with government agencies, but may be used by private parties as well. One difficulty here is that a civil suit publicly airing dirty laundry might catch the eye of regulatory agencies and precipitate an investigation.
Avoid unnecessary investigations
Generally, the public right of access to the courts extends to court records. This is why many criminal records and civil pleadings are available to those who know where to look. While individuals may be concerned that a future employer might come across these records, commercial cannabis businesses should be mindful that regulatory entities also have access to litigation documents. However, there are steps you may take to ensure that certain information is protected from disclosure to the general public, including regulators.
Before documents and testimony are exchanged in discovery, the parties should enter a stipulated protective order for the court’s approval. Many parties use generic protective orders with minimal modifications. A protective order can dictate how one party may produce discovery with various confidentiality designations, such as CONFIDENTIAL and CONFIDENTIAL-ATTORNEYS’ EYES ONLY. Most importantly, the protective order may prohibit the opposing party from using confidential information outside the confines of the lawsuit (like sharing protected information with news organizations or government agencies) or publicly filing that information without first giving notice and an opportunity to seal the filing. A court may seal a document or certain portions of a document if it finds a compelling interest that overcomes the public’s right to access. Classes of information that a court might seal include trade secrets, privileged material and confidential settlement agreements. While this list is limited, it may shield enough to keep your business off the regulators’ radar. For example, a California court has affirmed a lower court’s decision to seal “quality system procedures, complaint handling procedures … and corrective action procedures” pursuant to trade secret protection. It is not difficult to imagine how a disgruntled employee or opportunistic competitor might attempt to exaggerate or misconstrue quality control measures — and why such allegations might pique a regulator’s interest.
While staying up to date with current laws is essential to limit exposure to litigation in a highly regulated industry, it is difficult to prevent suits completely. However, when a lawsuit does come around, an attorney can help you take the steps necessary to soften the impact and avoid further legal action by protecting your confidential information.