The gloves have come off Compliance is key, particularly in California’s litigious climate
Business people rightly view California with great ambition, whether they’re considering its booming GDP (sixth-largest in the world), its huge consumer market or as fertile ground for entrepreneurship. But what makes California uniquely lucrative for businesses also makes it uniquely discomforting for their lawyers: every success story here has some trace of the same wreckage in its wake — litigation.
Land barons, Hollywood moguls and tech titans alike have used the California courts as an avenue to achieve business goals at the expense of their competitors. California law provides uniquely powerful weapons to those ends. As California’s cannabis industry now rises to take its place alongside the state’s other economic powerhouses, it too will be forged in the courthouse, as well as by the Legislature and the marketplace.
As economic pressures mount on the industry’s players, legal disputes become inevitable. Full legalization in California will drive cannabis prices down while simultaneously increasing costs in the form of new taxes or in complying with new regulations. As new businesses continue to rush into California and legacy operators continue to step into the mainstream, competition intensifies and friction ensues.
When friction becomes conflict, California’s distinctive Unfair Competition Law (UCL) looms large — as it does in all disputes between competitors. This powerful statute has been used countless times by regulators and prosecutors, consumers and investors, as well as by competitors to challenge a seemingly limitless range of business practices. UCL claims are alleged in circumstances as varied as consumer class actions, antitrust, securities fraud, false advertising and business tort cases.
The reason is the UCL’s broad, three-pronged prohibition of business practices that are either unfair, unlawful or fraudulent.
The prohibition against “unlawful” business practices is perhaps the most powerful element of the UCL. It allows a private plaintiff to “borrow” from other laws and to allege that the defendant’s violations of the borrowed law harm its law-abiding competitors and should be halted. Borrowed laws can be state or federal statutes, local ordinances, zoning rules or administrative regulations. A UCL claim can be brought on this basis even if the borrowed law is itself only enforceable by government agencies.
A plaintiff took this approach in an important cannabis UCL case brought in Orange County earlier this year, when an association of city-permitted Santa Ana dispensaries sued 14 unpermitted dispensaries in the city. The UCL claim alleges that all 14 defendants failed to obtain a permit or comply with other regulations in a voter-approved city ordinance. The association has asked the court to issue a permanent injunction shutting down the defendants’ operations. The ongoing case is still in its early stages.
UCL plaintiffs can choose from the glut of borrowable local ordinances and zoning restrictions that govern California’s cannabis industry today. And the options multiply with the June passage of the state’s new licensing law, the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which replaced the original medical and recreational statutes with a single legalization regime.
The act will, in turn, engender more new regulations from California agencies such as the Department of Food and Agriculture, the Bureau of Cannabis Control and the Public Health Department. Any of these laws — which will cover state licensing, water use, pesticide use, packaging, advertising and much more — could provide the basis for a UCL claim.
Moreover, the act itself contemplates litigation between competitors to regulate the cannabis market. Its unfair competition provisions largely track existing California antitrust law and were intended to forestall burgeoning “Big Weed” players from crushing smaller, legacy competitors. For example, attempts at monopolization are outlawed and market concentration will be taken into consideration when granting state licenses.
Additionally, the MAUCRSA forbids price-fixing, collusion and predatory pricing behavior that would harm free competition. Private plaintiffs can sue directly under the MAUCRSA itself to enjoin such unfair practices and (unlike under the UCL) recover monetary damages. In this respect, the latest act differs from California’s original cannabis legalization statutes, which allowed enforcement only by state regulators. The scope for private party litigation is therefore broader under the MAUCRSA.
In California’s litigious business climate, the best approach is compliance with the regulations applicable to your business — whatever they may be. In the cannabis industry, businesses face heightened uncertainty about new and shifting laws and must do so (as yet) without guidance from the courts. Yet, by planning carefully, engaging with regulators and seeking sound legal advice, it is by no means impossible. And the hard path to the high road is one worth taking.
Litigation is an inescapable business risk in California. But it is also a major catalyst driving one of the world’s most powerful and innovative economies. Whether it’s an offensive strategy or a defensive contingency, it must be accounted for.
Anthony Phillips is a founding member of the cannabis law practice group at Archer Norris, which provides transactional and litigation services and legal advice to businesses in California’s legal cannabis industry. Archer Norris has more than 100 attorneys and five offices throughout California.