WARNING: Warnings required!

Amid ongoing vape crisis, businesses must heed ‘duty to warn’

The “vape crisis” has consumed cannabis news. As of October 22, 2019, according to the Center for Disease Control, 1,604 illnesses across 49 states (all except Alaska) and 34 deaths in 24 states have been reported as resulting from the use of e-cigarettes or vape pens. Multiple states have enacted some sort of emergency rule, regulation or law prohibiting or limiting the sale of products intended for vaporization, mostly concerning “flavored” e-cigarettes.

Bans of varying duration and scope have been proposed or are effective in Los Angeles and San Francisco counties in California and statewide in Massachusetts, New York, Oregon and Washington. Cannabis operators throughout the supply chain are impacted by these bans, including manufactures or sellers of ingredients used as flavor or viscosity agents.

Similarly, the “core principals” of a “Joint Regional Approach to Cannabis and Vaping Policies” developed in mid-October by governors, officials and legislative leaders from Connecticut, Massachusetts, New Jersey, New York, Pennsylvania and Rhode Island, purport to limit flavors for inhalable products to the “taste of tobacco or cannabis or a taste derived from cannabis derived directly and solely from the cannabis or hemp plant.”

While federal and state investigations have revealed some commonalities among those who have fallen ill or passed away (children/adolescents, illicit market THC products and use of vitamin E acetate as a thickening agent), the jury is still out on causation; it could be hardware, process, solvents, ingredients, quality control, victim predisposition or some combination thereof. Accordingly, whether these bans appropriately (or arbitrarily) respond to safety concerns has become the subject of legal action (specifically in New York, Massachusetts and Michigan). By the time this article is published, it’s likely that the legal status of existing bans will have changed, additional municipalities or states will have implemented and/or enforced new bans and new lawsuits will probably be filed.

As health concerns escalate and vape sales sharply decline, private lawsuits, too, have been filed. In late September, the first product liability lawsuit, Wilcoxen v. Canna Brand Solutions, LLC et al. was filed in Pierce County Superior Court, naming five Washington state-legal cannabis vape “pod” manufacturers and a local distributor of CCELL pens and batteries. And investors in Greenlane Holdings (NASDAQ:GNLN), a publicly traded distributor of vape hardware and other cannabis accessories, are seeking class action certification (Hammond v. Greenlane Holdings, Inc.) to claim that the company failed to disclose to investors the alleged “material risk” of San Francisco’s vape ban in advance of the company’s IPO, notwithstanding that the company’s “key partner,” Juul, resides there.

These regulatory shifts and private lawsuits beg questions concerning the extent to which those in the vape-related supply chain must disclose health and financial risks to consumers and investors, respectively.

In the context of product liability, independent from defective design issues, product suppliers and manufacturers traditionally have a “duty to warn” of any danger from the intended or unintended but reasonably foreseeable use of their products. This duty is owed to those who use, purchase or are reasonably expected to suffer harm from the product. Hollow words won’t cut it; to avoid liability, warnings must be “adequate” — a fact-specific, but highly subjective inquiry with no clear-cut standards. And with respect to vape pens, there is no judicial precedent or conclusive safety information upon which to rely, making compliance challenging.

As regulators develop warning labels and icons that accurately inform consumers of dangers associated with cannabis and/or vape use, operators should consider revising their own labels, terms of sale and marketing materials (including investor material, websites and social media), to include warnings and disclosures about the safety of their products (or note the lack of information available regarding safety). It is also prudent to review (or first create) a solid recall plan that governs voluntary and mandatory recalls, including mislabeling, and determining whether recall insurance is available and advisable.

On investor relations, the Securities Exchange Commission through Regulation S-K requires companies to disclose to investors, in a concise, organized and logical manner, the “most significant factors that make an investment in a registrant’s securities speculative or risky” — another fact-specific inquiry that cannot be standardized. According to David Feldman, a partner at Duane Morris, LLP, the “key question [to avoid legal exposure] would be whether the risk was material to investors … calls that have to be made on a real-time basis,” Feldman explained.

“For example,” he said, “a company going public and providing consulting services to cannabis companies probably would not deem the San Francisco [vape] ban a material risk to their business. But many would probably say that the vape crisis is a potential risk to many in the industry,” thus lowering consumer confidence and impeding the industry’s sustained growth (and investment returns).

Finding yourself on the back end of a product liability or investment-related lawsuit is a very real possibility for those involved in the vape business. The time is now to prepare a litigation-defense strategy that involves preventive care, through warnings and disclosures.

 

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 boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.

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