With a million new lawsuits a year, the Golden State long ago earned its dubious distinction as America’s No. 1 judicial hellhole. Some of these lawsuits — like too much ice in iced coffee or not enough lip balm in a tube — induce the obligatory “only in California” eye rolls over the outlandish claims found before its courts
What makes California so litigious are its well-intentioned but uniquely powerful laws available to private plaintiffs to challenge a wide range of business conduct — a long list expanded by legislators and voters every year. In California, private attorneys general can enforce clean water laws (under the notorious Proposition 65) and consumer advocates can “borrow” a violation of any other law or regulation to enjoin business practices and disgorge profits (the equally notorious Section 17200). False advertising and labeling and packaging laws are likewise enforceable by consumer plaintiffs.
And the very statute that created California’s new legal cannabis regime — the Medicinal and Adult-Use Cannabis Regulatory Safety Act (MAUCRSA) — envisions private rights of action to challenge certain anti-competitive conduct.
These laws can entitle plaintiffs to monetary damages, injunctions, penalties, incentive payments and attorney fees and costs. The defendant’s potential losses — what lawyers call a lawsuit’s “in terrorem” value — are intended to far outweigh any profits from violating California laws and a “cost of doing business” mentality toward breaking them. These laws have deterred all manner of undesirable conduct while simultaneously creating a lucrative market for prolific plaintiffs’ lawyers, as well as trepidation about doing business in California (although not enough to scare companies out of California’s gigantic consumer market).
As the cannabis industry matures in California, it will inevitably take its turn in the consumer litigation barrel. In fact, the cannabis industry will likely face suits with a much higher in terrorem value.
Already, hundreds of Proposition 65 lawsuits alleging unsafe levels of pesticides and fungus in cannabis are underway. Plus, cannabis is a psychoactive intoxicant also touted for various health effects and available in a diversifying variety of new forms. The precise effects of different strains and dosages taken in different ways for different reasons remain unpredictable. Thanks to federal prohibition, peer-reviewed studies on long-term health outcomes — either good or bad — are scarce. It will not be long before a California consumer has a harmful experience and a case to bring.
In that inevitable event, California products liability law alone is expansive. A defect in a product’s manufacture, design or warning can be pinned on any defendant involved in its production or marketing. California’s strict liability laws place the burden on defendants, and joint and several liability means a single deep-pocketed defendant could be left holding the bag, irrespective of their role.
A Colorado case before the federal 10th Circuit Court of Appeals last year provides perhaps the most alarming portent for cannabis businesses, however. The court upheld the viability of a civil RICO claim brought against a cannabis farm by a neighbor who sued for the nuisance caused by the odor of cannabis at harvest time. The RICO (Racketeer Influenced Corrupt Organization) statute, originally enacted to prosecute the Mafia in the 1960s, also allowed private citizens to sue organized crime enterprises and to recover treble damages. Today, federal prohibition would allow plaintiffs to satisfy the “racketeering” element for a RICO claim against any state-legalized cannabis business. Along with other consumer protection claims, the treble damages threat of a RICO suit (which can be brought in state court) takes the risk of a lawsuit from in terrorem to just downright terrifying.
When will this wave of California litigation break? Perhaps once more deep-pocketed defendants enter the market. Perhaps not until more potential plaintiffs emerge from the ranks of new California consumers who are unfamiliar with cannabis and prone to mishap or misapprehension.
In the meantime, California cannabis businesses must prepare for the inevitable. Compliance is the first order, particularly in labeling, packaging and facilities open to the public. A comprehensive product recall policy must be part of any business plan.
Insurance is also essential. Businesses must take care to secure adequate coverage from a broker specializing in cannabis and to avoid boilerplate policies that may contain exclusions for losses arising out of federal crimes or Schedule I drugs.
With the entire supply chain at risk, agreements between suppliers, distributors and retailers must clearly account for indemnification of claims (who will defend and who will bear the liability).
Fighting well-tooled plaintiffs will be more than enough without the added stress of fighting indemnity claims amongst defendants.