California Cannabis Claims

Here are the most common causes of action that our litigation teams sees in and around the cannabis industry. We hope these overviews help our audience not only understand what they can expect if they ever find themselves in litigation, but also what they can and should be mindful of in conducting their businesses to avoid litigation altogether.

In this article:

Breach of Contract

Introduction

This is sometimes missed: a breach of contract claim has to begin with a valid contract, which is an agreement to do or not do something(s). The contract can be written or oral. It also can be express or implied (arises by law or from facts).

Statute of Limitations

The statute of limitations for breach of contract depends on whether it’s written or oral – four years for a written contract and two years for an oral contract. The clock starts ticking when the breach occurs.

Note, parties can agree to reasonably shorten the period within which a breach of contract claim has to be filed. But – If you decide to try this in one of your agreements, know that what’s “reasonable” may vary depending on the situation.

Elements of a Breach of Contract Claim

California Civil Jury Instructions (CACI) provides, in relevant part:

“To recover damages from [name of defendant] for breach of contract, [name of plaintiff] must prove all of the following:

1. That [name of plaintiff] and [name of defendant] entered into a contract;

2. That [name of plaintiff] did all, or substantially all, of the significant things that the contract required [him/her/it] to do;
[or]
2. That [name of plaintiff] was excused from having to [specify things that plaintiff did not do, e.g., obtain a guarantor on the contract];

3.That [specify occurrence of all conditions required by the contract for [name of defendant]’s performance …];
[or]
3.That [specify condition(s) that did not occur] [was/were] [waived/excused];

4. That [name of defendant] failed to do something that the contract required [him/her/it] to do;
[or]
4. That [name of defendant] did something that the contract prohibited [him/her/it] from doing;

5.  That [name of plaintiff] was harmed; and

6.  That [name of defendant]’s breach of contract was a substantial factor in causing [name of plaintiff]’s harm.”

While that may be a little hard to follow, elements 1-4 essentially indicate that in order to obtain remedies for a defendant’s breach of contract, the plaintiff must plead and prove (1) the parties entered into a valid contract (as mentioned above), (2) it performed its own obligations under the contracts (or was excused from doing so), and (3) the defendant didn’t perform its obligations in turn. Element 5 is pretty straightforward: any partial or total breach that causes harm creates a right to damages. Element 6 is less straightforward: the plaintiff must show that the defendant’s breach was a “substantial factor” in causing the plaintiff’s damages.

Remedies

A breach of contract claim gives rise to a few different kinds of remedies or “damages”. The most common are:

  • Compensatory damages: compensation for all the plaintiff’s harm caused by the breach, that in the ordinary course, could be expected to result from it. One question we often get is whether lost profits can be awarded – in short, lost profits may be recoverable if they’re sufficiently certain. So, for example, if you’ve got a newer business that isn’t very established or you’ve got a business with varying profits each month, an award of lost profits is unlikely.
  • Liquidated damages: a contractual liquidated damages provision is valid unless the defendant establishes that it was unreasonable under the circumstances at the time the contract was made or it fails to bear a reasonable relationship to actual damages the parties could have anticipated ahead of time.
  • Rescission of the contract: rescission will extinguish the contract and return the parties to the status quo ante. Usually, each side has to return what was received under the contract.
  • Interest: if the damages owed can be calculated with certainty, interest can be awarded as of the time of the breach.
  • Attorneys’ fees: prevailing party’s attorneys’ fees are recoverable if they’re provided for in the contract.

Note: unfortunately, punitive damages are not recoverable under a breach of contract claim, no matter how horrible the defendant’s conduct was.

Breach of Fiduciary Duty

Introduction

A fiduciary relationship exists between parties when at least one of the parties is, in duty, bound to act with the utmost good faith for the benefit of the other party. Meaning, if you’re classified as a fiduciary (either under statute, or by virtue of an agreement you have signed), you MUST act in good faith for the benefit of the other party on any matter within the scope of your relationship. This encompasses sub-duties, like managing the subject matter with “due care,” providing an account to the beneficiary, or keeping the beneficiary fully informed.

Statute of Limitations

Subject to certain exceptions, the California statute of limitations on a breach of fiduciary duty claim is four years. One exception we see often, and is worth mentioning here, is when the essence of the claim is that the defendant’s act constituted actual or constructive fraud – in that case, the claim is actually subject to California Code of Civil Procedure s. 338’s three-year statute of limitations period.

Elements of a Breach of Fiduciary Duty Claim

The elements of a breach of fiduciary duty cause of action are: (1) the existence of a fiduciary relationship, (2) breach of the same, (3) damage (4) caused by that breach.

  1. Existence of a fiduciary relationship: California case law has come a long way in recognizing certain relationships or transactions as establishing fiduciary relationships. In general terms, a fiduciary duty under common law can arise in any situation where “one person enters into a confidential relationship with another.” The most common fiduciary relationships in the business context are:
  • Corporate officers and directors toward corporation and shareholders;
  • Controlling shareholders toward minority shareholders;
  • Partner toward partner: “In all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.” Enea v. Sup.Ct. (2005) 132 Cal. App. 4th 1559, 1564; and
  • Joint venturer toward co-joint venturer.
  1. Breach of fiduciary duty: to have a valid claim, the plaintiff must prove that the defendant breached its fiduciary duty. This is a question of fact, so make sure you have concrete documentation and other evidence.
  2. Causation: the plaintiff must then demonstrate that the defendant’s breach proximately caused the plaintiff’s damages.
  3. Damages: finally, the plaintiff must demonstrate its damages.

Remedies

Under a valid breach of fiduciary duty claim, both legal and equitable remedies are available:

  1. Legal Remedies
  • Compensatory damages: compensation for all the plaintiff’s harm caused by the breach.
  • Punitive damages: unlike under a breach of contract claim, punitive damages can be awarded if the court is satisfied, by clear and convincing evidence, that the defendant is guilty of oppression, fraud or malice.
  1. Equitable Remedies
  • Accounting: if, for example, your partner was in charge of handling your business’ funds and it’s unclear how much money was stolen over a one-year period, the court can order an accounting to be complete.
  • Constructive trust: if a defendant has obtained property by violation of a fiduciary relationship, the court may impose a constructive trust to compel the transfer of that property back to its rightful owner.
  • Disgorgement of profits: if a defendant profits from transactions it conducted as a fiduciary, another proper measure of damages is full disgorgement of any secret profit made by the defendant.

Defamation

Introduction

At its core, defamation involves a false, unprivileged statement about an individual. Defamation is broken down into two categories – libel and slander:

  • Civil Code s. 45 defines libel as “a false and unprivileged publication by writing, printing, picture, effigy or other fixed representation to the eye, which exposes any person to hatred, contempt, ridicule or obloquy, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation.” In short, libel is written.
  • Civil Code s. 46 defines slander as “a false and unprivileged publication, orally uttered, and also communications by radio or any mechanical or other means …” Slander is oral.

Libel and slander are further broken down as “per se” or “per quod.” Libel per se means the written statement is defamatory on its face. Slander per se means the oral statement implicates the plaintiff with one of the following:

  • Criminal activity
  • Contagious, infectious or loathsome disease
  • Unethical/incompetent business conduct (most relevant)
  • Impotence or unchastity

Libel or slander per se are basically more egregious and implicate presumed damages. Libel or slander per quod is anything that doesn’t qualify as libel or slander per se.

Statute of Limitations

A defamation cause of action has to be brought within one year. The clock starts ticking when the statement is published – not when the plaintiff discovers it (for the most part). Publishing on a website counts!

Elements of a Defamation Claim

  1. Statement: this can be in any form of communication, and the statement must be of fact, not opinion. However, be careful about this – just because you start your “opinion” with qualifying words like “apparently,” or “you might say,” doesn’t mean your statement is undoubtedly an opinion. The court will decide whether a statement is an actionable fact or an unactionable opinion.
  2. About the plaintiff: the statement has to be about the plaintiff. Note: entities count as plaintiffs!
  3. Publication: publication doesn’t mean the statement needs to be in a magazine or said on a popular podcast – if it is communicated to at least one person (other than the plaintiff), that counts as publication.
  4. Defamatory meaning: the court determines as a matter of law whether a communication is defamatory – but in general, if it lowers plaintiff’s esteem in the community, it’s defamatory.
  5. Fault: defendant failed to use reasonable care to determine the truth or falsity of the allegedly defamatory statement.
  6. Causation:
    • Libel or slander per se: Statements that are defamatory per se are so serious that causation is presumed. The plaintiff does not need to prove actual injury.
    • Libel per quod: the plaintiff must prove he/she/it suffered “special damages” as a proximate result of the defamation. Special damages are defined as “all damages that plaintiff alleges and proves that he or she has suffered in respect to his or her property, business, trade, profession, or occupation, including the amounts of money the plaintiff alleges and proves he or she has expended as a result of the alleged libel …”
    • Slander per quod: the plaintiff must prove he/she/it suffered actual damage.
  7. Damages

Remedies

The remedies available are a bit nebulous, and they also depend on which sub-claim is being asserted:

  • Compensatory Damages: examples include harm to the plaintiff’s reputation, harm to the plaintiff’s property, business, trade, profession, expenses the plaintiff had to pay as a result of the defamation, and even emotional distress.
  • Injunctive Relief: an order enjoining future publication of the defamatory statements.
  • Punitive Damages: where the defendant is found of guilty of oppression, fraud or malice, punitive damages may be awarded as well.

Fraud

Introduction

A fraud claim requires six elements: (1) a misrepresentation, (2) knowledge of that representation’s falsity, (3) an intent to induce reliance, (4) reliance, (5) causation, and (6) resulting damages. Even in a complaint, fraud must be pleaded specifically – a plaintiff must plead facts that show the how, when, where, to whom, and by what means the misrepresentations were made. This level of detail is not typically required of a plaintiff’s first filing, which is why we commonly see fraud claims challenged early via a demurrer, which is a defendant’s first chance to challenge a plaintiff’s claim as legally insufficient on its face.

Statute of Limitations

The statute of limitations for fraud is three years. The clock starts ticking when a plaintiff discovers the facts constituting the misrepresentation. So if you wait three years and a day after discovery of facts leading to a fraud claim, your claim will likely be barred.

Elements of a Breach of Fiduciary Duty Claim

  1. The misrepresentation. While it’s clear a false representation would qualify, note that a failure to disclose facts or a promise made with no intent to perform also qualify as misrepresentations. Most opinions, puffery (“seller’s talk”), and statements about the future on the other hand, do not qualify. One really important thing to note: the failure to perform a promise is not enough to constitute a misrepresentation in itself. While we understand it’s completely frustrating, we often have clients ask to “throw in” a fraud claim because something they were promised doesn’t end up happening. We need more facts (for example, maybe evidence of the defendant’s behavior after making the promise) that tend to prove the defendant never intended to perform.
  2. Knowledge of that representation’s falsity. Also known as “scienter,” the defendant must know that the statement is false or act with “reckless disregard” of its truth or falsity when making the representation.
  3. Intent to induce reliance. The defendant must also intend to induce the plaintiff to act in reliance on the misrepresentation. This is different from an intent to deceive the plaintiff, or an intent to cause some particular harm. The standard is much lower.
  4. Justifiable reliance. Logically, the next thing a plaintiff must prove is that he/she did, in fact, justifiably rely on the misrepresentation in taking some action. The misrepresentation doesn’t need to be the sole motivating factor. It doesn’t even need to be the predominant factor. As long as the plaintiff truly believed the representation and decided to do (or not do) something, this element is satisfied.
  5. Causation. As with most tort claims, the plaintiff must demonstrate that the defendant’s fraud proximately caused the plaintiff’s damages.
  6. Damages.  Finally, the plaintiff must prove his/her damages that were proximately caused by defendant’s fraud.

Remedies

Like I wrote above, fraud is hard to plead and prove. If done successfully though, it opens doors to more remedies than most causes of action because it’s considered a more egregious, malicious harm.

  • Compensatory damages. Again, this remedy attempts to compensate the plaintiff for all his/her harm caused by the fraud. How this is measured depends on the relationship of the parties and the transaction itself. Perhaps most commonly, we see damages measured by the “out of pocket” rule – the plaintiff will receive the difference in value between what he/she gave to the defendant and what he/she received (in an attempt to restore the plaintiff to the position just before the fraud occurred). Sometimes, damages are measured by the “benefit of the bargain” rule – the plaintiff will receive the value of what he/she was promised.
  • Punitive damages. If the plaintiff is able to show that the defendant is guilty of malice, oppression, or fraud, punitive damages are also awarded.
  • Damages for physical harm or emotional distress. The contexts in which these types of damages are limited (for example, they’re not recoverable in property transactions) but these should also be considered in every case.
  • Statutory damages. Similarly, there are limited situations in which a fraud claim also opens the door to additional remedies provided by statute. For example, if the defendant receives stolen property due to the fraud, Penal Code s. 496 also allows recovery of treble damages (tripling of your damages), costs of suit, and reasonable attorneys’ fees.

Intentional Interference with Contractual Relations

Introduction

This claim stems from California’s basic recognition that contractual relationships are worthy of protection from the acts of third parties. Therefore, any third party that intentionally seeks out to disrupt or otherwise interfere with an existing contractual relationship can be liable for the damage that results from interference.

Statute of Limitations

The statute of limitations on an intentional interference with contractual relations is two years. That clock starts ticking on the date of the third party’s wrongful act or, if unknown, no later than the date the contract is breached as a result of the tortious interference.

Elements of an Intentional Interference with Contractual Relations Claim

The elements of a cause of action for intentional interference with contractual relations are:

  1. A valid contract: a valid agreement must exist between the plaintiff and a third party.
  2. The defendant is not itself a party to the contract: this claim only applies to a third party that isn’t involved in your contractual relationship. Courts are somewhat vague about how distant that third party needs to be, but generally, the third party cannot be a party or an agent of a party to the contract. On the other end, the third party doesn’t have to be a total stranger either – it can have some kind of relationship to the contracting parties. This is a determination of facts made on a case by case basis.
  3. The defendant has knowledge of the contract: pretty basic, but the third party has to know the contract exists. (This is because of the next element, intent.)
  4. The defendant has intent to interfere with the contract: the third party’s acts must have been “designed” to induce a breach or other interference with the contract. Note: intent can be inferred if the third-party’s conduct was “substantially certain” to cause interference.
  5. A breach or interference of the contractual relationship: there must be a breach of, or interference with, the contractual relationship between the parties. Even making either party’s ability to perform the terms of the contract more burdensome or costly will qualify – you don’t need to show that the third party’s action resulted in a total breach of the contract.
  6. Causation: the plaintiff has to show that, but for the third party’s interference, the contract would have been performed.
  7. Damages/harm: finally, the plaintiff has to show actual damages that resulted from the interference.

Remedies

Two types of damages are available here:

  • Compensatory damages: the plaintiff can potentially recover all damages flowing from the third party’s interference, including expenses, lost profits, and prospective profits. Again, lost and future profits are only recoverable when “their nature and occurrence can be shown by evidence of reasonable reliability.”
  • Punitive damages: if the plaintiff can show by clear and convincing evidence that the third party acted with “oppression, fraud or malice,” punitive damages are recoverable as well.

Unfair Competition

Introduction

California’s “Unfair Competition Law,” also known as the Unfair Competition Act, Unfair Business Practices Act, or the Unfair Practices Act, is codified at Business & Professions Code § 17200, et seq. As its name suggests, it generally prohibits “any unlawful, unfair or fraudulent business act or practice.” If this seems a little ambiguous or vague, that’s exactly the point – it’s purposefully written in “sweeping language” to prevent “anything that can properly be called a business practice and that at the same time is forbidden by law.”

Statute of Limitations

An Unfair Competition Law (“UCL”) claim must be initiated within four years.

Elements of an Unfair Competition Claim

There are five elements to any UCL claim:

  1. Proper Parties. Any person may sue or be sued under the UCL – that includes corporations, partnerships, associations, or other organizations of people.
  2. Parties may sue only if, as a result of the unfair competition they claim, they have (1) suffered injury in fact, and (2) lost money or property. “Injury in fact” requires an actual, legally protected interest that is invaded in a concrete and particularized way. A plaintiff can also establish “lost money or property” in a number of ways other than straight economic loss, such as acquiring less in a transaction than a plaintiff otherwise would have or having a present or future interest diminished.
  3. Enumerated violation of the UCL. There must be an unlawful, unfair, fraudulent business act or practice:
    • Unlawful: claims based on the “unlawful” prong of the UCL use other laws and assert that violation of those other laws is actionable under the UCL. The plaintiff must allege: (1) the specific violation, (2) that the unlawful conduct is a “business practice” of the defendant, and (3) as a result of this practice, the defendant received ill-gotten gains (like the plaintiff’s money and/or property).
    • Unfair: this is more nebulous, but the California Supreme Court has defined “unfair” as “conduct that threatens an incipient violation of an antitrust law … or otherwise significantly threatens or harms competition.”
    • Fraudulent: this is also somewhat nebulous, but a defendant violates the “fraudulent” prong of the UCL when it engages in conduct by which “members of the public are likely to be deceived” based on an objective, reasonable person standard.
  1. There must be a causal link between the alleged unfair competition and the plaintiff’s injury.
  2. And finally, the plaintiff must have sustained harm as a result of the defendant’s actions.

Remedies

Unlike most other claims, UCL claims do not provide for compensatory or punitive damages. Instead, UCL claims authorize the court to:

  1. Order injunctive relief. The Court can issue an order enjoining (stopping) any business practice that is found to violate the UCL. Sometimes, the Court will seek to enforce this by also appointing a receiver.
  2. Order restitution. The Court can order the defendant to “restore” the money or property that was acquired by the defendant’s violation. The point of restitution is to restore the status quo.

Conversion

Introduction

Conversion is defined by California case law as “the wrongful exercise of dominion over the personal property of another.” Essentially, if someone is substantially interfering with your possession or right to possession, you are entitled to recover the property or the full value of the property as a consequence. We typically see this cause of action in breach of contract actions, especially in the cannabis business purchase and sale context. For example, if a seller sells product to a buyer on terms, and the buyer ultimately ends up failing to pay the full contract price and fails to negotiate a return of the product, that seller typically has a conversion claim in addition to its breach of contract claim.

Statute of Limitations

The statute of limitations for conversion is three years under Code of Civil Procedure § 338(c). But, there are nuances here. That clock generally starts ticking on the date of the wrongful taking, even if you as the owner are unaware that the taking occurred). However, if the defendant fraudulently tries to hide the taking, then the clock starts ticking when the owner discovers or should have discovered the taking.

Also, if the taking was initially lawful (like in my above example), that clock starts ticking when you demand return of the property and its refused.

Elements of a Conversion Claim

The elements for a claim of conversion are:

  1. The plaintiff’s ownership or right to possession of the property;
  2. The defendant’s conversion by a wrongful act or disposition of property right; and
  3. Damages.

It’s not necessary that there be a physical taking of the property – a conversion cause of action can stand if it shown that there was an assumption of control or ownership over the property, or that the defendant applied the property to its own use.

Remedies

Conversion causes of action are often thrown in because they allow for both compensatory and punitive damages in certain cases:

  • Compensatory damages: Civil Code §§ 3336-3338 specifically address damages for conversion. Typically, damages is measured by the full fair market value of the property, plus interest from the date of conversion at the legal rate.
  • Punitive damages: where the plaintiff shows by clear and convincing evidence that the defendant is guilty of oppression, fraud, or malice in its conversion, punitive damages may be recovered as well.

Conversion: Buyer vs. seller disputes

How does California define a conversion claim?

The technical definition of conversion is “the wrongful exercise of dominion over the personal property of another.” It essentially means that the defendant interfered with the plaintiff’s right to possession of tangible property (not including real property). If a conversion claim is found, the plaintiff is entitled to recover the full value of the property. The plaintiff may also be entitled to punitive and other additional damages in certain contexts (more on that below). As I mentioned above, we typically see this claim pop up when a seller provides product to a buyer but doesn’t get paid – since the seller hasn’t received the benefit of the bargain, the buyer’s continued possession of the product could form the basis of a California cannabis claim for conversion.

Statute of limitations

The statute of limitations for conversion is three years. This means the claim needs to be filed within three years of the wrongful taking. There are exceptions to this rule though. First, if the defendant’s taking was initially lawful (like someone borrowed your tools with your permission), the clock starts ticking when the defendant rejects the plaintiff’s property rights (you ask for your tools back and they refuse to give them back). Second, if the defendant fraudulently conceals the conversion, the clock starts ticking when the plaintiff discovers or should have discovered the conversion. This second scenario is commonly known as the “discovery rule.”

Elements of a conversion claim

California Civil Jury Instructions (CACI) is a helpful that shows the elements of for California claims and causes of action. The relevant CACI instruction for conversion provides that in order to establish this claim, the plaintiff must prove all of the following:

  1. That the plaintiff owned (or possessed) some item of personal property;
  2. That the defendant substantially interfered with the plaintiff’s personal property by knowingly or intentionally taking possession of the personal property (or preventing plaintiff from having access to, destroying, or refusing to return the personal property);
  3. That the plaintiff did not consent;
  4. That the plaintiff was harmed; and
  5. That the defendant’s conduct was a substantial factor in causing the plaintiff’s harm.

So what needs to be established is this: the plaintiff lawfully owned something, the defendant wrongfully interfered with that ownership, and the defendant’s interference caused the plaintiff’s harm. If a plaintiff proves all of these elements and there are no applicable defenses, they can succeed on their California cannabis claim. The issue then becomes what remedies are available.

Remedies for claims of conversion

California Civil Code sections 3336-3338 specifically address damages for conversion. The normal measure of damages is the full fair market value of the property, plus interest. The fair market value is measured at the time of conversion – so for example, if product prices rapidly fell between the time of the conversion and the time of the lawsuit, the plaintiff would be entitled to that initial, higher price.

Conversion claims are especially scary because they potentially open the door to punitive damages. Punitive damages are available where plaintiff shows by clear and convincing evidence that defendant was guilty of oppression, fraud, or malice. In a case of willful conversion – i.e., someone breaks into a California cannabis business and steals something – this may not be all that hard to prove. In most cases, this can be much more difficult to prove.

Finally, when the facts of the conversion claim also constitute receipt of stolen property under Penal Code § 496, the plaintiff may seek treble damages (damages x3), costs of suit, and reasonable attorneys’ fees. There is a line of California case law that specifically establishes that Section 496 can apply to “ordinary business disputes where traditional remedies for breach of contract, fraud, and conversion were available.”

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