Federal Judge Tosses MMJ RICO Lawsuit: Don’t Let This Happen To You

Like so many cannabis lawsuits before it, a recent case in California provides plenty of opportunity to learn from the litigants’ mistakes. The case is Smith v. City of Berkeley, et al., filed in the U.S. District Court for the Northern District of California in September of this year.

But before we examine what went wrong for Smith in this case, a little background is in order. Smith has operated 40 Acres Medical Marijuana Growers Collective in Berkeley, CA since early 2010. Less than two years later it boasted more than 7,000 members, and was raising the ire of Smith’s landlord, neighbors, and city officials. The city has been attempting to shut down 40 Acres since at least 2012, having declared 40 Acres a public nuisance on multiple occasions due to various zoning violations, chief among them, that Smith has operated 40 Acres in a commercial zone, where only medical marijuana dispensaries are allowed. Under the City Berkeley’s municipal code, collectives like 40 Acres are restricted to residential areas. Smith eventually moved 40 Acres to a different location, but that has not solved his problems. Berkeley’s efforts to shutter 40 Acres have been equaled or maybe even exceeded by Smith, who has now brought six separate lawsuits against the city.

We’ll spare you all the details, but at various times, Smith has alleged civil rights violations against the city (for our take on such claims, read here), complained that the three city-sanctioned dispensaries operate illegally (for various reasons, including because they are not not-for-profit entities), challenged the dispensary licensing process, and here, alleges that the City of Berkeley, the City of Berkeley Medical Cannabis Commission, the Berkeley City Council, and the three dispensaries conspired to create a medical marijuana monopoly.

Smith’s latest suit alleges civil claims under the federal RICO (Racketeer Influenced and Corrupt Organizations) statute, which was originally designed to go after the mafia and other organized crime. But in the decades since its passage, civil RICO provisions have been used to transform garden-variety fraud and business torts into statutory claims with the threat of treble damages. This possibility of treble damages is probably a significant driver of civil RICO actions.

In a nutshell, Smith contends that Berkeley has failed to enforce state law requiring dispensaries to be not-for-profits, has conspired to create ordinances favoring existing dispensaries or exempted them from new laws, and has permitted industry capture of the Commission and the Peer Review Committee. All this, according to Smith, amounts to a coordinated scheme to allow the three dispensaries to monopolize the medical cannabis market in Berkeley, to the exclusion of Smith and to the detriment of medical marijuana patients.

Defendants immediately filed a motion to dismiss Smith’s case on procedural and substantive grounds, arguing that the allegations in Smith’s complaint inadequately addressed the requirements of RICO and were based on an incorrect interpretation of state law concerning the requirement that dispensaries not “operate” for profit. During oral argument, as judges are often wont to do, Judge Alsup raised a different issue, asking whether Smith could seek remedies under a federal statute while he was simultaneously contravening a different federal law, i.e., operating a medical cannabis facility in violation of the federal Controlled Substances Act. After additional briefing on the issue, Judge Alsup threw out Smith’s entire case on that basis, relying on long-standing law that “no court will lend its aid to a party who founds his claim for redress upon an illegal act.” Alsup’s view appeared to be that Smith had real nerve/chutzpah/audacity bringing his case in his federal court at all, departing from usual practice and denying Smith permission to amend his pleading. The court’s brief order is available here.

We don’t relish courts tossing cannabis business people out of court, but we don’t like bad lawsuits either, and this one strikes us as a pretty weak from its inception. Still, as promised, there are some lessons to be learned here:

  • First, don’t sue in federal court when your client is violating federal law, which anyone selling or even possessing cannabis is doing. Though some federal judges’ attitudes have relaxed (read here), you just never know who you’re going to get on the bench. Smith’s federal RICO claims could have been brought in state court (where it perhaps could have asserted state law RICO claims as well); but, given his previous unsuccessful five trips there, we’re guessing he and his lawyer decided to roll the dice in a different forum.
  • Even if you could state a RICO claim, you most of the time should not. We realize the temptation created by the treble damages provision of the statute is hard to resist, but courts don’t like them. It’s tedious to clearly and completely set out a RICO claim in a complaint, and they are often challenged on a motion to dismiss on that basis anyway.
  • Follow state and local law. We’ve said it in dozens of posts before, and we’ll say it again. Courts are not going to stick their necks out by ruling in favor of a canna-business that cuts corners. If you haven’t always operated above board, clean up your act before you even consider going to court. Doing this certainly will not guarantee your success, but it will help. See Understanding and Managing Cannabis Legal Compliance: No Excuses.
  • Work with your municipality. Clearly Smith and the City of Berkeley don’t see eye to eye, but lawsuits don’t usually bring parties together. Municipalities often need and seek out expertise and input from those in the industry and you should take advantage of whatever such opportunities exist, and maybe a compromise can be reached when the relationship gets bumpy. For more on the need to know and comply with local laws and for how to stay in good stead with your local authorities, check out Cannabis Businesses Laws: It’s Almost All Local

This isn’t the first ill-advised pot lawsuit and it certainly won’t be the last. Just try not to let this happen to you.

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