When the Hunted Becomes the Hunter: Cannabis Companies Turn to RICO

We’ve been writing about Racketeer Influenced and Corrupt Organizations Act (“RICO”) lawsuits and cannabis companies since 2015. See:

RICO has been a thorn in the side of the cannabis industry, but not necessarily for actual criminal reasons relative to federal illegality. Instead, it’s been used predominantly by NIMBYs against cannabis companies in a civil capacity to try to squeeze them out of existence, on a theory that trafficking in an illegal controlled substance (amongst other required RICO elements) qualifies as racketeering activity. NIMBYs don’t necessarily seek to prevail on the merits; their goal is to just make the cannabis company spend a prohibitive amount of money defending them.

In an interesting turn of events, as reported by MJ Biz Daily, it seems that some cannabis companies may now be trying to use RICO in their favor to go after state-illegal cannabis outfits. These businesses are also chasing third parties that support or enable or “aid and abet” state-illegal market cannabis operators (pretty clever if you ask me).

As a reminder, RICO is a 1970 federal law originally intended to combat organized crime (namely, the mob). Among other features, it allows average citizens claiming a loss in property value to bring civil suit for triple damages plus attorney’s fees against any “person” or “enterprise” that has a part in any pattern of “racketeering activity”.  In order to establish a federal civil RICO violation, seven elements must be met:

  1. only ‘persons’ can sue or be sued;
  2. the plaintiff must show that the defendant(s) participated in a ‘pattern of racketeering activity;’
  3. the ‘pattern’ must consist of at least two acts of racketeering committed within 10 years of each other with at least one act occurring after the effective date of the statute;
  4. the existence of an ‘enterprise’ which is the instrument or the target of racketeering activity is required;
  5. the enterprise must engage in or affect interstate commerce;
  6. the plaintiff must allege and prove injury to their business or property; and
  7. the plaintiff must demonstrate that their injuries resulted from a pattern of racketeering activity.

Note that is extremely difficult to win a civil RICO case because the bar is so very high when it comes to plaintiffs being able to meet all of the foregoing elements.

Still, two state licensed cannabis businesses are taking the leap with these civil RICO lawsuits in San Diego (by cannabis retailer Valley Greens Retail Outlet, Inc. d/b/a March and Ash) and Mendocino Counties (by four individuals that include cannabis farmers that make up the business Goose Head Valley Farms), respectively. A copy of the complaints can be found here and here.

Both lawsuits are fascinating in that all cannabis businesses are federally illegal even though state law may permit and license them. In fact, one California court dismissed a RICO action brought by a cannabis company where the court found that the plaintiff had no standing to sue under federal law because of the federal illegality of cannabis. Still, federal illegality aside, since these newer cases were brought under the California RICO statute (similar to federal law), there’s a chance that standing will not be an issue– unless of course defendants try to remove to federal court. The plaintiffs are state-licensed cannabis businesses, after all.

In the March and Ash lawsuit, plaintiff alleges that some of the defendants that make up unlicensed (and not locally approved) retail outfits that have been unlawfully helped and supported by:

  1. the defendant landlords who rent space to them;
  2. the defendant advertisers who allow illegal operators to advertise illegal sales on their platforms (including the San Diego Reader);
  3. “owners and operators” of ATM machines in illegal dispensaries that claim to be legitimate on paper and that assist in laundering money;
  4. manufacturers of cannabis products that sell those products to illegal operators; and
  5. law enforcement that allegedly tips off these illegal operators to things like raids so as to avoid penal punishments and being fully shut down.

On that last note, there’s apparently evidence from the U.S. Attorney’s Office in the Southern District that at least one former San Diego County sheriff notified an illegal dispensary of an upcoming raid, and that the sheriff also pressured another illegal dispensary to hire a family member while receiving kickbacks from the same. The Mendocino suit essentially alleges organized corruption and crime by state and local law enforcement personnel against cannabis farmers in order to establish the racketeering pattern.

My eye is really more on the March and Ash lawsuit because it brings to bear one of the main issues in California cannabis–the illegal, unlicensed market that rages on while licensees struggle to comply with excessive state and local hurdles and incredibly high taxes.

In reality, cannabis companies shouldn’t have to bear the brunt of bringing these tough-to-win lawsuits in order to better survive in the marketplace. Instead, the Department of Cannabis Control combined with local and state law enforcement should do a better, more consistent job of shutting down these rampant illegal operators that are undermining the entire democratic experiment of legalization. This would include going after third party advertisers and online platforms that continue to promote and enable the sale of cannabis by these unlicensed scofflaws. Until that happens though, I am not at all shocked that the industry is starting to self-police and taking matters into its own hands by bringing these issues into open court. Best of luck to them.