Jihee Ahn, Autorin bei Harris Sliwoski LLP Schwierige Märkte, mutige Anwälte Thu, 14 Mar 2024 18:13:11 +0000 en-US stündlich 1 https://wordpress.org/?v=6.4.3 https://harris-sliwoski.com/wp-content/uploads/cropped-Harris-Sliwoski-Logo-FinalIcon-White-1-32x32.png Jihee Ahn, Autorin bei Harris Sliwoski LLP 32 32 Schützen Sie sich bei Rechtsstreitigkeiten mit Cannabis: Der Pfändungsbeschluss https://harris-sliwoski.com/cannalawblog/protecting-yourself-in-cannabis-litigation-the-writ-of-attachment/ Di, 22 Aug 2023 14 :00:52 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=132448 On the heels of my last post discussing the limited situations under which a lawsuit can be filed against a cannabis business owner, today’s post will kick off a series of other ways you can protect yourself and exert leverage in a lawsuit. This is a key question as so many in the cannabis industry

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On the heels of my last post discussing the limited situations under which a lawsuit can be filed against a cannabis business owner, today’s post will kick off a series of other ways you can protect yourself and exert leverage in a lawsuit. This is a key question as so many in the cannabis industry are hurting and have limited capacity to litigate OR to settle their disputes – it’s imperative now more than ever to make sure your strategies and tactics are efficient and effective. One potent tool in this arena is the writ of attachment, a prejudgment remedy that can offer substantial leverage and protection.

Understanding the mechanics of attachment

A writ of attachment is a legal instrument that empowers a creditor, often the plaintiff, to establish a lien on the assets of the defendant during the pendency of a lawsuit. The lien acts as a security interest, providing the creditor with priority over potential future creditors that may emerge as the case unfolds. This can be a powerful incentive for defendants to engage in settlement negotiations and avoid long (think 2-3 years) legal battles.

Qualifying for a writ of attachment

While the benefits are clear, it’s important to recognize that obtaining a writ of attachment in cannabis litigation — as in any litigation — is no small feat. The process is marked by stringent statutory requirements and technical intricacies. These vary by state, but you can expect to need to prove some or all the below:

  • Contractual Basis: To initiate the pursuit of a writ of attachment, the claim must be founded upon an express or implied contract.
  • Quantifiable Amount: The claim must be of a fixed or readily ascertainable amount exceeding $500. This stipulation ensures that damages can be computed with a reasonable degree of certainty.
  • Secured by Personal Property: The claim must not be secured by real property; instead, it should be either unsecured or secured by personal property.
  • Commercial Nature: The claim is required to be commercial in nature, aligning with business transactions rather than personal disputes.

Benefits of obtaining a writ of attachment

  • Leverage for Settlement: A writ of attachment can significantly tip the scales in favor of the plaintiff, compelling the defendant to engage in settlement negotiations to protect their assets.
  • Priority Creditor Status: By securing a lien on the defendant’s assets, you position yourself as a priority creditor, ensuring that you stand ahead of potential future claimants.
  • Enforcement of Future Judgments: In the event that a favorable judgment is obtained, the attached assets can be seized and liquidated to satisfy the awarded damages, streamlining the enforcement process.
Conclusion

A writ of attachment can be a formidable tool in cannabis disputes, providing security and leverage in the face of a pending lawsuit. While it may not make sense to pursue one in all cases because of the extensive process, it’s perfect in certain situations and can be the single difference between getting a favorable settlement quickly, or not.

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Kann ich den Eigentümer des Cannabisunternehmens persönlich verklagen? https://harris-sliwoski.com/cannalawblog/can-i-sue-the-owner-of-the-cannabis-company-personally/ Fr, 11 Aug 2023 14:00:26 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=132284 The cannabis industry is hurting right now, and most everyone is feeling it. As new and old clients consider pursuing breach of contract and other claims against cannabis businesses that are failing, one question seems to come up again and again: can we sue the owner(s) of the cannabis company personally for the company’s failures

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The cannabis industry is hurting right now, and most everyone is feeling it. As new and old clients consider pursuing breach of contract and other claims against cannabis businesses that are failing, one question seems to come up again and again: can we sue the owner(s) of the cannabis company personally for the company’s failures (failure to pay, failure to provide goods or services as promised, etc.)?

Unfortunately, the short answer generally is, no you cannot. Most states generally adhere to the principle of limited liability, which shields owners from personal liability for the company’s debts and obligations. That includes cannabis company owners.

Exceptions to the rule

However, there are specific circumstances under which you may be able to sue an owner of a cannabis company personally. These are exceptions and situations in which you might be able to pierce the corporate veil and hold owners personally liable:

Fraud and misrepresentation. If an owner of a cannabis company engages in fraudulent or deceptive conduct that causes harm to you or your business, you may be able to sue them personally for damages. This could include situations where the owner intentionally misrepresents information or conceals material facts to induce you into a transaction. Note fraud claims are held to a heightened pleading standard – so you have to have specifics about the fraud in order to include a fraud claim (and hold an owner liable for it).

Tortious conduct. This is very fact-dependent, but if a cannabis company owner’s actions or negligence result in some damage or other harm, you may be able to sue them individually. This could apply to situations where the owner’s actions go beyond the scope of the company’s regular business activities.

Personal guarantees. Of course, if an owner has personally guaranteed a company debt or obligation, you may be able to sue them personally for any default on that guarantee. Personal guarantees are a direct contractual commitment by the owner to be personally liable for the debt. In times like these, we are using personal guarantees more and more in settlements, because we know all too well that people can just abandon ship and leave their A/P high and dry.

Piercing the corporate veil. This is quite difficult, but courts in California may “pierce the corporate veil” and hold owners personally liable for the company’s debts if it can be proven that the company was not operated as a separate legal entity. The most common ways to show this is if the owner commingled personal and business finances, or failed to observe corporate formalities, or engaged in fraudulent or illegal activities.

Alter ego doctrine. Similar to piercing the corporate veil, the alter ego doctrine can be used to hold owners personally liable if they use the company to perpetrate a fraud or to unfairly shield themselves from personal liability.

Conclusion

It’s important to note that successfully suing a cannabis company owner personally under California law, as well as the laws of other states, can be complex and requires a thorough analysis of the specific facts and circumstances of the case. It’s imperative to consult with an experienced litigation team that specializes in business and corporate law to determine if you have basis to include an owner as an individual defendant.

Need Help With California Cannabis Law?

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Die Erstattung von Anwaltskosten in Cannabisstreitigkeiten https://harris-sliwoski.com/cannalawblog/the-recovery-of-attorneys-fees-in-cannabis-litigation/ Tue, 06 Jun 2023 14:00:29 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=131175 We got a lot of good follow-up questions last week after our webinar covering cannabis litigation in the current down market. One of them related to the recovery of attorneys’ fees and how likely that is to happen. Potential recovery of attorneys’ fees is an important consideration at the outset of any case, but can

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We got a lot of good follow-up questions last week after our webinar covering cannabis litigation in the current down market. One of them related to the recovery of attorneys’ fees and how likely that is to happen. Potential recovery of attorneys’ fees is an important consideration at the outset of any case, but can especially make an impact on whether to pursue a lawsuit or not when businesses are hurting. It not only impacts a party’s overall ability to litigate (on the hope of recovering the costs later on), but also impacts the entire dynamic of the case because the stakes are higher.

The general “American Rule” for attorneys’ fees

Under the American Rule, which is followed in most states, the default is that each party is responsible for its own fees, regardless of the outcome of the case. The theory behind this default rule is that it would promote access to the courts and avoid situations where a party may essentially financially bully another party by driving up litigation costs and creating the threat that one will foot the entire bill.

Exceptions to the general rule

Of course, there are situations where recovery of attorneys’ fees is granted:

  • Contractual agreements. Parties may include attorneys’ fees clauses in their agreements that allow for the recovery of attorneys’ fees by the prevailing party in any dispute relating to those agreements. We’ve seen the gambit of these provisions – some are good and some are really bad. If this is the intention by both sides, it’s important to make sure these kinds of provisions are fully negotiated and clear.
  • Arbitration agreements and rules. In a similar vein, whether recovery of attorneys’ fees in the arbitration setting is possible depends on the arbitration agreement and maybe the rules of the arbitration forum. For example, the American Arbitration Association (AAA) has its own set of guidelines on attorneys’ fees and specific procedures for seeking them.
  • Statutes. Sometimes, statutes allow for awards of attorneys’ fees to the prevailing party. For example, consumer protection laws or intellectual property infringement laws allow for them as a matter of law.
  • “Equitable” doctrines. Sometimes, certain situations in litigation can provide for recovery of attorneys’ fees related to a specific procedural dispute. For example, if a party isn’t complying with their discovery obligations, a motion to compel is often accompanied by a request for attorneys’ fees in preparing that motion. This is to discourage bad faith behavior by parties in active litigation.

Court/Arbitrator considerations for attorneys’ fees requests

Most situations call for an award of attorneys’ fees to the “prevailing party.” Unfortunately, what constitutes a prevailing party often isn’t clear, and some of it can change depending on your decisionmaker. The prevailing party is generally the party who succeeds on a significant portion of its claims or defenses. But where there are multiple claims and multiple damages amounts, this gets amorphous.

And, even where fees are deemed recoverable, the judge or arbitrator will often exercise their discretion to determine whether the fees requested are reasonable. Factors we know to be considered include: the complexity of the case, the experience of the attorneys, and whether the amount of time spent was reasonable. It’s not uncommon for decisionmakers to decide to cut some amount of time billed, or reduce the hourly rate of an attorney to decrease the fee award. So, while some recovery is of course better than no recovery, it’s important to be prepared for that.

Conclusion

Understanding the rules and exceptions governing the recovery of attorneys’ fees is important for any lawsuit. Parties entering into cannabis litigation or arbitration should consult with experienced legal counsel to ensure they’re clear on whether recovery of their attorneys’ fees is possible, in order to make informed decisions down the road.

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TTAB lehnt Registrierung von Bakked-Marken ab https://harris-sliwoski.com/cannalawblog/ttab-denies-registration-of-bakked-trademarks/ Thu, 11 May 2023 14:00:51 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130978 In a precedential decision, the Trademark Trial and Appeal Board (“TTAB”) affirmed an examining attorney’s refusal to register two “Bakked” trademarks by deeming the goods to be illegal drug paraphernalia under the Controlled Substances Act (the “CSA”) and deciding the two exemptions of the CSA did not apply. The Bakked trademark applications National Concessions Group

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In a precedential decision, the Trademark Trial and Appeal Board (“TTAB”) affirmed an examining attorney’s refusal to register two “Bakked” trademarks by deeming the goods to be illegal drug paraphernalia under the Controlled Substances Act (the “CSA”) and deciding the two exemptions of the CSA did not apply.

The Bakked trademark applications

National Concessions Group (“NCG”), a Colorado-based subsidiary of Canadian company SLANG Worldwide, filed two trademark applications to protect its brand name “Bakked” in connection with a product identified as “an essential oil dispenser, sold empty, for domestic use.” The examining attorney took the position that the product constituted illegal drug paraphernalia because it was primarily used for “dabbing” cannabis-based oils, and it denied the applications. Appeals ensued, and the refusals remained in effect until it escalated to the TTAB. Unfortunately for NCG, the TTAB agreed.

The TTAB decision

First, the decision (which is marked “This Opinion is a Precedent of the TTAB”) analyzes whether the product should be considered drug paraphernalia under the CSA:

“equipment or products primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana into the human body (e.g., water pipes, roach clips and bongs) constitute unlawful drug paraphernalia under Section 863(d) of the CSA, but for two exemptions set out in Section 863(f).”

Here, the TTAB cited several extrinsic pieces of evidence to show that the oil dispenser should be considered drug paraphernalia. This included a press release by National Concessions, which advertised itself as “The Largest Cannabis Company in the US” as well as news articles describing “dabbing” as a new way to get high – which is what the oil dispenser was primarily linked to.

Having decided the dispenser did constitute drug paraphernalia, the decision then examines whether it fell under an exemption of the CSA. Section 863(f)(1) of the CSA exempts “any person authorized by local, State, or Federal law to manufacture, possess, or distribute such items.” Here, NCG argued that because it is authorized by Colorado state law to produce such a product, it should qualify for the exemption. The TTAB disagreed that Colorado state law should have any bearing on federal trademark registration and protection:

“[A]ny authorization by Colorado of Applicant’s manufacture, possession or distribution of the goods cannot override the laws of the other states or federal law outside Colorado. … While Applicant may be correct that Colorado has authorized it to manufacture, possess or distribute the goods, such authorization does not extend beyond the borders of Colorado. … But that exemption is insufficient to support the federal trademark registration Applicant seeks, which would be nationwide in effect. We hold that when a Section 863(f)(1) exemption is applicable based on state law, that exemption does not support federal registration.”

The TTAB similarly found that NCG did not qualify for the second exemption either. Section 863(f)(2) of the CSA exempts “any item that, in the normal lawful course of business is imported, exported, transported, or sold through the mail or by any other means, and traditionally intended for use with tobacco products, including any pipe, paper, or accessory.” Here however, NCG just fell short of convincing the TTAB its product was traditionally intended for use with tobacco products.

Conclusion

While the Opinion is certainly in keeping with the lack of USPTO protection for the industry, it’s notable in that it unabashedly declares marijuana’s legality in any one state has no bearing on whether federal registration and protection should be granted. It’s disappointing for those in the industry who want to (rightfully) protect their brand, but it looks like that’s how it’s going to be for the foreseeable future.

We’ve also written about other TTAB decisions and its general process here:

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Cannabis-Rechtsstreitigkeiten: Zahlungsausfälle und Versäumnisurteile https://harris-sliwoski.com/cannalawblog/cannabis-litigation-defaults-and-default-judgments/ Mon, 08 May 2023 14:00:13 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130935 One thing to know about litigation is that timing is everything. Many clients that come to us are unaware that the process of litigating is governed by a series of statutorily-defined deadlines and schedules. Failing to abide by those deadlines can have huge effects on a litigant’s position in a lawsuit. One of the worst

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One thing to know about litigation is that timing is everything. Many clients that come to us are unaware that the process of litigating is governed by a series of statutorily-defined deadlines and schedules. Failing to abide by those deadlines can have huge effects on a litigant’s position in a lawsuit. One of the worst positions someone can find themselves in is “in default,” which ultimately triggers a cut-off of a defendant’s rights to defend itself until a default judgment is entered.

Phase 0.5: Being “In Default”

A defendant is technically “in default” if they fail to file an answer or any other permitted response to a complaint within the time allowed by law (typically, 30 days within being personally served). Being in default doesn’t really have any legal consequence in and of itself. The court can’t refuse to accept a response even if it’s a few days late – the defendant can appear until the clerk has entered the default (which is step 1 defined below).

As a side note, a response filed after the deadline can be challenged by a motion to strike. But these are generally not granted because, by not requesting entry of default, the law generally views this as a situation in which the plaintiff has allowed the defendant further time to respond.

Phase 1: The Entry of Default

Once a defendant is in default, the plaintiff must request the court clerk to make a formal entry of default. In California, the plaintiff needs to make this request within ten days of the missed deadline. Importantly, entry of default instantly cuts off a defendant’s right to appear in the action.

The defendant is now what we call “out of court.” That defendant no longer has any right to participate in the case until (a) its default is “set aside” and it can then respond, or (b) a default judgment is entered. In the latter case, the defendant cannot even participate in the prove-up hearing to challenge the default judgment. This is because by defaulting, the law deems the defendant to have admitted the material allegations of the complaint. It has to wait for the default judgment to be entered, and then appeal. This is the worst position to be in.

Phase 2: The Default Judgment

After the default is entered, the plaintiff then may apply for a default judgment. This needs to be done within 45 days after entry of default. In California, this breaks down into two types of default judgments:

  1. Clerk judgment: in more simple cases pursuing a fixed amount of money, the clerk can enter a default judgment without any judicial hearing.
  2. Court judgment: in other cases, where the plaintiff may need to “prove up” the default, a court hearing is necessary.

If the plaintiff is successful in obtaining a default judgment, that’s it – the defendant now has a judgment entered against it without being able to do a single thing about it. The defendant now faces the costly options of (a) appealing, or (b) trying to reach a settlement with a party that already has a full judgment against it (not a great negotiation position).

The above is a primer on what the default judgment process is. If you find yourself or your company served with a lawsuit, please act on it quickly – engage with experienced litigators who can strategize options with you and ensure you don’t find yourself in arguably the worst position possible in litigation.

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E-Mail-Zustellungen an chinesische Beklagte https://harris-sliwoski.com/chinalawblog/email-service-of-process-on-chinese-defendants/ Thu, 04 May 2023 10:58:25 +0000 https://harris-sliwoski.com/?post_type=chinalawblog&p=130882 Pursuing an individual or business in China is notoriously difficult for several reasons. One of them is that at the outset of any lawsuit, a complaint needs to be filed and served – meaning, it must be demonstrated to the Court that the complaint was provided to the named defendant(s) in a satisfactory manner. The

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Pursuing an individual or business in China is notoriously difficult for several reasons. One of them is that at the outset of any lawsuit, a complaint needs to be filed and served – meaning, it must be demonstrated to the Court that the complaint was provided to the named defendant(s) in a satisfactory manner. The law provides for several methods to accomplish this, but some methods are simply unavailable when trying to serve a Chinese defendant. This post will discuss whether email service is possible.

Application of the Hague Convention

A recent case that is currently on appeal breaks down the analysis. Smart Study Co. v. Acuteye-US, et al. is a case in the Southern District of New York. Smart Study owns multiple intellectual property rights associated with the insanely popular “Baby Shark” song, and it filed a lawsuit against many defendants located in China who were marketing and selling counterfeit Baby Shark products via their Amazon storefronts. Smart Study served those defendants via email addresses identified by Amazon.

The question of whether email service can be used to serve Chinese defendants rests on the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters (or, the “Hague Convention” for short). Both China and the United States are parties to the Hague Convention, and Federal Rule of Civil Procedure 4(f) is what gives effect to the Hague Convention and its exceptions:

“Unless federal law provides otherwise, an individual . . . may be served at a place not within any judicial district of the United States:

(1) by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents;

(2) if there is no internationally agreed means, or if an international agreement allows but does not specify other means, by a method that is reasonably calculated to give notice:

(A) as prescribed by the foreign country’s law for service in that country in an action in its courts of general jurisdiction;

(B) as the foreign authority directs in response to a letter rogatory or letter of request; or

(C) unless prohibited by the foreign country’s law, by:

(i) delivering a copy of the summons and of the complaint to the individual personally; or

(ii) using any form of mail that the clerk addresses and sends to the individual and that requires a signed receipt;

or

(3) by other means not prohibited by international agreement, as the court orders.”

Even though the Court had initially granted Smart Study’s request to serve the defendants by email, some of the defendants eventually appeared and challenged Smart Study’s ability to effectuate service in mainland China by email. The Court agreed the Hague Convention did not allow it. The Smart Study court did conclude the Hague Convention does not apply where a defendant’s address is unknown. However, in this particular case, the Court also concluded Smart Study had failed to meet its burden of showing it had “exercised reasonable diligence in attempting to discover a physical address for service of process” and, therefore, the Hague Convention did apply.

Application of Chinese Law

Then, because the Hague Convention did apply, the Court secondarily analyzed whether defendants in mainland China could be properly served by email as a matter of law. The Court decided they could not:

“Article 284 expressly provides that, subject to exceptions not applicable here, “no foreign agency or individual may serve documents or collect evidence within the territory of the People’s Republic of China without the consent of the in-charge authorities.” That provision is unambiguous: foreign individuals cannot serve documents unless Chinese authorities consent to their doing so. Moreover, and as previously discussed, China has objected to Article 10(a) of the Hague Convention, thus disallowing service by postal channels. Thus, a foreign individual or entity cannot, as a general rule, directly serve an individual in China by any means—not just email.”

Conclusion

As mentioned above, the Smart Study decision is currently on appeal. Notably, other courts, even in the Second Circuit, have reached contradictory decisions. Inevitably, this will be a big issue for international litigation cases involving Chinese defendants until a consensus is reached.

For more on what it takes to effectively serve process under the Hague Convention on a China-based defendant, check out Hague Service of Process on Chinese Defendants.

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Cannabis-Rechtsstreitigkeiten: Eine Fibel über Vorladungen https://harris-sliwoski.com/cannalawblog/cannabis-litigation-a-primer-on-subpoenas/ Wed, 03 May 2023 14:00:36 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130883 A “subpoena” is used in cannabis litigation (or any litigation) when third-party witnesses or documents become necessary for a lawsuit. Over the years, we’ve seen the need for subpoenas come up in a variety of contexts. Below is a primer on what to do as a recipient of one: What is a subpoena? There are

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A “subpoena” is used in cannabis litigation (or any litigation) when third-party witnesses or documents become necessary for a lawsuit. Over the years, we’ve seen the need for subpoenas come up in a variety of contexts. Below is a primer on what to do as a recipient of one:

What is a subpoena?

There are generally three types of subpoenas:

  1. The deposition subpoena that asks for a witness to sit for a deposition (a “testimony only” subpoena)
  2. The deposition subpoena that asks for a production of documents (a “business records” subpoena); or
  3. The deposition subpoena that asks for both (a “records and testimony” subpoena)

If the subpoena is demanding a witness to appear, it should set forth the time and place for doing so. It should also include a description of topics on which the questioning will focus on “with reasonable particularity.” If the subpoena is demanding documents, it should also outline the types of documents that is expected to be produced by providing “specific descriptions” of each.

How to comply with a subpoena

The most important thing about compliance is being mindful of the time for compliance. As mentioned above, if the subpoena is asking for attendance, it will set forth a (typically placeholder) time and location – it’s important to communicate with the subpoenaing attorney and indicate whether attendance will happen or not, whether rescheduling is necessary, etc. If the subpoena is asking for a production of documents, the subpoenaing attorney will typically include a deadline to do that as well, and again, a different compliance date can be negotiated in most cases. Note that, in California for example, that compliance date must be at least twenty days after the subpoena is issued, or at least fifteen days after service of the subpoena, which is later. And obviously, in relation to a subpoena that asks for records and testimony, both issues can be worked out.

How to challenge a subpoena

A subpoena can be attacked on several grounds:

  • Form or content defects (like an inadequate description of what documents they’re requesting);
  • Service defects;
  • Not within the permissible scope of discovery (like the documents sought are protected under various privileges or privacy laws such as consumer or employee laws); or
  • “Unjustly burdensome” or oppressive

Where one of the above is particularly egregious, it may be most worthwhile to file an affirmative “motion to quash” – a motion asking the Court to essentially invalidate the subpoena. For example, in California, the Court may in its discretion order the losing party to pay the winning party’s expenses, including reasonable attorneys’ fees in filing the motion.

In other cases (such as when the subpoenaed party is a “consumer” or “employee”), serving written objections is sufficient. These objections need to state specific grounds for why documents will not be produced. This will automatically excuse the custodian from producing the records until the court orders their production or the parties come to an agreement on what should be produced, etc.

Conclusion

It can be particularly annoying to receive a subpoena, especially in a matter that is of no relevance to your particular business. It’s nevertheless important to address the subpoena in a timely manner. For other articles we’ve written about them, please see:

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Neues Gutachten bestätigt wachsenden Trend weg von der "Nulltoleranz"-Politik zur Cannabis-Konkurserleichterung https://harris-sliwoski.com/cannalawblog/new-opinion-confirms-growing-trend-away-from-zero-tolerance-cannabis-bankruptcy-relief-policy/ Thu, 06 Apr 2023 14:00:56 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130546 As those in the cannabis industry are fully aware, the option of bankruptcy has not been available to cannabis or many cannabis-adjacent businesses to date. The courts have consistently indicated debtors who work in the cannabis industry or derive meaningful income from cannabis activity (directly or indirectly) cannot use bankruptcy, a federal mechanism, so long

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As those in the cannabis industry are fully aware, the option of bankruptcy has not been available to cannabis or many cannabis-adjacent businesses to date. The courts have consistently indicated debtors who work in the cannabis industry or derive meaningful income from cannabis activity (directly or indirectly) cannot use bankruptcy, a federal mechanism, so long as marijuana remains illegal under federal law. The seminal Arenas decision from 2014 observed that things get especially awkward when “granting [relief to the debtor] directly involves a federal court … administering the fruits and instrumentalities of federal criminal activity.”

This rationale has prevailed without exception for a decade now. Here and there, a bankruptcy court will break away in very limited and specific scenarios, like when the Ninth Circuit confirmed a plan of reorganization for a group of cannabis-adjacent real estate companies in 2019 (see that post here). A recent case highlights perhaps another specific scenario in which a distressed cannabis business was given the chance to pursue bankruptcy under federal law.

Facts of In re: The Hacienda Company, LLC

The Hacienda Company, LLC (“HC”) was in the business of wholesale manufacturing and packaging cannabis products under the “Lowel Herb Co.” brand, also known as “Lowell Farms.” It stopped operating in February 2021. After it ceased operations, it transferred its value to a publicly traded Canadian company by structuring the sale as one of intellectual property, not the sale of an operating cannabis business. The Canadian company’s sole business is cannabis growth and sale, which is legal under Canadian law. In return, HC received 9.4% of the shares of the Canadian company.

After this, HC filed for bankruptcy in the Central District of California. The United States Trustee subsequently filed a motion to dismiss HC’s bankruptcy case under the same rationale that allowing bankruptcy would necessarily involve violations of the Controlled Substances Act (“CSA”).

The Court’s ruling and rationale

The Court denied the Trustee’s motion to dismiss. It started its opinion by indicating that the Trustee had failed to establish any ongoing violation of the CSA, only pre-petition violations – which was a significant factor:

“… [T]he tentative ruling is that this interpretation of section 856(a) of the CSA goes too far. Debtor’s passive ownership of stock, with intent to liquidate that stock to pay creditors and thereby terminate any connection with canabis, appears to be the opposite of an intent to profit from an ongoing scheme to distribute canabis. Therefore, the tentative ruling is that the UST has not established a violation of section 856(a) of the CSA. … Debtor does not propose, postpetition, to use any of its remaining assets to “invest” in any enterprise (canabis-related or otherwise). Instead, Debtor proposes to sell the stock and distribute the resulting cash to creditors.”

Ultimately, the Court believed a bankruptcy court could use its discretion to determine whether the debtor’s connections to cannabis profits or past or future investments in cannabis warranted dismissal of its petition or not. In stark contrast to the trend, the Court went on to write that Congress did not adopt a “zero tolerance” policy for any illegality. It wrote that “some of the largest business bankruptcy cases, like Pacific Gas & Electric Co. … of ‘Erin Brockovich’ fame, involve alleged or actual criminal activity.” Similarly, even small business bankruptcies that involve restaurants or apartment buildings regularly involve violations of health and safety regulations:

“If all of the foregoing examples were ‘cause’ for dismissal, this Court might have to dismiss most bankruptcy cases. That would harm all of the constituencies that Congress attempted to protect using all of the tools of the Bankruptcy Code, including creditors, debtors, employees of debtors, and local governments and communities that depend on debtors’ ability to reorganize their finances and resume making contributions to commerce and society.”

Takeaway

As we’ve written with other cases, this is a very limited situation where the debtor divested cannabis from its assets. A cannabis company won’t be able to reorganize under Chapter 11 or liquidate under Chapter 7 if it’s still a going concern with cannabis products. However, the dicta and overall message of the opinion clearly marks a break from the zero-tolerance approach that has been typical for these cases.

It should be noted that the Trustee did file an appeal of the decision on January 9, 2023. We’ll monitor that docket and report back on how the appellate proceeding plays out over the coming months.

For other posts we’ve written about this topic, check out:

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Kalifornischer Cannabis-Einzelhändler sieht sich kostspieligen ADA- und UCRA-Klagen gegenüber https://harris-sliwoski.com/cannalawblog/california-cannabis-retailer-faces-costly-ada-and-ucra-claims/ Wed, 08 Mar 2023 15:00:07 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130149 A recent lawsuit filed in California federal court serves as a good reminder to all our readers that it’s so important to be mindful of Title III of the Americans with Disabilities Act (the “ADA”). For the past several years, we’ve seen a steady flow of cases filed against cannabis companies for their alleged failures

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A recent lawsuit filed in California federal court serves as a good reminder to all our readers that it’s so important to be mindful of Title III of the Americans with Disabilities Act (the “ADA”). For the past several years, we’ve seen a steady flow of cases filed against cannabis companies for their alleged failures to run websites and point-of-sale terminals that interfere with a disabled person’s ability to access their products or services online. Under the ADA, “a business may have discriminated against handicapped individuals when they construct and maintain quote on quote architectural barriers which prevent disabled people from enjoying the business as any other person.”

The Complaint and allegations

Plaintiff Steven Moore (“Moore”) filed his Complaint in the Central District of California on February 26, 2023. The defendant is 1 Vertical Inc., who owns and operates a retail cannabis store named 420 Central in Santa Ana, California and website at www.420central.com. Moore has claimed that he, as a blind person, cannot use a computer without the assistance of screen-reading software, and that he has tried to visit the 420 Central website with a screen-reader to no avail. Moore claims he has “been denied the full enjoyment of the facilities, goods, and services of www.420central.com, as well as to the facilities, goods, and services of Defendant’s location in California” due to laundry list of “accessibility barriers” on the 420 Central website.

As a reminder, the World Wide Web Consortium’s Web Content Accessibility Guidelines (“WCAG”) is a set of well-established guidelines created to make sure websites are accessible. Moore claims 420 Central is in clear violation of the WCAG.

The ADA and UCRA causes of action

Moore alleged causes of action under the ADA and California’s Unruh Civil Rights Act (“UCRA”), which is California’s state-version of the ADA. The UCRA also guarantees every person in California “full and equal” access to “all business establishments of every kind whatsoever” and imposes a duty on business establishments to serve all persons without arbitrary discrimination. Like the ADA, a “business establishment” is defined to include nonphysical places like internet websites.

It’s important to note the UCRA provides standing on “any person aggrieved” by conduct that violates the UCRA. This is a narrower definition than is provided by the ADA – a private plaintiff can sue only if they are an actual victim of the discriminatory act. A person who visits a company’s website with intent to use its services, but encounters terms and conditions which allegedly deny that full and equal access, has standing. There’s no requirement that the person also perform some kind of transaction or enter into an agreement.

Between the ADA and UCRA, the damages that can awarded are severe:

  • Statutory penalty: a plaintiff is entitled to recover statutory damages of at least $4,000 and up to three times actual damages per violation – even if no actual damages are suffered or proved. Again, the plaintiff must show the violation denied them “full and equal access to the place of public accommodation on a particular occasion,” meaning, they were denied access by encountering the violation or being deterred by the violation.
  • Injunctive relief: including permanent injunctions, preliminary injunctions and restraining orders.
  • Compensatory damages: a plaintiff may recover their actual damages.
  • Attorneys’ fees and costs.

What you need to know

These lawsuits have typically been brought by groups of visually-impaired consumers who claim that a certain website fails to accommodate their disability. If a claim is successful, the defendant can be required to perform all sorts of actions. These include things like incurring the cost of redesigning its website or point-of-sale system to comply, and pay the plaintiff’s attorneys’ fees and costs. And in California, plaintiffs can additionally ask for statutory damages. All in all, these lawsuits also can become very costly, very fast.

Ultimately, it really is important to make sure your business is staying apprised of ADA/UCRA requirements and maintaining practices to ensure their systems are updated. Compliance is key here. And, if your business does find itself on the receiving end of a demand letter or complaint, the allegations should be taken seriously and dealt with quickly.

For other relevant articles to cannabis and the ADA and UCRA, check out:

Need Help With California Cannabis Law?

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Die Beklagten beantragen die Abweisung der Klage der SEC gegen das Aktienförderungsprogramm https://harris-sliwoski.com/cannalawblog/defendants-move-to-dismiss-secs-stock-promotion-scheme-lawsuit/ Fr, 24 Feb 2023 15:00:07 +0000 https://harris-sliwoski.com/?post_type=cannalawblog&p=130022 Last November, I wrote this post about a recent case filed by the Securities and Exchange Commission naming cannabis industry players for an alleged stock promotion scheme (or, as some call them, anti-touting violations). Last month, the primary individual defendant, Jonathan Mikula, filed a Motion to Dismiss the claims against him. The other individual defendant,

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Last November, I wrote this post about a recent case filed by the Securities and Exchange Commission naming cannabis industry players for an alleged stock promotion scheme (or, as some call them, anti-touting violations). Last month, the primary individual defendant, Jonathan Mikula, filed a Motion to Dismiss the claims against him. The other individual defendant, Christian Fernandez, filed his own Motion to Dismiss shortly after.

The case is one to watch given its potential impact on the cannabis industry at large – especially in light of Mikula’s pending Motion to Dismiss – which argues, in part, that the SEC must prove a specific scienter requirement to successfully plead their securities violation claims against him.

What is a stock promotion scheme?

To recap, stock promotion schemes involve scenarios where public companies hire promoters or marketing firms to generate publicity for their stocks, and those promoters or marketing firms publish articles boosting those stocks – while failing to publicly disclose that they’re receiving payments from the companies. Those writers will post seemingly unbiased, glowing articles or reviews about the companies when they’re really nothing more than paid advertisements. Sometimes, the number of articles can get into the hundreds. And sometimes, the articles even go so far as to state the writers had not been compensated by the companies they’re writing about, when they in fact were.

The SEC v. Mikula, et al. Complaint

The Complaint at issue alleges Mikula unlawfully promoted the securities of four issuers without disclosing the fact that he was paid for those promotions. As one example – one of his articles stated, on behalf of Elegance Brands, that its CBD product, Gorilla Hemp, was retailing for $3.95 per can and could ultimately yield Elegance Brands a 2,630% price increase. It also claimed distribution agreements were in place which could potentially increase Elegance Brands’ share price by 9,900% in five years. He presented his “recommendations” to therefore invest in Elegance Brands as unbiased and not paid for, even though he actually was compensated via cash and “extravagant expenses.”

Mikula’s associates, which include Fernandez, were also charged for acting as middlemen. The SEC alleged they arranged to receive a percentage of investor funds under the guise of “consulting agreements” with the companies.

The Defendants’ positions

Between the filing of the Complaint and December 2022, most of the parties agreed to settle with the SEC by agreeing to permanent injunctions (meaning, they agreed to a laundry list of things they can never do again, starting immediately). Monetary penalties ranged from the $100,000s to the $700,000s. And, the individuals agreed to various bans from serving as an officer and director of any company.

However, Mikula and Fernandez chose to file Motions to Dismiss instead. In broad strokes, Mikula’s Motion to Dismiss is interesting – it argues the SEC failed to plead all facts required by the statute to allege an “anti-touting” violation. Mikula’s position is that this failure impacts all five claims for relief against Mikula:

  1. Violations of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c)
  2. Violations of Section 10(b) of the Exchange Act and Rule 10b-5(b)
  3. Violations of Section 17(a)(1) and (3) of the Securities Act
  4. Violations of Section 17(a)(2) of the Securities Act
  5. Violations of Section 17(b) of the Securities Act

He cites Section 17(b) of the Securities Act (15 U.S.C. section 77q(b)), which provides:

“It shall be unlawful for any person, … to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, … describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt …”

Mikula’s position is that the SEC has done nothing more than quote buzzwords of the statute as a legal conclusion – it wholly fails to factually allege that Mikula published articles about the stocks “for a consideration received” from the issuers. His position is that receiving payment, even from an issuer, isn’t enough – there must be a causal element demonstrating that the article’s publishing occurred “for the consideration received.” Here, the SEC’s allegations within the Complaint do not specifically allege that the issuers’ money caused Mikula’s publication.

Should scienter be required?

Of course, this essentially amounts to a position that scienter should be pleaded as an additional element of anti-touting allegations. Mikula’s Motion to Dismiss notes the Supreme Court and Ninth Circuit have not ruled on the exact question of whether the SEC must plead and prove scienter to state a violation of Section 17(b). However, relevant case law certainly has impliedly inserted an element of fraudulent intent in prior situations. And, Mikula argues that the core conduct is analogous to the federal bribery criminal statute where the Supreme Court implied a requirement that there be a showing that a defendant acted “corruptly.”

Secondarily, his Motion to Dismiss also generally argues the SEC failed to plead their fraud claims with particularity, and the SEC proceeded in an improper venue (or the case should be transferred to a more convenient forum for the remaining defendants). Fernandez’s Motion to Dismiss makes similar claims.

Conclusion

While the SEC’s pursuit of stock promotion schemes is no new development, their attention to the cannabis industry makes sense in light of the fact that securities violations (and associated lawsuits) have abounded for years, and the public is increasingly interested in both consuming and investing in the space. This case is certainly one to be watched – both as a potential cautionary tale and as potentially precedent-setting in securities law.

In terms of being a cautionary tale, this case serves as a good reminder that the SEC considers stock promotion schemes to be a huge threat to the investing public. In 2017, Melissa Hodgman, then Associate Director of the SEC’s Division of Enforcement, was quoted as stating “Our markets cannot operate fairly when there are deliberate efforts to reach prospective investors with positive articles about a stock while hiding that the companies paid for those articles.” To ensure that purportedly objective investment information is what it claims to be, the SEC has historically settled for high amounts of disgorgement or penalties, as well as injunctive relief.

In terms of being potentially precedent-setting in securities law, Mikula’s position that the SEC must specifically plead a scienter requirement is not squarely addressed by the courts. He is asking the Court to demand the SEC prove he acted with the requisite scienter by proving he had a certain fraudulent state of mind, i.e., intending to mislead the investing public. While it’s up for debate on whether this should be required (especially in order to get past just the pleadings stage), plenty of law in analogous situations do require a high bar in demonstrating scienter to avoid early dismissal (such as fraudulently inducing a shareholder to buy or retain shares or insider trading).

If the Court is sympathetic to Mikula’s position, it may make for significant case law that may make the SEC’s job of pursuing stock promotion schemers much more difficult. This would essentially create an additional factor the SEC to prove – scienter – which is often a fact-intensive inquiry that is difficult to establish, especially in advance of discovery.

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