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In July 2022, plaintiffs purporting to represent every medical marijuana patient in Arkansas filed a lawsuit against a cannabis testing company, a group of cannabis cultivation facilities, and John Does who are “the law firms, accountants and financial entities who have assisted Defendants,” according to the suit. The complaint alleges that the defendants conspired to sell underdosed cannabis products at premium prices. The plaintiffs asserted their claim under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), a type of specialized anti-conspiracy statute that provides criminal penalties for acts performed as part of an ongoing criminal organization.
While somewhat different than prior cases, this lawsuit is not the first time plaintiffs across the U.S. have tried to deploy the RICO statute against the state-legal cannabis industry.
RICO cases against cannabis businesses share broadly similar facts. The plaintiffs typically reside in the vicinity of a cannabis cultivation operation and generally oppose cannabis legalization, then sue a group of businesses and individuals involved in a neighboring cannabis business. The plaintiffs allege that those involved in the cannabis business are engaged in a criminal enterprise to violate the Controlled Substances Act (CSA) by cultivating and selling cannabis.
For members of the state-legal cannabis industry—and their investors, advisors and other purported “co-conspirators”—this trend might be alarming. Presently, however, there is little cause for concern. To date, none of these cases have resulted in a judgment for the plaintiff(s), and in most of the cases, the RICO claim gets dismissed early on.
Civil RICO and Cannabis Businesses
RICO, which Congress originally passed in 1970, was intended to be a tool for prosecutors to target crime organizations like the Mafia, according to The Wall Street Journal. While RICO is primarily criminal, it also vests private citizens with rights to avoid “injur[ies]” to their businesses or property caused by racketeering activity (e.g. running an illegal business/organization) by explicitly allowing those private citizens to file lawsuits against those participating in racketeering.
Civil plaintiffs, however, have deployed RICO beyond traditional organized crime. For example, the National Organization of Women tried (with some initial success, until the Supreme Court reversed the lower court decisions) to deploy RICO against anti-abortion activists. In connection with the Cambridge Analytica data scandal, Facebook defended itself against civil RICO claims for allegedly failing to notify its users about the data breach.
In the typical civil RICO case, the plaintiff alleges that the defendant businesses and/or persons associated with that business violate 18 U.S.C. § 1962(c), which “makes it unlawful for a person employed by or associated with an enterprise to conduct the enterprise’s affairs through a pattern of racketeering activity.” This, in turn, requires proof that each defendant “(1) conducted the affairs (2) of an enterprise (3) through a pattern (4) of racketeering activity.” The civil RICO plaintiff also must prove the enterprise caused injury to the plaintiff’s business or property—this is sometimes called “RICO injury” and it has two distinct concepts: (1) proof of injury, and (2) a causal connection between defendant’s violation of the law and the injury itself. This is where most cases fail—the plaintiffs’ inability to allege or prove “RICO injury.”
In the cannabis industry, defendants are often cultivators or dispensaries, but could also be other businesses touching the operations, including banks providing services or landlords renting to the business. Let’s take a look at some past RICO suits involving cannabis businesses to see how they panned out.
Proving Injury
In Safe Streets All. v. Hickenlooper (2017), the plaintiffs asserted a civil RICO claim against a neighboring “recreational ‘marijuana grow’ operating out of a newly constructed building” adjacent to the plaintiffs’ parcel of land.
Plaintiffs alleged that (1) the operation of the enterprise, and (2) the resultant noxious odors emanating from the grow operation caused them harm. The alleged damages included: (A) the “publicly disclosed drug conspiracy” itself had “injured the value of [their] property,” because (i) the large quantity of drugs at the operation makes them targets for theft, and (ii) prospective buyers worry that the grow operation increases crime in the area; and (B) the operation had “caused a distinctive and unpleasant marijuana smell to waft onto” the property—i.e. a “noxious odor” that “makes the . . . property less suitable for recreational and residential purposes” and interferes with their “use and enjoyment of their property, and diminishes the property’s value,” according to the lawsuit.
The district court dismissed the plaintiffs’ RICO claim, but the case moved to the 10th U.S. Circuit Court of Appeals, where a judge ruled that (1) showing a concrete financial loss is not necessary (despite the district court’s holding), and (2) Colorado’s state-common law nuisance doctrine “recognized that invasion of one’s property by noxious odors itself . . . is a direct injury to property.” Following remand and further proceedings, the case proceeded to trial, where the jury found that—despite the plaintiff’s allegations of injury—they failed to prove they actually suffered RICO injury.
In another case, Ainsworth v. Owenby (2019), the U.S. District Court of Oregon (in the 9th Circuit) addressed whether plaintiffs living in the vicinity of a cannabis grow operation had plausible alleged injury to plead a civil RICO violation. The plaintiff in Owenby alleged they experienced: “(1) diminished use and enjoyment of their properties, (2) reduction in the fair market value of their lands, and (3) expenditures on additional security measures [that] constitute proprietary injuries, each of which has resulted in concrete financial losses,” according to the lawsuit.
The Owenby court reached a result different than that of Safe Streets and specifically determined it to be inapplicable in the 9th Circuit. Instead, the court found diminished use and enjoyment of property was not an injury to property; rather, in the 9th Circuit, it is a personal injury. Similarly, expenses plaintiffs incurred on additional security measures did not suffice to show RICO injury; such damages were based on the plaintiffs’ emotional “distress over neighborhood safety.”
The Owenby court also focused on whether plaintiffs adequately pled a reduction in the fair market value of their lands and found they had not. The court explained that such injury must be more than “purely speculative” and that plaintiffs must plead a “concrete financial loss” not in “any way contingent upon the occurrence of future events.” Because plaintiffs had not sold their land (realizing the reduction in market value), the Owenby court dismissed the RICO claim.
Several other district courts in the 9th Circuit follow the approach of the Owenby court. For example, in Bokaie v. Green Earth Coffee LLC (2018), while the district court acknowledged the plaintiffs’ alleged diminution of market value by the purported “continuing nuisance” of the grow operation to be plausible interests under RICO, it still dismissed the claim because “under California law ‘a plaintiff in a continuing nuisance case may not recover diminution in value damages [because] the [p]laintiff would obtain a double recovery if she could recover for the depreciation in value and also have the cause of that depreciation removed,’” according to the lawsuit.
One interesting takeaway here is that it is harder to bring a RICO claim against members of the cannabis industry in states in the 9th Circuit than it is in states in the 10th Circuit (even though the Safe Streets plaintiffs ultimately failed in that case). The 9th Circuit encompasses Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington, along with Guam and the Northern Mariana Islands. Meanwhile, the 10th Circuit includes Oklahoma, Kansas, New Mexico, Colorado, Wyoming and Utah (plus portions of Yellowstone National Park extending into Montana and Idaho).
In other cases, even when the RICO claim survives past the motion to dismiss stage (whether in the 9th Circuit or 10th Circuit), the cases often end once discovery has started.
For example, in Momtazi Fam., LLC v. Wagner (2019) (9th Circuit), the court denied a motion to dismiss because the plaintiff adequately alleged a decrease in the marketability of grapes grown on their property as a result of the defendant’s nearby cannabis cultivation operation, specifically alleging that at least one customer cancelled their order as a result of concerns over the quality of grapes grown on the property. Similarly, in Underwood v. 1450 SE Orient, LLC (2020) (9th Circuit), following multiple attempts to plead RICO injury, the court finally allowed the plaintiff to proceed past the pleading stage after alleging she had “advertised” her property for sale but had received no offers. In both cases, following the opening of discovery, the plaintiffs dismissed the cases.
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While RICO sounds scary, and RICO claims can be costly to litigate if they get past the motion to dismiss stage, plaintiffs asserting RICO claims against cannabis businesses, their owners, their employees, their investors, or their landlords have not been successful to date. This is generally because of the plaintiff’s inability to plead sufficiently or prove “RICO injury.” But, as the recently filed case in Arkansas shows, anti-cannabis plaintiffs have not given up trying to deploy a civil RICO against members of the state-legal cannabis industry.
Brett Schuman is the chair of Goodwin’s San Francisco office and partner in the firm’s IP Litigation group. Jennifer Fisher is partner in Goodwin’s Complex Litigation & Dispute Resolution practice and a co-chair of the firm’s Cannabis practice. Aaron Thompson is a senior associate at Goodwin.
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