How to Avoid the Rising Tide of Cannabis Lawsuits

How to Avoid the Rising Tide of Cannabis Lawsuits

The cannabis market is shaping up to be the major sector it was long expected to become. Currently, its global market is estimated at around $7.7 billion. Some projections estimate that the international market could top $31 billion by 2021.

Such staggering growth is sure to bring about increasing amounts of lawsuits of different varieties. Both tort and statutory claims have been on the rise for a few years now. Companies face a multitude of lawsuits, ranging from wage disputes to medical marijuana use.

As cannabis remains federally illegal, the industry faces more risk than other sectors. Lawsuits can impact the entire supply chain due to longstanding regulations. With most companies just beginning to grow, any suit can topple its progress.

In tort claims, professional negligence is often the focus. In these cases, the claimant's private civil claim can include manufacturings and design defects as well as issues around product safety and warranties.

In a statutory claim, cannabis companies face the brunt of federal and state laws. Due to its legal status, cannabis can fall under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act statutes and face civil liability consequences for participating in what is deemed a racketeering operation.

While companies have been accused of violating state and federal regulations, tort claims appear to be more on the rise in recent years. While still a concern, those fretting over RICO claims received a reprieve of sorts in November 2018 when the first suit filed under the RICO Act to go to the jury did not succeed. However, additional cases could add more concern for the industry.

Concerning the cannabis industry tort claims, one of 2015’s more prominent cases of the year featured Florida's BioTrackTHC. The company's former lawyer sued their former employers over what they claimed to be unpaid services.

In the same year, BioTrackTHC found itself in another lawsuit. This time, it was filed by its competitor, Franwell. The rival company claimed that BioTrackTHC made false claims in promotional materials, including lies about Franwell.

In 2018, major retailer MedMen became the subject of its own lawsuit. In this case, MedMen faces a class action lawsuit brought on by two former employees. The November filing by the two former employees claims that MedMen breached several labor laws. The company is alleged to have paid employees minimum wages for untracked hours, failed to track employee hours accurately worked and was unable to provide mandatory breaks for meals and rest.

Lawsuits in the cannabis industry tend to reflect cases that other sectors experience as well. They include inventory mismanagement, where tracking and reporting to the state becomes a compliance issue.

Other common disputes center on contractual problems stemming from noncompete and nondisclosure clauses. However, contracts can also incorrectly list workers as contractors when they are actually employees, which can create a series of legal issues and significant penalties.

The key to avoiding lawsuits is to act like any other compliant business. Daniel Shortt, a Seattle cannabis attorney with the Harris Bricken law firm, told MJ Biz Daily how to do so. “You shouldn’t treat your marijuana business as if it’s some special entity when it comes to employment and labor,” he said. “You have to operate as a business first. That means complying with employment laws at the state and federal level.”

In short, never skip on Human Resources. The HR department is vital in keeping a company compliant. In some cases, particularly in growth sectors, HR can fall by the wayside in favor of growth. Often, this directly links to costly compliance-related issues.

Human Resources is an excellent start but may not be all that is needed. This rule applies to every industry. Yet, once again, cannabis should be especially concerned due to its legal status. As such, organizations should exercise additional precaution to avoid statutory and tort claims.

A rather clear starting point is to know the laws. Fully understand state and federal regulations inside and out. A large number of companies employ a Chief Compliance Officer who has the sole focus of keeping the company compliant on a daily basis. Doing so ensures that HR isn't tasked with daily compliance in addition to their other duties.

Additionally, consider relying on experts. Such experts can come in various forms. They include Consultants who specialize in workplace compliance issues. These professionals are valuable resources in addressing any concerns around robust matters including but not limited to the Americans with Disabilities Act (“ADA”) and the Health Insurance Portability and Accountability Act (“HIPAA”). Companies may also find viable consulting advice from lawyers and companies in trade organizations and other networking communities.

With the cannabis industry slated to grow exponentially in the years to come, companies must do what it can to avoid unneeded lawsuits. Compliance is an evolving and challenging aspect of the business. However, its complexity cannot allow it to be pushed off. A failure to prioritize these aspects of the company could topple years of hard work.


David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
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