Recently, a divided United States Supreme Court held that a cannabis product manufacturer could face civil liability under the Racketeer Influenced and Corrupt Organizations Act (RICO) if a consumer suffered a personal injury that created a business or property loss to the consumer. Specifically, the Court concluded that an employee could state a claim under RICO for losing his job after testing positive for THC when the product he took was advertised as being THC-free.

Unfortunately, this post won’t be replete with Napoleon Dynamite references (although now we want to watch that beautifully stupid piece of cinema and write such a post). Instead, at the risk of sounding like grumpy lawyers and alarmists, this case could dramatically alter the landscape of cannabis marketing and substantially change the industry as a whole. 

Our preferred style at Budding Trends is to write for the cannabis industry and not for naval-gazing lawyers, but in this instance it is important for cannabis operators to understand what the Supreme Court said, and what it didn’t say, about RICO liability for cannabis companies.  

So, What’s This All About?

In the case, Medical Marijuana, Inc. v. Horn, the Court addressed the sole and broad question of “whether civil RICO categorically bars recovery for business or property losses that derive from a personal injury.”

The facts are relatively straightforward:

Douglas Horn, a commercial truck driver who injured his back and shoulder in an automobile accident, treated his injuries, in part, with a product called “Dixie X.” That product is a tincture infused with CBD that is advertised as “CBD-rich” and containing “0% THC.” A few weeks after ingesting “Dixie X,” Horn’s employer selected Horn for a random drug screening. The test detected “THC” in his system, and Horn’s employment was subsequently terminated. Horn alleged to have ingested no other products that could have contained THC and sent a sample of “Dixie X” for third-party lab testing, the results of which confirmed some presence of THC.

Horn sued the manufacturer of “Dixie X,” Medical Marijuana, Inc., in a United States District Court in New York alleging, among other claims, a civil RICO claim. The complaint contends Medical Marijuana is a RICO “enterprise” that distributes and sells “Dixie X,” and that Medical Marijuana’s false and misleading advertising constituted mail and wire fraud and that those crimes represented a “pattern of racketeering activity.” The district court dismissed Horn’s RICO claim on summary judgment because RICO only affords relief to plaintiffs who suffer business or property injuries. Horn’s injury, according to the lower court, was merely a personal one. As any business or property injuries Horn allegedly suffered stemmed from a personal injury, the district court further reasoned that RICO offered Horn no redress.

Horn appealed that ruling to the United States Court of Appeals for the Second Circuit, which disagreed with the district court’s conclusion and reversed that decision and remanded the matter back to the district court for continued litigation. In doing so, the Second Circuit characterized Horn’s personal injury as one regarding his personal employment and, therefore, a business injury under the RICO statute. As such, the court rejected the notion that RICO imposes an “antecedent-personal-injury bar” to recovery. That holding added to the existing circuit split on the issue, and the High Court decided to review Medical Marijuana’s appeal.

The Supreme Court, at the outset of its opinion affirming the Second Circuit, made clear that the sole question it was deciding was: “whether civil RICO bars recovery for all business and property harms that derive from a personal injury.” Answering in the negative, the Court sent Horn’s RICO claim back to the trial court, allowing Horn’s RICO claim to fight another day – treble damages and all (more on this below).

The Court’s opinion was not unanimous, however, and was not split on perceived political lines. Justice Amy Coney Barrett authored the majority opinion, which was joined by Justices Sonia Sotomayor, Elena Kagan, Neil Gorsuch, and Ketanji Brown Jackson. Justice Jackson also filed a concurring opinion, and Justices Clarence Thomas and Brett Kavanaugh filed dissents, the latter of which was joined by Chief Justice John Roberts.

What Is RICO?

RICO was passed in the 1970s and imposes both criminal and civil penalties for a “pattern of racketeering activity.” Racketeering activity is broadly defined and includes not only the sale of illegal drugs but also wire and mail fraud, both of which can be implicated when a product is intentionally mislabeled and sent to a customer.

Originally aimed to aid in mafia prosecutions, the law now operates to punish those that commit crimes that constitute a pattern. While significant criminal penalties can befall a RICO defendant, the civil penalties are nothing to sneeze at. In addition to attorneys’ fees and litigation costs, a successful RICO plaintiff can recover treble damages. That is, a successful RICO plaintiff can recover as much as three times the actual damages incurred. That’s a heavy sword.

What Does This Mean for Cannabis Operators and Service Providers?

The bad news is that RICO claims carry the possibility of criminal penalties (yeah, that means prison time) or significant money damages (again, up to three-times actual damages plus attorneys’ fees and costs). And the Horn opinion, at least on its face, provides plaintiffs’ attorneys a blueprint of sorts to assert more civil RICO claims.

But the good news is that cannabis companies can mitigate against the risk of RICO liability by ensuring that their practices remain fully compliant with state laws in which they operate.

I’ve seen arguments about whether this is a hemp case or marijuana case. After all, in 2012 the term “hemp” was not included in the Controlled Substances Act; rather, most of the cannabis sativa plant was included within the definition of “marijuana.”

I’m willing to be turned around on this but I’m not yet sold that the effort to distinguish marijuana and hemp under these facts is a worthwhile exercise under current law. Because the underlying claim relates to the labeling of the product, I believe wire and/or mail fraud claims would apply with equal force to either marijuana or hemp companies engaged in the shipment of mislabeled products. And there may be more instances of overlap not addressed by the Court. 

The takeaway for cannabis operators: While you can’t eliminate the chances of being sued for anything, don’t mislabel your products and then you’re less likely to face the kind of claim filed by Horn. 

Conclusion

There are few acronyms that strike fear in a defense lawyer like RICO. Regardless of how you feel about the wisdom of the policy, RICO is an extraordinarily wide-reaching law and its application to the hemp industry poses a threat that has probably seemed more theoretical than pressing in the minds of hemp operators. Not anymore. 

Notably, the Court recognized Congress was the proper place to decide the scope of RICO. Hemp operators should consider whether a tweak to the RICO law could exempt their products from its scope. In the meantime, be careful out there. Stay vigilant. 

Thanks for stopping by.