Civil Challenges to Cannabis Businesses in Legal States
Although selling cannabis is legal in several states—but still a crime under federal law—a recent case may mark a new trend: private, civil lawsuits to attack businesses engaged in the marijuana industry.
A recent Tenth Circuit decision shines light on a new avenue to challenge cannabis businesses, even in states where medical and recreational marijuana is legal.
Although the potential federal criminal threat to cannabis businesses in states that have legalized medical or recreational cannabis has been relatively well-discussed, the potential civil threat has received little attention. In Safe Streets Alliance v. Hickenlooper, 859 F.3d 865 (10th Cir. June 7, 2017), the Tenth Circuit reversed the dismissal of civil Racketeer Influenced and Corrupt Organizations Act (RICO) claims against a cannabis growing operation in Colorado, leaving open the possibility of future civil challenges to cannabis businesses.
Although commonly associated with anti-mob criminal prosecutions, RICO contains a provision that creates a federal civil private right of action that “vests a private citizen with substantive rights to avoid ‘injuries’ to ‘his business or property’ caused by a pattern of racketeering activity.” Safe Streets, slip op. at 15 (quoting 18 U.S.C. § 1964(c)). The plaintiffs in Safe Streets, Michael and Phillis Reilly, used precisely this mechanism to pursue federal civil claims against a cannabis cultivation operation that neighbored the Reillys’ property. Id. at 10. (The defendants in the case were a somewhat loosely affiliated group of individuals and entities, including 6480 Pickney, LLC, Alternative Holistic Healing, LLC, Camp Feel Good, LLC, Jason M. Licata, Joseph R. Licata, and Parker Walton. Id. at 12.)
The Reillys owned a piece of land in Pueblo County, Colorado, where they did not live but occasionally used for recreation such as horseback riding. Id. at 10-11. Defendants operated a cannabis cultivation operation on the neighboring property. Id. at 11. Amendment 64 to the Colorado Constitution legalized recreational cannabis, including its cultivation. Id. at 5; see also Colo. Const,art. XVIII, § 16. The Reillys alleged the defendants’ operation caused a “distinctive and unpleasant marijuana smell” to waft onto their property. Id.. The Reillys filed a federal RICO lawsuit in Colorado, but the trial court dismissed their complaint. The Reillys then appealed to the Tenth Circuit.
Under the citizen suit provision of RICO, a plaintiff must prove (1) a violation of RICO section 1962; (2) that his or her business or property has been injured; and (3) that the RICO-prohibited activity caused the injury. Id. at 15 (citing RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2096 (2016)). The court concluded the Reillys plausibly pled the defendants’ cannabis cultivation operation constituted a violation of RICO section 1962. Id. at 22. The court reasoned that racketeering activity defined under RICO expressly includes dealing in a controlled substance, which is illegal under federal law, and therefore a cannabis cultivation operation was racketeering activity conducted by an association in fact. See id. at 20-22.
Analyzing the harm
Most interestingly, the court concluded the Reillys may be able to prove the cannabis cultivation operation harmed their property interests by (1) substantially reducing their use and enjoyment of their property due the “noxious odor” of the cannabis—i.e. a nuisance; (2) reducing the value of their property due the cannabis smell nuisance; and (3) reducing the value of the property by having a neighbor that is “openly operating criminal enterprise.” See id. at 24-29.In doing so, the court also concluded that the causation requirement had could likely be met, as it was folded into the analysis of the harms themselves.
At the same time, the court rejected more vague injuries asserted by the Reillys, such as claims they were “injured each time they look[ed] to the west and observe[d] the Marijuana Growers’ facility because the structure itself is a constant reminder of the crimes occurring therein.” Id. at 29-30. The court ruled these “emotional, personal, or speculative future injuries” were not compensable under RICO. Id. at 30.
The portion of the opinion discussed immediately above has potentially far-reaching implications for cannabis-related businesses. First, it opens the door for federal RICO civil suits premised upon nuisances. Ordinarily, a claim based upon a neighbor’s property’s “noxious odor” would be dealt with in state court, as a classic common law property action. Perhaps fearful of a cannabis-sympathetic Colorado state bench, the Reillys managed to transform their state law nuisance cause of action into a federal RICO action, by virtue of the fact cannabis cultivation is still illegal at the federal level under the Controlled Substances Act (CSA).
Second, it provides two methods by which neighboring civil plaintiffs may legally challenge cannabis businesses: (1) via claims of nuisance and (2) via property value reduction due to criminal activities.
Although the transmutation of a state law nuisance claim into a RICO claim is somewhat eyebrow-raising, the true revelation in this case is the ratification of the “criminal activities property value reduction” RICO claim. For example, a cannabis business can insulate itself from nuisance or nuisance-based RICO claims by taking precautions—whether by operating indoors with proper HVAC or by operating in commercially or agriculturally zoned land. However, even a cannabis business that emits no odors or other nuisances—for example, a refining lab that uses cannabis to create CBD oil for treatment of epilepsy—could still be subject to a RICO claim purely based on the theory its very existence and operation in the plaintiff’s neighborhood lowers the plaintiff’s property value.
The way the court framed this type of property injury suggests a solution for cannabis businesses. The court reasoned that “it is reasonable to infer that a potential buyer would be less inclined to purchase land abutting an openly operating criminal enterprise than she would be if that adjacent land were empty or occupied by a lawfully-operating retailer.” Id. at 29 (emphasis added). The court went on to state “[b]ased on the Reillys’ assertion that the Marijuana Growers’ operation is anything but clandestine, the Reillys’ land plausibly is worth less now that is was before those operations began.” Id. (emphasis added). Both of these lines suggest if a neighboring cannabis business is operating discreetly, the argument that there is property value reduction falls apart.
In this regard, the Safe Streets case is a cautionary tale for cannabis businesses in states that have recently legalized recreational marijuana. Cannabis entrepreneurs, emboldened by state-by-state decisions to legalize recreational marijuana, can be tempted to jump in with both feet and operate their business openly, assuming the recent legalization effectively operates as a mandate for their business. However enthused the majority may be in a given legal recreational marijuana state, there may still be a minority that may oppose the direction their state has taken.
As such, cannabis businesses can take precautions to avoid upsetting their neighbors and risking nuisance and/or RICO claims. First, as mentioned above, a cannabis business can design its property to avoid the dispersion of the “noxious odors” at issue in Safe Streets. Second, a “cannabis business” can choose to locate in an agriculturally or commercially zoned area, or better yet, in an area surrounded by other cannabis businesses. Third, a cannabis business can operate discreetly—or, to borrow the words of the Tenth Circuit, “clandestinely”—to avoid the “criminal enterprise” property value reduction discussed above. By operating indoors or not broadcasting the nature of their business, a cannabis business gives its neighbors less ammunition to supply a potential RICO lawsuit.
We pause to emphasize that we are using the term “cannabis business” to refer to businesses that handle the actual cannabis plant or its derivatives. The “cannabis ancillary” business market—which provides services and goods to aid those who directly handle physical cannabis or its derivatives—is by nature more naturally insulated from these concerns, and is also beyond the scope of this article.
Additional facets to the Safe Streets decision
The Safe Streets appeal also involved several parallel threads that bear mention.
In addition to their suit against their neighbors, the Reillys also brought suit against Colorado and Pueblo County in an “equity” action in which they requested a judgment declaring that the federal Controlled Substances Act entirely preempted Amendment 64, along with statewide injunctive relief blocking enforcement of Amendment 64. Id. at 35. However, the court concluded the CSA provided no private right of action to civil plaintiffs, and as a result the Reillys could not bring a suit demanding preemption under the CSA. Id. at 58-59. Although this analysis clearly takes a backseat to the RICO claims, it eliminates a potential path by which private civil plaintiffs can challenge the legalization of cannabis at a state level. Although the conflict between the CSA and the laws of the states that have legalized cannabis, whether medical or recreational, is well-documented, the Safe Streets decision confirms private plaintiffs cannot force a resolution of this conflict themselves.
Law Enforcement Officers Action
The Safe Streets court also ruled on a parallel appeal not involving the Reillys. That case, Smith v. Hickenlooper, involved “a group of county attorneys and sheriffs from Colorado, Kansas, and Nebraska” which took a path similar to the one followed by the Reillys: they sued Colorado to preempt enforcement of Amendment 64 under the CSA. The plaintiffs argued Amendment 64—and, for the non-Colorado plaintiffs, the attendant influx of “Colorado-sourced marijuana”—inhibited their ability to enforce the CSA. Id. at 63-65. For the same reasons as the Reillys, the Tenth Circuit held that the law enforcement officer plaintiffs had no substantive rights to enforce under the CSA or the Supremacy Clause of the United States Constitution. Id. at 68.
Nebraska and Oklahoma Action
The final appeal addressed by the Tenth Circuit dealt with a complaint filed in the United States Supreme Court by Nebraska and Oklahoma against Colorado. Id. at 69. Nebraska and Oklahoma also sought to enjoin Amendment 64 by virtue of its preemption by the CSA. Id. The Supreme Court declined to hear the matter. Id. Afterward, Nebraska and Oklahoma moved to intervene in the Safe Streets appeal, requesting that the Tenth Circuit exercise jurisdiction over their claim. Id. at 70. However, because the Supreme Court has exclusive jurisdiction over disputes between the states, the Tenth Circuit was “forbid[den] from deciding” the alleged controversy between the states. Id. at 76. The Tenth Circuit’s reasoned but efficient disposal of this aspect of the litigation shows that until the Supreme Court is willing to hear a dispute between a state that has legalized marijuana and one that has not, those cases will die on the vine.
The legalized cannabis civil lawsuit developments in Safe Streets naturally point the spotlight back to the criminal side of the ever-evolving landscape of cannabis law. In April 2017, comments from Attorney General Jeff Sessions and then-Presidential Press Secretary Sean Spicer created some uncertainty over the fate of the Rohrabacher-Farr amendment, now called the Rohrabacher-Blumenauer amendment, a Congressional appropriations bill rider that withholds federal funding for criminal prosecutions in legal medical marijuana states. See Heinlein & Ayres, Federal-State Marijuana Policy: An Uneasy Peace, California Lawyer.com (Apr. 24, 2017).
After two short term extensions, the Rohrabacher-Blumenauer amendment was signed into law as part of a Congressional appropriations bill on May 5, 2017. H.R. 244, P.L. No. 115-31 – Consolidated Appropriations Act (May 5, 2017); Resolution Extends Rohrabacher-Blumenauer Amendment, Culture Magazine (Apr. 27, 2017), http://ireadculture.com/resolution-extends-rohrabacher-blumenauer-amendment/. However, in his signing statement, President Trump said he would “treat this provision consistently with my constitutional responsibility to take care that the laws be faithfully executed.” Statement by President Donald J. Trump on Signing H.R. 244 into Law, The White House (May 5, 2017), https://www.whitehouse.gov/the-press-office/2017/05/05/statement-president-donald-j-trump-signing-hr-244-law.
President Trump’s signing statement, of course, leaves open the possibility that his administration may pursue a more aggressive anti-marijuana prosecutorial regime in line with Attorney General Sessions’ public comments. Whether President Trump will attempt to fund marijuana prosecutions in legal medical marijuana states in contradiction to the Rohrabacher-Blumenauer amendment—and United States v. McIntosh, see Heinlein & Ayres, supra—remains to be seen. Prognosis on the Trump administration’s future action on this front is especially difficult in light of the uncertainty surrounding Attorney General Sessions’ future. See Charlie Savage, How Trump Could Oust Sessions if He Declines to Quit, N.Y. Times (July 26, 2017), https://www.nytimes.com/2017/07/26/us/politics/trump-jeff-sessions.html. The current Congressional appropriations bill expires on September 30, 2017. H.R. 244, P.L. No. 115-31 – Consolidated Appropriations Act (May 5, 2017). In the meantime, the “Task Force on Crime Reduction and Public Safety,” created by Attorney General Sessions, is scheduled to release its findings on potential links between violent crimes and cannabis by the end of the month. Avantika Chilkoti, States Keep Saying Yes to Marijuana Use. Now Comes the Federal No., N.Y. Times (July 15, 2017), https://www.nytimes.com/2017/07/15/us/politics/marijuana-laws-state-federal.html.
Regardless of odor, the smoke surrounding the movement to legalize marijuana continues to swirl. The decision in Safe Streets proves that the legal developments in this area bear continuing scrutiny.
Josh Heinlein and Jacob Ayres are both litigators at Dinsmore & Shohl’s San Diego office. Mr. Heinlein’s practice focuses on complex litigation involving real estate, construction, intellectual property, contracts, partnerships and tort actions. Mr. Ayres’s practice includes commercial litigation, real estate litigation, and products liability matters.