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Don’t Let Marijuana’s Legal, Regulatory Burdens Burn Through Your Capital

Nov. 27, 2020, 9:01 AM

Although opportunities in the nascent marijuana industry abound, those evaluating prospects in Arizona, Montana, New Jersey, and South Dakota must understand not only the criminal risk involved but also the civil and commercial exposure as well.

It’s not all sunshine and daydreams for states that legalize recreational marijuana. Voters in Arizona, Montana, New Jersey, and South Dakota passed ballot initiatives on Election Day 2020, increasing the number of adult-use states to 15 plus the District of Columbia. However, regulators and businesses alike in those four states should anticipate a multitude of legal hurdles, lawsuits and regulatory action in the coming months as they prepare for the regulated marijuana marketplace.

First-time entrepreneurs planning to enter the marijuana industry would be wise to heed the lessons learned in other states. They must be prepared to defend their investment and have legal teams at the ready to file lawsuits if necessary against state regulators and competitors.

As the Grateful Dead so eloquently sang, “Since it costs a lot to win and even more to lose, you and me are bound to spend some time wondering what to choose.”

Consumer Class Action Lawsuits

Many new cannabis entrants tend to focus their attention on avoiding the threat of criminal liability from the federal Controlled Substances Act, but fail to appreciate that in reality the “company-killer” threat more likely emanates from other federal and state laws. Consumer protection statutes have put more cannabis companies out of business than Schedule 1.

Alleged violations of these statutes are used to assert consumer class action lawsuits that often are based on state laws that regulate accurate labeling, false advertising, and unfair competition.

A particularly active source of current class action litigation against the cannabis industry involves alleged violations of the federal Telephone Consumer Protection Act (TCPA). Enacted in 1991, the TCPA was the government’s response to telemarketing abuses, making it unlawful for any person to make calls—other than for emergency purposes or with prior consent of the recipient—using an automatic telephone dialing system to access telephone numbers assigned to a cellular telephone service.

Plaintiffs’ attorneys have quickly embraced the TCPA as their go-to vehicle for filing class-action lawsuits against the cannabis industry.

The most recent lawsuit, filed on Sept. 30 in federal court in Denver, names five individual marijuana companies as defendants, alleging that plaintiffs received dozens of unsolicited text messages without consent from the defendants’ telemarketing text campaigns. In one example, the complaint alleges that over an 18-month period, one of the plaintiffs received more than 43 text messages from defendant Euflora Recreational Marijuana emanating from multiple numbers, after the plaintiff visited Euflora’s dispensary just once and interfaced with a check-in tablet that captured the plaintiff’s cell phone number.

With the threat of statutory damages ranging from $500 to $1,500 for each text message sent in violation of the TCPA, new entrants into the cannabis industry must take notice of the applicable laws and employ strategies to mitigate risk or find themselves on the receiving end of a class-action complaint.

Litigation Against Regulators

In addition to defending lawsuits, cannabis companies should prepare to play offense, especially in states that first require local licensing and approval. Increasingly, those shut out of the application process have sued regulators and cast blame on competitors when they fail to win a license.

As one of many such lawsuits, MedMen Enterprises, a publicly traded, U.S.-based cannabis company, recently sued the city of Pasadena, Calif., asking for an injunction to stop the city’s licensing process. According to the complaint, after Pasadena initially determined in 2019 that MedMen was one of the top six applicants selected to proceed in the application process, it reversed course in July 2020 and retroactively rejected MedMen’s application.

Believing that it would be one of only six license winners, MedMen entered into a 10-year lease with a $6,569,833 rental obligation and spent more than $700,000 on licensing and professional fees. Without a license, MedMen could not meet its rental obligations.

Naming the six other licensees as interested parties in the lawsuit, MedMen alleged that one of its competitors pressured city regulators to change its rules at the last minute so that MedMen would be denied the license.

Regardless of the veracity of these allegations, six unwitting businesses are now wrapped up in litigation and face the potential of a lengthy wait to begin legally selling marijuana and recognizing returns on their multimillion-dollar investments.

It is imperative that new companies entering the cannabis industry anticipate unexpected hurdles and lengthy delays, and plan accordingly. Otherwise, businesses just may find themselves in an undesirable position without working capital to successfully launch their business once they are finally licensed to do so.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Ian A. Stewart is a partner at Wilson Elser Moskowitz Edelman & Dicker LLP and co-chair of firm’s national Cannabis & Hemp Law practice.

Neil M. Willner is an associate at Wilson Elser Moskowitz Edelman & Dicker LLP in the firm’s Cannabis & Hemp Law practice.

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