If you are an owner, operator, or manager of a U.S.-based cannabis company with “hands-on-the-plant” operations, or an investor in a U.S.-based cannabis company, you may be concerned about the current spate of “civil RICO” actions filed against similar businesses around the country.
These have been brought by plaintiffs with motives ranging from recalcitrant ideological hostility to pure, unabated greed and the possibility of tripled damages in the event of victory. Some may even be motivated by practical concerns, such as personal aversions to the odor of cannabis.
For those who face such suits – and those who want to avoid them – here are two issues to consider that otherwise might be overlooked.
Beware of Personal Liability in Cannabis Civil RICO
First and foremost, everyone remotely involved with a cannabis business in any kind of significant capacity needs to consider the fact that civil RICO cases come with personal liability.
Even though you may have done all of your business through a corporation or your limited liability company, and even though those “shields” will work in a variety of other contexts, the fact is that the limited liability “veil” is utterly irrelevant in civil RICO cases.
Any individual owner, operator, investor, and manager of a cannabis operation facing a civil RICO lawsuit is personally at risk.
Strong asset protection planning using trusts and other structures, months or years in advance of being named a defendant, may be effective in protecting some of your assets, perhaps many or most.
(Once a lawsuit becomes a reality, these same protective measures become “fraudulent transfers” that courts have no problem unwinding, and which often compound legal problems – so, plan well in advance. Offshore options are expensive, but may be worthwhile.)
Attorneys’ Fees May Be the Biggest Expense
If you find yourself a defendant in a cannabis RICO case, there is a very real possibility that attorneys’ fees – your own and your adversary’s – will be your single greatest expense.
Actual damages may be minimal.
In a Washington RICO case, a plaintiff won an award of exactly $1. The “injury” she sustained to her property was real, according to the court, but it was trivial.
The award of $1, rather than nothing, had a significant consequence: it opened the door to the defendant’s liability to pay all of the plaintiff’s legal fees. Those fees amounted to $10,915 – nearly 11,000 times the underlying damages award.
Cannabis industry defendants facing RICO claims must take this possibility very seriously, and should consider the bottom line when evaluating litigation strategies.
The fact is that it is not at all difficult to prove that a cannabis operation is openly in violation of RICO as a matter of federal law. Is it worth paying your lawyers – and your adversary’s lawyers – to deny the plain fact, when it is highly likely that you will ultimately lose on the issue?
The Safe Streets Alliance v. Alternative Holistic Healing, LLC lawsuit was filed in 2015, and is currently up to hundreds of docket entries.
After more than 200 filings, the judge decided that there was no question that the cannabis company was in violation of RICO. That included a doomed appeal by the defendant to the 10th Circuit Court of Appeals, and a host of other subsidiary battles that Alternative Holistic decided to fight.
We have the benefit of hindsight, of course, and from our vantage point, it appears that the defendants have likely spent hundreds of thousands of dollars on their own legal bills to fight all of these unnecessary battles.
If the defendants are held liable for even $1 of damages, they likely will be on the hook for hundreds of thousands more in damages, for the plaintiffs’ legal fees.
Instead of fighting every battle – every motion for an extension of time, every battle over expert witnesses, every futile motion to dismiss or to obtain summary judgment – it might be worth considering settling, fast and without the fight.
That comes with a known cost, and foregoes the possibility of being found not liable at all.
But, it also puts an end to the legal battles and limits downside risk – for the company, for investors, for officers, directors, and managers.
It can allow the company, and everyone involved, to move on with their lives, to focus on the business, and to make much better long-term investments with the money that otherwise would go to paying legal bills. Litigation is exhausting and expensive. It consumes time, energy, focus, and resources in ways that are all cost, no benefit – negative ROI.
There are no perfect answers, and context always matters. If your adversaries are ideologically motivated, or hell-bent on shutting down your operation, the calculus may change. Other issues may come into play.
But, comparing the potential costs and benefits of a conciliatory strategy, rather than fighting a dicey “scorched earth” legal battle, is certainly worth considering at the outset.
For those interested, Judge Blackburn’s order granting summary judgment, finding that the defendants in Safe Streets had committed the underlying RICO offense, is here.