By Benjamin O. Kostrzewa
Katten Muchin Rosenman LLP
USA June 26 2017
Don’t look now cannabis businesses, but your neighbors may be raising a racket. A June decision by the 10th Circuit Court of Appeals in Denver may have opened the doors to new legal challenges to marijuana operations: civil suits under the Racketeer Influenced and Corrupt Organizations Act (RICO).
RICO was originally intended to go after the mafia and other organized crime, but its broad language means it can be applied in other settings. RICO allows a private citizen to sue “racketeers” for damage to business or property due to the racketeer’s illegal activities or activities that were conducted under his guidance. Since marijuana remains illegal under federal law, the production or distribution of marijuana is considered racketeering.
In this case, a Colorado couple claimed a neighboring marijuana operation was creating “noxious odors” that drifted onto their land allegedly causing the value of their property to drop. The Reillys contended that the odors coming from the marijuana facility adjacent to their land were a nuisance because it “interfered with their present use and enjoyment of the land” and caused a “diminution in its market value.” The Reillys (aided by Safe Streets Alliance, an anti-marijuana organization that was also party to the case) argued that any business engaged in the commercial cultivation and sale of recreational marijuana is a criminal enterprise for purposes of RICO, so they were entitled to relief under federal law.
The District Court in Colorado dismissed the suit for failure to state a claim under RICO. The District Court stated that Reillys’ injury (the noxious odors and reduced market value) was “speculative” and that they failed to provide any concrete evidence that they had provided harm. The District Court ruled that a “clear and definite” showing of damages were necessary under RICO.
On appeal, the 10th Circuit’s three-judge panel reversed the District Court’s conclusion that the Reilly’s claim of damages was merely “speculative” and thus must be dismissed. Instead, the 10th Circuit held that by alleging that the Reillys’ property has been directly injured by their neighbors’ “odorous and publicly-operating criminal enterprise,” the Reillys properly stated a claim and the case can proceed.
The 10th Circuit ruling also went out of its way to explain that the defendants’ growing marijuana as alleged would meet the elements of a RICO claim. As alleged, defendants were (a) racketeering by growing marijuana, which remains illegal under federal law; (b) were an “association-in-fact enterprise”; (c) the defendants conducted the enterprise’s affairs; and (d) that this activity constituted a “pattern” of illegal acts that is the direct cause of the Reilly’s alleged damages. By providing such analysis, it may have provided a roadmap to future plaintiffs for RICO.
Anti-legalization advocates such as the Safe Streets Alliance are likely on the lookout for more RICO cases to bring against marijuana operators. They likely believe they have found a profitable way to improve litigation risks on marijuana companies even in the event of federal inaction on marijuana and state expansion. Not only are the RICO charges relatively easy to bring, but if successful, RICO plaintiffs can receive treble damages. Treble is lawyer-speak for triple, meaning that plaintiffs can receive up to three times the actual damages. Plaintiffs, if successful, are also eligible to have their attorney’s fees covered by the defendant and have the courts shut down the marijuana operation.
For marijuana operators around the country, now is the time to assess your liability and reduce litigation risk:
**Review leases and other documents that may contain limitations as to what you can do on your property
**Review local ordinances on noxious odors and other nuisance rules, as they could be the basis for a dispute
**Be in strict compliance with any and all state laws related to cannabis
**Avoid any public disputes that could raise attention to your company
Moreover, perhaps above all else, determine if you have any frustrated neighbors that anti-legalization advocates could target. If you have an ongoing dispute with a neighbor, attempt to resolve it amicably before it can rise to this level
RICO charges are challenging, but a prepared company can avoid the trouble before it starts.