October 17, 2022
By Michael Bentivegna, CPA, CFE
While we still await federal legalization of medical and recreational marijuana, the legalization by nineteen individual states has resulted in increased litigation revolving around the cannabis world. The legalized marijuana/cannabis industry is still in its infancy stage. As the industry continues to grow with a mixture of new entrants and established entrepreneurs and business owners, combined with the unknowns still out there in this industry (such as accepted business practices) and federal/state laws such as IRC Sec. 280E (which states that no tax deduction/credit is allowed for expenses incurred by a business related to trafficking a controlled substance prohibited by federal law or the law of a state in which the business is conducted), there will inevitably be more litigation in the years to come.
I would like to concentrate on a few commercial litigation issues that, while not new, are emerging in the marijuana/cannabis industry. A Reuters analysis of cannabis-related civil litigations filed in the 19 states, including the District of Columbia, which have enacted laws fully legalizing adult recreational cannabis has identified 55 cases between January and June 2022.
Reuters’ analysis showed that the most common of the litigations (approximately 34%) were identified as commercial disputes. These disputes included actions for breach of contract, landlord-tenant disputes, securities issues, and other business torts, such as breach of fiduciary duty and fraud.
The second most common type of litigation the analysis found (approximately 21%) is classified as actions against state and local governments relating to the administration and regulation of a state's cannabis market. This includes licensing disputes or disputes challenging the legality or constitutionality of a state's cannabis licensing administration.
Employment disputes and disputes relating to the collection of unpaid taxes constituted approximately 14% and 10% of the litigations, respectively. About 5% of the litigations were classified as consumer class actions, consisting of actions brought under the Telephone Consumer Protection Act (“TCPA”). These TCPA cases allege that a cannabis company sent unsolicited "spam" text messages promoting their products. There is also a class action alleging violations of the Americans with Disabilities Act alleging that the CBD-selling defendant failed to maintain its website in a way that is fully accessible to visually impaired people.
Intellectual property (“IP”) disputes are currently only 9% of the litigations; however, this is largely due to the fact that cannabis is illegal on the federal level and the United States Patent and Trademark Office (“USPTO”) typically denies the registration of cannabis-related trademarks (for now). There is no doubt that IP disputes will boom as legalization occurs in more states or on a federal level and the USPTO begins to grant more patent and trademark registrations in this industry. As discussed in our Cannabis Industry Trends for 2022, for many cannabis businesses, their IP is generally their most valuable asset. Reuters notes that trademark infringement cases are the most common IP dispute item.
According to the 2020 census, as of now only approximately 44% of the U.S. population lives in states where cannabis use is fully legal. There is no doubt that once medical and recreational marijuana is legalized by more states or on a federal level, and new medical or adult-use programs are introduced, the industry will truly boom. According to Reuters, it is only a matter of time before there is an increase in Food and Drug Administration enforcement actions relating to alleged violations of the Food, Drug, and Cosmetic Act (“FDCA”). The cannabis industry will be as litigated as any other “ordinary” industry.