Federal Courtroom Dismisses RICO Claims: Treatments Would Violate Federal Regulation

cannabis RICO litigation

The RICO claims in the cannabis industry have certainly evolved over the years, but the general trend for the courts to reject these claims or cases altogether has persisted. In Shulman et al. v. Kaplan et al., A case filed in the Central District of California, plaintiffs, who are involved in the manufacture, marketing, and sale of cannabis, enlisted the defendants’ help to grow their business in 2017, when the relationship broke together, and plaintiffs filed a lawsuit alleging defendants behaved illegally, which ultimately undermined the plaintiffs’ cannabis business. This case has been brought in federal court because two claims involve violations of the RICO and two claims violations of the Lanham Act. In his statement published last week, Judge Birotte ruled that all four complaints should be dismissed because the plaintiffs were not in a position because the court cannot grant the relief associated with their damage.

The defendants had filed a motion to dismiss, arguing that plaintiffs had no legally identifiable interest (or basically a court-confirmed right) in their RICO claims because plaintiffs’ damage was related to a cannabis business – loss of control over their cannabis cultivation , the loss of their ability to buy and grow cannabis, etc. – all of which are illegal under federal law. Judge Birotte agreed and wrote:

The damages suffered by the plaintiffs under RICO are inextricably linked to their cannabis cultivation – any relief would offset the plaintiffs’ lost profits from the sale, production and distribution of cannabis. In this respect, the Court notes that a possible remedy in this case would violate federal law under the law [Controlled Substances Act].

Judge Birotte stated that he was not authorized to order plaintiffs to pay sums of money that would (1) provide remedy for illegal acts under federal law and (2) inevitably require a federal court violation of federal law. Unfortunately, he went so far as to say, “It seems implausible that RICO – a federal law – is intended to appeal against activities that are illegal under federal law.” Such a dictation makes it clear that at least this court will not make any RICO claims in the cannabis room.

Plaintiffs’ trademark infringement suit under the Lanham Act met the same fate – as detailed on this blog, Judge Birotte stated that “when a trademark is used for cannabis products, the Lanham Act does not recognize the user’s trademark priority or any derivative claims, regardless of state laws that might conflict with federal law. “

Finally, the plaintiffs’ false advertising claims under the Lanham Act were also dismissed. To properly raise a claim to false advertising, you must demonstrate (1) that you are within the “Zone of Interest” protected by the Lanham Act; and (2) immediate cause between his / her violation and the alleged violation of law. Here, the plaintiffs ‘false advertising claim was based solely on the fact that the defendants used the plaintiffs’ “brands” to advertise marijuana products. Since the alleged trademarks themselves were illegal under federal law, the court found that plaintiffs could not be classified within the “Zone of Interest” protected by the Lanham Act.

While this is an expected, yet severe blow to this class of plaintiffs, they will at least be able to sue the remainder of their twenty-one claims in California state court. Unfortunately, doing so has likely cost plaintiffs a great deal of time and expense, so all actors in the industry considering litigation should consider these types of opinions before making federal claims.

For more information on RICO litigation involving cannabis, see the following sections: