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Article: November 2019: Early Victory for Winery in “Pot v. Pinot” Case

Business Litigation Reports

Early Victory for Winery in “Pot v. Pinot” Case

 

A federal district court has provided guidance on how to state claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962 et seq., for property owners aggrieved by nearby marijuana growing operations.  On August 27, 2019 the U.S. District Court for the District of Oregon denied a motion to dismiss brought by defendant cannabis growers in the widely-publicized Momtazi Family, LLC v. Wagner et al. case.  See 2019 WL 4059178 (D. Or. Aug. 27, 2019).

            The plaintiff in Momtazi is a limited liability corporation that operates a certified biodynamic vineyard in Oregon that sells grapes to wine producers, including a wine producer owned by plaintiff that is the current lessee of plaintiff’s property.  Asserting a claim under RICO, the plaintiff alleges that defendants developed a plot of land adjacent to plaintiff’s property into a marijuana farm.  Plaintiff alleges it is unable to sell grapes grown on the portion of its property that abuts defendants’ property, and defendants’ “marijuana operation” diminished the fair market value of plaintiff’s property, decreased the marketability of grapes grown on plaintiff’s property, and diminished the income plaintiff could obtain by renting its property.  Amongst other allegations, the plaintiff contends that one of its customers cancelled an order for grapes because the customer believed the smell created by the marijuana grown on defendants’ property contaminated plaintiff’s grapes and would affect the wine made from those grapes.

            At issue on defendants’ motion to dismiss was whether the plaintiff has standing to assert claims under Article III or the RICO statute and whether plaintiff’s allegations state a RICO claim.

            The court dispensed with the threshold question of constitutional standing first, finding that plaintiff’s allegations of diminution in property value, inability to market and sell its grapes, and damage to plaintiff’s property – all allegedly caused by defendants’ marijuana-growing activities – are concrete, particularized, and actual and, therefore, sufficient to allege constitutional standing. 

            The court next addressed the plaintiff’s standing to state a RICO claim.  The RICO statute provides that “[a]ny person injured in his business or property by reason of a violation of [RICO]” may bring a civil suit for damages.  18 U.S.C. § 1964(c).  To show standing, a plaintiff must allege: (1) “harm to a specific business or property interest” and (2) that the injury was “a proximate result of the alleged racketeering activity.”  Momtazi, 2019 WL 4059178, at *4 (internal citation omitted).  The injury must be proprietary and must result in “concrete financial loss.”  Id. (citing Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 975 (9th Cir. 2008)). 

            The Momtazi court ruled that the plaintiff had alleged facts sufficient to confer RICO standing.  As to concrete financial loss, the court held that plaintiff’s allegations of diminished rental income, decreased marketability of grapes grown on the property as a result of defendants’ marijuana operation, and the cancellation of a grape order over concerns relating to the quality of plaintiff’s grapes were sufficient to state a RICO claim under the standard for recovery set forth by the Ninth Circuit in Canyon CountyMomtazi, 2019 WL 4059178, at *5.  Turning to direct or proximate cause, the court ruled that plaintiff’s allegation that it has been unable to sell its grapes as a result of defendants’ marijuana operation was sufficient to allege a direct link between plaintiff’s injuries and defendants’ alleged RICO violations.  Id. at *6. 

            The court also rejected defendants’ argument that the complaint failed to show that defendants were conducting or participating in an association-in-fact enterprise of racketeering activity, as required to state a RICO claim.  The court reasoned that plaintiff stated a claim with allegations that the presence of a marijuana operation on defendants’ property – and the effects of that operation – directly and materially diminished the fair market value of plaintiff’s property, the marketability of grapes grown on that property, and the decline in rental income from the property.  Momtazi, 2019 WL 4059178, at *7.  Because the complaint plausibly alleged a direct link between defendants’ marijuana operation and the claimed reductions in plaintiff’s property value, the plaintiff stated a claim for relief under RICO, and defendants’ motion to dismiss was denied. 

            The Momtazi case is significant.  As an initial matter, the court did not even address whether a defendant engaged in the growing of marijuana is committing a pattern of predicate offenses associated with a commercial enterprise, as necessary to state a RICO claim.  See 18 U.S.C. §§ 1961-62.  The Momtazi court thus joins other federal courts in accepting that operating a marijuana business may constitute racketeering because it involves dealing in a controlled substance under federal law, even in states that have legalized the use of recreational marijuana.  See, e.g., Safe Streets Alliance v. Hickenlooper, 859 F.3d 865, 882 (10th Cir. 2017) (“[C]ultivating marijuana for sale . . . is by definition racketeering activity.”).  The same type of reasoning may subject future defendants to other RICO claims premised on activities that are legal under state law but prohibited under federal law.

            Momtazi is also significant because it provides guidance to plaintiffs seeking to allege RICO claims against marijuana growers.  Earlier cases in the District of Oregon dismissed claims asserted by adjacent property owners on the basis that mere allegations of diminished use or enjoyment of property, or the costs of increased security measures as a result of marijuana-growing operations, do not constitute injury to property under Ninth Circuit precedent.  The Momtazi court distinguished those prior cases and, in so doing, provided a roadmap to plaintiffs seeking to assert analogous claims in that Circuit.

            In Ainsworth v. Owenby, the district court dismissed an action brought by residential property owners against defendants who allegedly maintained a marijuana production and processing operation on nearby land because the plaintiffs did not allege concrete financial loss where they did not allege either “specific prior attempts to monetize a property interest” or “at least a present intent or desire to do so.”  326 F. Supp. 3d 1111, 1125 (D. Or. 2018).  The court subsequently rejected an amended complaint alleging harm from plaintiffs’ inability to obtain a larger home equity loan on the basis that plaintiffs were placed in a stronger financial position because a smaller loan meant less debt on a lower principal amount.  2019 WL 1387681, at *1-2 (D. Or. Mar. 27, 2019).  Similarly, in Shoultz v. Derrick, plaintiffs alleged that defendants’ marijuana operation “interfer[ed] with [their] use and enjoyment of [their property], burdening it with noise pollution, diminishing its market value and making it more difficult to sell.”  369 F. Supp. 3d 1120, 1127 (D. Or. Feb. 22, 2019).  Plaintiffs did not allege either a past attempt or a current desire to convert their property interests into a pecuniary form.  Id.  The court held that plaintiffs failed to allege concrete financial loss and their claim was dismissed.  Id. 

            As the Momtazi court reasoned, both of these earlier cases “turned on whether an allegation of diminished market value was sufficient to constitute injury.”  Momtazi, 2019 WL 4059178, at *4.  In Ainsworth, plaintiffs had not alleged either specific prior attempts or a present intent to monetize their property interest.  Id. (citing Ainsworth, 326 F. Supp. 3d at 1126).  In Shoultz, the mere allegation of diminished market value was insufficient.  Id., at *5 (citing Shoultz, 369 F. Supp. 3d at 1128).  While the Momtazi plaintiffs did not specify a dollar amount of loss sustained, the court reasoned that such an amount “would be calculable in a pecuniary form based on evidence that would be discoverable,” and plaintiff’s allegations, therefore, established “injury to a property interest” constituting a “concrete financial loss” sufficient to confer RICO standing.  Id.  Particularly in light of the proximity of many marijuana operations to wine growers in California and Oregon, it is easy to imagine allegations analogous to those asserted in Momtazi surfacing in future cases involving marijuana growers in the Pacific Northwest.