Recent Federal Court Decisions Rely on Illegality and Abstention to Avoid Hearing Cannabis Disputes
Several recent federal cases demonstrate that federal courts can be an unwelcome venue for cannabis litigants. First, the United States District Court for the Central District of California relied on the illegality doctrine to find that certain federal causes of action could not be asserted by an individual engaged in cannabis cultivation. In addition, the United States District Court for the Western District of Washington abstained from hearing a cannabis dispute, leaving it to the state court to resolve.
I. Federal Court Refuses to Hear RICO and Lanham Act Claims
Claims arising under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) pose a significant danger to cannabis businesses because damages are trebled. RICO claims have often been asserted against cannabis companies and growers by neighboring landowners alleging claims for nuisance and diminution of value. See, e.g., Safe Sts. All. v. Hickenlooper, 859 F.3d 865, 886-88 (10th Cir. 2017). The recent ruling by the Central District of California in Shulman v. Kaplan, 2020 WL 7094063 (C.D. Cal. Oct. 29, 2020), casts doubt on the ability of participants in the cannabis industry to use the RICO laws to their own advantage. The plaintiff in Shulman v. Kaplan leased a large tract of farm land in Santa Barbara where she planned to grow cannabis. Complaint at 2-4, 2020 WL 7094063. She entered into a pair of cultivation agreements and a branding agreement with a partner. Id. at 28, 101-02. She alleged in her lawsuit that the partner lied about his experience, background, and capabilities, and she sought lost profit damages under RICO, the Lanham Act, and a host of state law claims. Id. at 6-9, 69-125. Ms. Shulman based her RICO claims on the mail fraud and wire fraud that defendant allegedly committed in service of his alleged scheme. Id. at 81. She did not allege that the cultivation of cannabis was a predicate act for her RICO claim.
The court ruled that Ms. Shulman could not pursue her RICO claim because granting relief would require the court to violate the Controlled Substances Act (CSA) reasoning that lost profits for sales of cannabis violate the CSA. Shulman v. Kaplan, 2020 WL 7094063, at *2. The court called it “implausible” that Congress designed RICO to protect plaintiffs who violate federal law. Id. The court reached the same conclusion as to the Lanham Act claims, holding that the Lanham Act does not recognize false advertising claims concerning trademarks used to advertise products that are illegal under federal law. Id. at *2-3.
Accordingly, while RICO and Lanham Act cases may proceed against cannabis businesses, cannabis firms cannot use the law to protect their interests where their claims concern the production and sale of cannabis.
II. Federal Courts Abstain from Hearing Cannabis Disputes
Another recent federal court decision in Brinkmeyer v. Washington State Liquor & Cannabis Board, 2020 WL 5893807 (W.D. Wash. Oct. 5, 2020), confirms that federal courts will sua sponte abstain from hearing cannabis disputes under certain circumstances. Brinkmeyer involved a cannabis investor’s challenge to the Washington State Liquor and Cannabis Board’s residency requirements, which restrict certain licenses to those who have resided in the state for at least six months. Id. at *1. The Board had approved the plaintiff, Mr. Brinkmeyer, as a debt financer for cannabis businesses, but because he did not satisfy the state’s residency requirements, he could not become an equity financer and could not share in the profits of his investments. Id. Mr. Brinkmeyer asserted the residency requirements violated numerous provisions of the United States Constitution and the privileges and immunities clause of the Washington state constitution. Id. Mr. Brinkmeyer also argued that the Board had exceeded its authority under the relevant Washington statute in enacting the regulation. Id.
The court abstained from deciding the case under a doctrine called Pullman abstention. Id. at *2. Under Pullman abstention, a court may sua sponte postpone exercising jurisdiction where a federal constitutional issue may be mooted by a state court determination of pertinent state law. Id. The court applied the Ninth Circuit’s test for invoking Pullman abstention, which asks 1) if the case touches on a sensitive area of social policy, 2) if a definite ruling on the state issue would terminate the controversy, and 3) if the possible determinative issue of state law is uncertain. Id. Concluding that all three prongs were met, the court returned the state-law claims to state court and stayed the federal constitutional claims. Id. at *3.
This is at least the third time in the last two years that a federal court has applied an abstention doctrine in a cannabis case. In 2019, the Ninth Circuit applied Younger abstention, declining to hear a case in light of an ongoing state judicial proceeding in a case involving the seizure of a hemp shipment. Big Sky Sci. LLC v. Bennetts, 776 F. App’x 541 (9th Cir. 2019). Under Younger abstention, federal courts in the Ninth Circuit abstain from hearing cases where 1) there is an ongoing state judicial proceeding, 2) the proceeding implicates important state interests, 3) there is an adequate opportunity in the state proceeding to raise constitutional challenges, and 4) the requested relief seeks to enjoin or has the practical effect of enjoining a state judicial proceeding. Id. (citation omitted).
Later in 2019, a district court in Washington invoked Burford abstention, declining to hear a contract dispute concerning the rights to a license to distribute medical cannabis. Left Coast Ventures Inc. v. Bill’s Nursery Inc., 2019 WL 6683518, at *2 (W.D. Wash. Dec. 6, 2019). Under Ninth Circuit law, Burford abstention, which applies where a case presents difficult questions of state law bearing on substantially important policy problems, requires at least the first two of these three factors be satisfied: 1) the federal issues must not be easily separated from complicated state law issues, 2) federal review may disrupt state efforts to establish a coherent policy, and 3) the state must have concentrated suits involving the local issue in a particular court. Id. (citation omitted).
These three abstention doctrines should be considered by defendants seeking to avoid litigating in federal court and must be taken into account by plaintiffs seeking to sue in federal court and are increasingly invoked in cases involving the cannabis industry.