Cannabis IP Litigation: Principal Liability

14 Feb Cannabis IP Litigation: Principal Liability

Do principals need to worry about personal exposure in cannabis intellectual property (IP) litigation? Surprisingly, the answer is sometimes “yes.” In this post, we will look at the “Borat” case as one example.

First, it’s important to note that there are varying levels of liability that can be attributed to a cannabis company’s principals. In general, personally liability is not something we see often. But it does happen. Please note that the term “principals” does not just include company members or shareholders. For purposes of this post, it refers to directors, officers and employees of a company as well.

Cannabis IP litigation: personal liability in the “Borat” case

The copyright lawsuit filed by Sacha Baron Cohen is a lesson for our Massachusetts folks that a corporate officer can be found personally liable for a company tort in cannabis IP litigation. This can happen if that officer personally directed, controlled, approved, or ratified the wrongful act.

To quickly recap our first post on the Borat case, Solar Therapeutics Inc., a cannabis dispensary in Massachusetts, caused a billboard to be erected on the side of an interstate highway to advertise its cannabis products. The billboard features a portrait of Sacha Baron Cohen as his “Borat” movie character, with two thumbs up and his signature “It’s Nice!” slogan displayed across the top. The billboard was allegedly up for several weeks but has since been taken down. Cohen and his company, Please You Can Touch, filed a lawsuit against Solar for copyright infringement.

A couple months later, Solar’s President and Director, Edward Dow III, had filed a motion to dismiss. He claimed there was no basis to hold him personally liable for the allegations. Ultimately, the Court denied Dow’s motion. That has to be scary.

The standard to win a motion to dismiss: cannabis IP litigation or anything else

To win a motion to dismiss, the defendant has a high bar to meet – which makes sense, because it can end the case before it really begins. Under the Federal Rules, the Court must determine if the facts alleged “plausibly narrate a claim for relief.” This is the same standard in a cannabis IP litigation case involving personal liability, as it is in any other case. To prevail on such a motion:

1. First, the Court must perform a close reading of the claim to distinguish the factual allegations from the conclusory legal allegations. Factual allegations must be accepted as true.
2. Second, the Court must determine whether the factual allegations present a “reasonable inference that the defendant is liable for the conduct alleged.” Or, accepting the facts as true, the complaint must provide sufficient factual allegations for the Court to find the claim “plausible on its face.”

In this case, Massachusetts case law provides that employees can be liable for wrongs in which they personally participated. “Personal participation” includes “directing, controlling, approving, or ratifying the act that injured the aggrieved party.” And since Cohen’s complaint does indeed allege that the actions of Solar were “specifically and personally directed, controlled, ratified, approved, and implemented by Dow,” the Court was satisfied.

What comes next

This isn’t to say that Dow will ultimately be found personally liable, of course. Time and the discovery process will inform the parties of that. But having a lawsuit filed against a company and its principal undoubtedly increases litigation costs and drastically shifts settlement posture in most cases.

Make sure to stay on top of company decisions because there’s no guarantee you can be shielded by your LLC or corporation in cannabis IP litigation– or any litigation for that matter.