California Cannabis Litigation: Airing the Dirty Laundry Edition

06 Mar California Cannabis Litigation: Airing the Dirty Laundry Edition

We’ve written a good amount on how ugly litigation will be. There’s federal illegality and the possibility that a court refuse to rule on a contract dispute because cannabis is federally illegal. Companies can be sued for false advertising and have all of their profits attributable to the false advertising disgorged by competitors. Allegedly false claims can also be the subject of class-action shareholder suits. If a company is engaged in ongoing wrongs, courts can literally order them to stop via injunctions, and if they do not, people could be held in contempt and go to jail. Courts can award punitive damages just to punish companies who do very wrong things like engage in fraud. The list goes on.

One thing that many cannabis companies may not even have on their radars is the damage that can arise through pleadings and during the discovery process in court litigation. Pleadings are the complaint and answers in any case. Plaintiffs file complaints and make allegations about defendants, and defendants answer those complaints and admit or deny the allegations. All of this is public unless companies are in arbitration or a court has ordered that it not be public (and good luck getting that order).

When it comes to the discovery process, during litigation, parties can make requests for the other parties to produce documents or information and can even force certain people to sit for hours under oath and testify (this is often videotaped and almost always transcribed for later use). Discovery is not necessarily public, but outside of arbitration and without “protective orders” signed off on from the court, the information learned in discovery often winds up in the public domain.

Cannabis companies should not overlook the importance of pleadings and discovery and their potential public nature. By now, everyone is familiar with this fact pattern: allegations are made against a public cannabis company, and overnight, its stock value plummets significantly. Even for non-public companies, having allegations of things like fraud, false advertisement, breach of contract, etc. out in the ether can be problematic when trying to raise funds and get licenses. Moreover, even if a cannabis company gets a case dismissed, the complaint is still public record without a court order sealing it, and again, that’s probably not going to happen.

What makes the risk of publicity all the more problematic is the potential for rule violations to come to light. Given the fact that all state-level cannabis regulations are murky and complicated, it is understandable that some companies may not have strictly complied with the rules. That may come out in discovery. What also may come out in discovery are the internal conversations about those rule violations. Imagine an email chain where the owners of a company talked about, acknowledged, and agreed to sweep under the rug a severe rule violation. That could be part of the record in litigation.

Also problematically, cannabis regulations require licensees to keep records of just about everything, and to keep them for years. Parties to litigation will have a hard time saying that records don’t exist, and if they truly don’t exist…. well, that’s another potential rule violation that could come out.

Litigation is almost always ugly and unpleasant for the parties. But in this industry, parties will have a lot of leverage over each other given the nature of cannabis regulations and the industry as a whole. In the first quarter of 2020, our cannabis attorneys have already seen a huge uptick in disputes, and we don’t expect it to relent anytime soon. Stay tuned to the Canna Law Blog for more on the wave of disputes that are about to hit.