Earlier this year, we addressed some emerging trends to watch in the cannabis industry in 2022. One of those trends was an increase in litigation — a natural consequence of a growing industry (in this case, one facing some unique challenges). With half the year behind us, we take a deeper dive into the kinds of cases we have been seeing. Specifically, we look at litigation trends to determine the kinds of cases we are likely to see more of as the industry matures.
To better understand the landscape faced by potential litigants, we conducted an analysis of cannabis-related litigations filed within the first half of 2022, specifically focusing on civil litigations commenced in the 19 states — including the District of Columbia — that have enacted laws fully legalizing adult recreational cannabis.
We looked at state and federal dockets, as well as other public filings and news coverage, to compile a data set of litigations commenced between Jan. 1, 2022, and June 30, 2022, impacting the industry in some way. We then looked at filings in those cases to filter out false hits, which narrowed our data set to 55 representative cases.
By far, the most common category of dispute appearing in our analysis is what we classified as commercial disputes, which include actions for breach of contract, landlord-tenant disputes, securities issues, as well as other business torts, such as breach of fiduciary duty and fraud. Roughly 34% of the litigations in our data set were identified as commercial disputes. This should come as no surprise given the industry's sustained expansion over the years, driven largely by continued growth in mature markets, such as California, and further bolstered by the prospect of new and emerging markets in those states that have recently legalized recreational cannabis or are likely to do so in the near future.
By most estimates, the industry's impressive growth is not expected to slow any time soon, which will only encourage more businesses and investors to try to get a foothold in the cannabis space. Some of those deals are bound to go south since valuations often remain speculative, and a gold rush mentality prevails in new markets. As a result, we expect commercial disputes to remain prevalent in the years ahead.
The next most common category of dispute we found in our analysis includes what we classified as actions against state and local governments. These are actions relating to the administration and regulation of a state's cannabis market, including, for example, licensing disputes or disputes challenging the legality or constitutionality of a state's cannabis licensing regime. Such actions made up approximately 21% of the litigations in our data set. Again, the prevalence of this category of dispute is expected to remain high as states roll out new programs — whether medical or adult use — and more businesses seek to break into these markets.
Other notable mentions include employment disputes and disputes relating to the collection of unpaid taxes, which constituted approximately 14% and 10% of the litigations in our data set, respectively.
Intellectual Property disputes — particularly disputes alleging trademark infringement — made up approximately 9% of the litigations analyzed. This number will remain depressed so long as cannabis remains federally illegal, and the United States Patent and Trademark Office (USPTO) maintains a policy of denying registration to cannabis-related trademarks (unless they concern hemp, which was legalized by the 2018 Farm Bill).
On the state level, trademark protection — which remains the only viable route for cannabis-related companies — is not as strong as nationwide federal trademark protection, and we are not surprised that resulting litigation is far more limited.
Roughly 5% of the litigations in our data set were classified as consumer class actions and include actions brought under the Telephone Consumer Protection Act (TCPA), typically relating to allegations that a cannabis company sent unsolicited "spam" text messages promoting their products.
There is also one consumer class action alleging violations of the Americans with Disabilities Act (ADA) on the basis that the defendant failed to maintain its website, which sells CBD products, in a manner that is fully accessible to visually impaired people.
The least common disputes reflected in our analysis comprise what we classified as actions brought by state and local governments against industry participants for failure to comply with state laws and regulations — such as operating an unlicensed cannabis business or failing to comply with a state's workers' compensation laws — and antitrust disputes.
Disputes alleging an industry participant's failure to comply with state laws and regulations made up approximately 4% of the litigations in our data set while antitrust disputes accounted for just about 2% of the litigations. This is likely because government actors have other tools — such as the ability to pull licenses or otherwise punish noncompliance — at their disposal.
Although our analysis reflects a relatively limited number of cases, the results are largely in sync with other industry experts and watchers who have observed similar trends in cannabis-related litigations. For example, a recent webinar by ADR Services, Inc. and the International Cannabis Bar Association identified partnership disputes, breach of contract, landlord-tenant, and real property issues as the most common litigation disputes facing cannabis businesses. Tax issues, intellectual property disputes, and employment disputes were similarly identified as very common within the cannabis space.
And while not reflected in our findings, a growing number of legal experts anticipate that the cannabis industry may soon face a surge of products liability suits as the market matures and the plaintiffs' bar becomes more sophisticated. In particular, the industry should be prepared for an uptick in disputes alleging bodily injury due to some defect in the way a cannabis product was manufactured or marketed and disputes claiming cannabis products were inaccurately labeled.
The industry should also be prepared for an increase in Food and Drug Administration enforcement actions relating to alleged violations of the Food, Drug, and Cosmetic Act (FDCA), especially in the hemp-derived CBD space. The FDA has already issued more than a dozen warning letters to companies this year relating to the sale, labeling, and/or marketing of CBD products.
In short, cannabis litigation remains something to keep an eye on.
Authors: Alex Malyshev, Sarah Ganley and Jodutt (Joe) Basrawi.