Minnesota recently became the 23rd state to legalize the recreational use of cannabis/marijuana. Regulation of this industry will develop over the coming year, but certain products are already available. The question companies—and their business partners—should be concerned about is this: How do we avoid legal risk in this developing industry?

The past is often an able predictor of the future. Marijuana is new to Minnesota, but has been legalized in over 22 other states in the past decade. Based on what has happened in those states, Minnesota companies can anticipate the following:

  • Scrutiny over breaches of rigorous state and federal regulations and guidance;
  • The need for strong, reliable, scientific evidence of product characteristics; and
  • Lawsuits from neighbors and business partners alike.

Regulation May Lead to Litigation

It should be no surprise that this new industry will be highly regulated. Minnesota has established the Office of Cannabis Management (OCM) to govern the cannabis industry. OCM will regulate product labeling and packaging, business licensing, product testing, and more. The legislature granted OCM the authority to make rules quickly. Once OCM finishes the rulemaking process, industry participants should follow the regulations closely to ensure that they comply. Indeed, a 2022 study determined that failure to do so in other states led to public and private litigation in several instances.

OCM still has work to do, but the Minnesota Department of Health has already issued guidance for businesses based on statutory requirements. Visit this link for more information. A helpful fact sheet can be viewed at this link as well. The recommendations address topics ranging from packaging and labeling, to product shape and size, to registration, to testing, and so on. Businesses involved in the industry need to keep abreast of this guidance, as well as the upcoming regulations from the OCM.

In addition, although marijuana consumption is not legal under federal law, federal agencies such as the Food and Drug Administration (FDA) and Federal Trade Commission (FTC) have provided guidance, such as that THC and CBD products cannot be marketed as dietary supplements. The FDA and FTC are also acutely concerned with marketing to children. They recently issued warning letters to six companies who sold products “in a form (e.g., candy) that is appealing to children, that mimic well-known snack food brands by using similar brand names, logos, or pictures on packaging, and that consumers may confuse with traditional foods.”

The Importance of Strong, Reliable, Scientific Support

Businesses should also be aware of the potential of consumer litigation, especially lawsuits challenging the accuracy of labeling or advertising statements. The best defense to these claims is to have accurate, reliable, scientific evidence in support of product characteristics.

The cases filed in states that legalized cannabis provide insight on where Minnesota businesses ought to be concerned. There are many cases involving claims based on a product being “mislabeled” or “falsely advertised.” Plaintiffs have alleged a product’s packaging or advertising communicates a certain potency of THC or CBD, but that the potency is not as advertised. For example, consumers in California recently filed a class action complaint accusing “prerolls” of containing less THC than advertised on the label. The case remains pending.

Another common issue is when a product is advertised as containing CBD, but contains THC. In one case, the plaintiff purchased and consumed a CBD oil that was marketed to be void of THC. After consuming the CBD, the plaintiff was subjected to an employer drug test, tested positive for THC, and was fired. Later testing of the CBD oil determined that the product contained THC. The employee sued, and the court determined the employee had a viable claim for fraud. In another case, the plaintiff brought claims after lab testing showed that the defendant’s chocolate CBD products did not have the amount of CBD advertised. Both cases are pending.

These cases illustrate the kinds of issues businesses could face in Minnesota. Even companies who partner with cannabis businesses could face claims for aiding and abetting, civil conspiracy, and the like. Those who wish to market, sell, or distribute cannabis products—or partner with those kinds of companies—should ensure that their advertising and packaging is accurate and supported. An ounce of prevention is often worth a pound of cure.

Haters May Hate

Sometimes cannabis businesses face litigation from other companies or citizens at large. There have been a number of cases in which these businesses were attacked by others as allegedly acting as part of a “criminal enterprise” to encourage “drug trafficking,” for example.

In Colorado, a neighborhood organization brought racketeering claims against regulators and cannabis companies. The organization claimed these defendants’ “criminal enterprise” caused injury to Colorado property through loss of enjoyment and diminution in value due to “noxious odors.” The district court initially dismissed the claims, but the court of appeals reversed. On remand, the jury awarded no damages, rejecting the plaintiffs’ claims. Similar lawsuits have arisen in other states, but none appears to have been successful.

Souring business relationships can also lead to disputes. For example, in one case, a California cannabis company brought claims against a business partner after their relationship deteriorated. The plaintiff alleged that the defendant engaged in unlawful and fraudulent conduct that injured the plaintiff’s business, including by misrepresenting the defendant’s experience in the industry and connections to various retail outlets, but the claims were dismissed.

Industry participants should be aware of the potential for these kinds of claims, especially by plaintiffs testing new theories in an undeveloped area of law. Cannabis industry participants may face legal attacks on several fronts from consumers, competitors, business partners, and citizens wishing to dismantle the cannabis industry in general.

*Originally Published on LinkedIn Articles

October 12, 2023