Imagine a new bakery opens on your block. Every morning, much to your displeasure, you arise to the pungent aroma of baking bread. The bakery is a success, leading to congested traffic, lines around the block, and loud customer noise. “There goes the neighborhood,” you mutter, resigned to either accept gentrification or move out.
But now imagine you learn the bakery doctored its employees’ immigration paperwork in violation of federal law. Though the U.S. attorney did not indict, the acts can be deemed “racketeering activity” under the federal Racketeer Influenced and Corrupt Organizations, or RICO, statute. Suddenly, RICO may give you a path to shut down the neighborhood scourge: Find an expert to testify the odor and foot traffic drove down your property value, and you can sue the bakery as a racketeering enterprise. With RICO’s treble damages and attorneys’ fees provision, you can send a message: “Not in my backyard.”
This thought experiment should sound absurd. Congress did not enact RICO as a weapon for neighborhood nuisance grievances. Yet this is precisely what is happening in states with legalized cannabis. Property owners in California, Colorado, Massachusetts, and Oregon—seizing on the inclusion of the Controlled Substances Act (CSA) in RICO’s definition of “racketeering activity”—have filed approximately a dozen RICO lawsuits against neighboring cannabis businesses, alleging “noxious odor” and foot traffic have driven down their property values. A federal appeals court greenlit such lawsuits when it reopened a RICO lawsuit against a Colorado cannabis operation in Safe Streets Alliance v. Hickenlooper.
Cannabis is legal, and highly regulated, in some form in thirty-three states and the District of Columbia. The Department of Justice has refrained from prosecuting legitimate businesses in these states under the CSA, concluding that “strong and effective regulatory” schemes minimize threats to “public safety, public health, and other law enforcement interests.” Current Attorney General William Barr stated this hands-off approach will continue, recognizing cannabis enterprises have made substantial investments in reliance on the Obama-era DOJ policy.
The Safe Streets case, however, undercuts these congruent federal and state policies by empowering property owners to use RICO to disrupt regulated cannabis businesses. Plaintiffs have filed RICO lawsuits against not just growers and distributors, but also their lenders, accountants, and landlords.
We believe these defendants have a strong defense courts have thus far overlooked. Under Supreme Court precedent, lawsuits based on federal statutes may proceed only if plaintiffs allege harm within the “zone of interests” that Congress intended to protect with the statute. Congress did not enact RICO or the CSA to protect property owners from cannabis odor any more than it enacted immigration statutes to protect against bakery aromas. Cannabis businesses sued under RICO should ask the courts to dismiss their cases under the “zone of interests” doctrine.
Action and intention
Congress enacted RICO in 1970 to provide “new remedies to deal with the unlawful activities of those engaged in organized crime.” (See U.S. v. Turkette.) RICO is primarily a criminal statute, but Congress added a federal cause of action for legitimate businesses muscled out by organized crime families. In time, RICO’s civil remedy evolved beyond organized crime “into something quite different from the original conception of its enactors,” as plaintiffs’ attorneys began to use civil RICO “as a tool for everyday fraud cases.” (See Sedima, S.P.R.L. v. Imrex Co.) Opponents of legalized cannabis seek to further expand RICO into a tool for shutting down the operations of regulated cannabis businesses.
A successful RICO plaintiff must prove it suffered business or property damage caused by a RICO violation, namely 1) conduct 2) of an enterprise 3) through a pattern 4) of racketeering activity. Most participants in the operation or management of a cannabis business are likely to meet all four elements. The statute defines “enterprise” as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” Under the statute, “racketeering activity” includes CSA violations, and a “pattern” comprises two or more such acts within ten years of one another. While RICO defendants can push back on specific allegations—e.g., courts have dismissed claims against lenders, landlords, and investors not involved in the operation or management of a cannabis business—a complaint against participants in a regulated cannabis enterprise is likely to satisfy the foregoing elements.
Congress enacted RICO in 1970 to provide “new remedies to deal with the unlawful activities of those engaged in organized crime.”
The real fight in these cases has been over whether the alleged RICO violations actually caused any damage. The plaintiffs generally have asserted the same type of RICO injury: a decrease in property value caused by odors from the neighboring cannabis operations and undesirable foot traffic. To date, four federal courts have rejected that theory—two in Oregon, one in California, and one in Colorado—but the Safe Streets court reversed the latter on appeal. The Oregon and California courts concluded such damages were not recoverable under the laws of those states, but the Safe Streets court concluded otherwise under Colorado law.
One takeaway from these cases is a cannabis operation’s RICO exposure depends on the state in which it operates. This is a peculiar application of a federal statute, especially since those states already have decided the underlying conduct should be legal. We believe, however, courts have overlooked a more fundamental question: Do cannabis odors and foot traffic truly make the plaintiffs victims of CSA violations so as to support a civil RICO claim?
Under Supreme Court precedent, a RICO plaintiff must show a direct causal connection between the predicate wrong and the harm. This “directness” requirement leaves RICO enforcement to “the immediate victims” of a crime who “can generally be counted on to vindicate the law as private attorneys general.” (See Holmes v. Securities Investor Protection Corp.) Arguably, neighbors of regulated cannabis operations are not—or at least should not be—“vindicating” the CSA when the DOJ has concluded robust state regulation “may affirmatively address” federal enforcement policies. In any event, it is not obvious those neighbors are “the immediate victims” of any predicate crime.
The Supreme Court’s RICO cases center on crimes such as fraud where plaintiffs allege financial damages. Those cases do not easily apply to other types of damages. The late Justice Antonin Scalia keyed into this problem in several concurring opinions, remarking RICO does not provide a remedy to a “stockholder who suffered a heart attack upon reading a false earnings report” even if the medical expenses can be traced to fraud. (See Holmes, 503 U.S. at 288 [Scalia, J., concurring].) In Scalia’s view, the starting point for analyzing RICO injury is to ask whether a plaintiff is in the “zone of interests” protected by the statute. Congress did not enact fraud statutes to keep medical costs down, so such costs are not recoverable under RICO, according to Scalia.
Under this reasoning, odors emanating from a legitimate business—whether a bakery or a cannabis operation—should not automatically be the basis for a RICO claim just because the business also engaged in a federal crime. Rather, a RICO plaintiff should first show that odorless air was in the “zone of interests” that Congress sought to protect by outlawing the predicate act.
Scalia’s analysis eventually became the centerpiece of the Supreme Court’s doctrine of “zone of interests” test in Lexmark Int’l., Inc. v. Static Control Components, Inc. The Lexmark court held “a statutory cause of action extends only to plaintiffs whose interests ‘fall within the zone of interests protected by the law invoked.’” At the outset of any federal lawsuit, a court must determine whether such a situation exists. If not, the court should dismiss the case.
The “main objectives of the CSA were to conquer drug abuse and to control the legitimate and illegitimate traffic in controlled substances.” (See Gonzales v. Raich.) That is, the CSA’s “zone of interests” are protecting communities from the ill effects of addiction and the violent crime that can accompany illicit drug trade. Arguably, addicts suffering from narcotic abuse are within the CSA’s “zone of interests,” but the CSA has nothing to do with protecting neighbors from odors inherent in the highly-regulated cannabis industry. Perhaps those odors should be subject to regulation in legalized states—and, indeed, they are in many jurisdictions—but zoning grievances should not be redressed through RICO.
Plaintiffs in the legal cannabis cases are using RICO in a way Congress never intended: as a tool to upend regulated businesses approved by the voters of their states. Since neither RICO nor the CSA concern themselves with odors emanating from a regulated business, the “zone of interests” doctrine provides cannabis operators a tool to dismiss the RICO nuisance claims at the outset.
David T. McTaggart is a commercial litigator with trial and appellate experience. In addition to his work in the cannabis industry, he represents individuals and businesses in a wide range of legal matters, including breach of contract, corporate disputes, employment law, fraud, insurance coverage, intellectual property, and securities law.
Seth A. Goldberg serves as team lead for the Duane Morris cannabis industry group, where he advises core and ancillary cannabis and hemp companies in a wide array of regulatory and business matters pertaining to their legal marijuana activities. He also advises non-cannabis companies as they evaluate the cannabis sector, both hemp and marijuana. His practice includes a particular emphasis on the CBD regulatory framework. (DuaneMorris.com)