by Julie Hussey, Barak Cohen, Tommy Tobin
Recent years have seen increased growth for cannabis companies, especially as the market for THC products continues to expand. But this growth brings with it increasing scrutiny of the industry by regulators and private party litigants. Class action litigation risks are a real concern that will only expand as the industry continues to grow. In 2019 and 2020 alone, there were over 100 class action cases filed against cannabis companies, with many focused on issues regarding cannabis labeling, marketing, and disclosures. This article outlines recent cannabis class action trends from across the country.
The Regulatory Landscape
Cannabis companies face complex compliance requirements at the federal and state levels, especially as states may have varying approaches to regulating cannabis products in their jurisdictions. Compliance challenges are exacerbated as the cannabis industry faces constantly evolving rules and regulatory structures. For example, New York only recently announced the formation of its new Office of Cannabis Management, which aims to enforce “a comprehensive regulatory framework” in that state.
At the federal level, agencies, namely the Food and Drug Administration (FDA) and Federal Trade Commission (FTC), have issued public announcements and dozens of warning letters to cannabis companies. Throughout 2020, the FDA raised questions concerning the accuracy of cannabidiol (CBD) content on product labeling and, more generally, concerning the overall safety of CBD, especially for certain populations such as children or pregnant women. The FTC launched “Operation CBDeceit,” a suite of six settlements of enforcement actions regarding the agency’s ongoing efforts to monitor the marketplace for what the agency considers misleading health claims. The FTC noted that cannabis companies, particularly CBD product manufacturers, “that represent expressly or by implication that what they sell can prevent, treat, or cure serious medical conditions will be held to the highest substantiation standards and marketers can expect careful scrutiny of those promises.” Separately, the Securities and Exchange Commission (SEC) has also taken action against cannabis companies and individuals in the industry for suspected securities fraud, including federal lawsuits in California and Illinois alleging inflated stock prices, sale of illusory securities, or conversion of money raised from the sale of unregistered securities.
States have developed their own approaches to regulating cannabis within their jurisdictions, with many now allowing THC products in some form. Variations among these requirements create myriad challenges for cannabis companies wishing to operate across state lines.
Increasing Cannabis Class Action Risks
The growth of the cannabis marketplace in recent years has prompted increased litigation risks, especially regarding consumer class actions. From data-related class action concerns to security disclosures and labeling issues, cannabis companies may see themselves facing class action filings.
Surveying court dockets across the country, Perkins Coie found approximately 100 new cases filed between 2019 and 2020 that highlight potential litigation risks related to cannabis labeling, marketing, and disclosures.
The most significant cases for cannabis product manufacturers are the approximately 30% of claims alleging: (i) that the labeled amount of THC or CBD was inaccurate or (ii) that the CBD product was “illegal to sell.”
Both categories of cases were prompted by the FDA’s reports and public announcements. At the federal level, the FDA has announced that it is “currently illegal to market CBD by adding it to a food or labeling it as a dietary supplement.” Similarly, the FDA has reported concerns with potentially inaccurate CBD concentration information on product labels, finding that dozens of products contained levels of CBD that varied from the product’s labeling.
The courts and the cannabis industry continue to await clear guidance from the FDA on how it will regulate CBD products, particularly regarding standards for labeling. In the meantime, many courts are pressing pause on CBD class action matters, staying these cases to allow the FDA to develop enforcement policies before the court is asked to interpret the existing law.
The Telephone Consumer Protection Act (TCPA) was associated with approximately 20% of the class action filings that Perkins Coie identified. These cases alleged that consumers received unsolicited, autodialed communications from cannabis companies. The TCPA is a favorite of the plaintiffs’ bar, given that statutory damages under the law can be considerable. Companies can be liable for $500 per unwanted text or call, and the statute provides that courts can award three times that amount for willing and knowing violations of the law. In addition, there is no cap to potential recovery available under the law, which can create sizeable damage awards for even relatively small numbers of calls or texts. While a recent Supreme Court decision may cool this trend by adopting a narrower interpretation of an “autodialer” system, as we have discussed elsewhere, cannabis businesses should nonetheless get smart about TCPA litigation risks.
Cannabis Disclosures and Other Cases
Securities-related disclosures comprised another 30% of recent class action filings. These cases allege that cannabis companies (or individuals affiliated with these companies) did not make proper disclosures related to the offering and sale of securities. For example, in one New York “stock drop” case, putative class plaintiffs alleged that the business should have done more to prevent the losses associated with an FDA warning letter. Given that the SEC has become more active in its own enforcement activity regarding cannabis securities, this litigation trend may see continued growth.
The remaining cannabis cases largely involved employment-related or disability-related claims. These include individuals who allege that (i) they consumed a product, failed a drug test, and were subsequently fired from their employment, or (ii) a cannabis company’s website did not accommodate visually disabled users.
With more states legalizing cannabis and CBD, the market is becoming even more dynamic, especially with newly proposed regulatory regimes. Given this growth, the number of class actions targeting cannabis and CBD companies is expected to expand. Taking proactive measures toward complying with applicable law is a fundamental first step in addressing this growing litigation risk, especially in light of increased federal activity targeting what agencies consider to be potentially misleading health and potency claims.
As demonstrated in the growth of consumer class action cases targeting other industries, namely the food and beverage industry, class action claims often do not focus exclusively on issues of product safety or integrity, but instead often make allegations regarding deception over labeling claims—even where no reasonable consumer could possibly be misled. To further mitigate litigation risk, cannabis companies could consider:
- ensuring that cannabis labeling, marketing, and disclosures are truthful and not misleading;
- substantiating claims made in the product’s marketing and labeling; and
- providing training to employees and marketers to further bolster compliance with cannabis and advertising laws.
As the cannabis industry continues to expand, so too do the litigation risks cannabis companies face, especially as those companies grow in size, scope, and sophistication. While these litigation risks cannot be eliminated, compliance with applicable law and the steps outlined above could assist cannabis businesses amid an expanding number of class actions matters filed in the nation’s state and federal courts.
About The Co-Authors
Barak Cohen is a partner in Perkins Coie’s Washington, D.C. office and the firm-wide chair of the Cannabis industry group.
Tommy Tobin is an associate in Perkins Coie’s Seattle office, where he focuses on complex commercial litigation and class action matters involving statutory, constitutional and regulatory issues in a range of industries, including food and beverage as well as cannabis.