In our last article, we discussed the potential for litigation faced by CBD companies and analyzed a court’s handling of claims regarding fraudulent inducement. Today, we turn to that scary claim of RICO, or the Racketeer Influenced and Corrupt Organizations Act. For most, this term conjures images of mafia prosecutions. The federal government trying to bring down organized crime with wiretaps and FBI agents raiding social clubs as depicted in various movies. However, the RICO statute is also applied in civil litigation. We will address how allegations brought under the act can be interpreted and how companies can best defend such allegations. Keep in mind that there is dissent among the federal circuits when addressing certain claims and that each case is fact-specific.

Referencing Douglas Horn’s case pending in New York federal court, the plaintiffs brought their RICO claim under 18 U.S.C. Section 1962(c). That provision “makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” [i] “To establish a civil RICO claim … a plaintiff must allege (1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity, as well as injury to business or property as a result of the RICO violation.”[ii]

“The pattern of racketeering activity must consist of two or more predicate acts of racketeering,” which must be related and must pose a threat of continued criminal activity.[iii] Racketeering activity is defined to include “any offense involving … the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance … punishable under any law of the United States.” [iv] This definition extends to the cultivation, manufacture, and sale of marijuana.[v] (Operation of marijuana cultivation facility necessarily would involve some racketeering activity.)

After reviewing the evidence, the court held that Horn and his wife provided sufficient evidence to show a pattern of racketeering activity. Specifically, Horn purchased two bottles of CBD oil from the defendants, which at the time of sale, was a controlled substance under the CSA. The court held these two transactions constituted two predicate acts of racketeering activity. 18 U.S.C. Section 1961(1)(D). The court also noted their ruling would not change even if the defendants mistakenly believed their product was not a controlled substance. It is unlawful for any person, knowingly or intentionally, to distribute or dispense a controlled substance. 21 U.S.C. Section 841(a)(1).

A defendant satisfies the knowledge requirement if he knew he possessed a substance listed on the schedules or, alternatively, if he knew the identity of the substance he possessed, whether or not he knew it was listed on the schedules.[vi] Here, the court noted there were sufficient facts that revealed the defendants knew the identity of the substance they possessed—a mixture containing a resin extract derived from the cannabis sativa plant. In 2012, that substance fell within the definition of marijuana under the CSA. 21 U.S.C. Section 802(16) (2012).

These transactions also met the relatedness and continuity requirements. The transactions were related because such acts were the business of the defendants’ venture.[vii] The defendants’ activities also presented a threat of continued criminal activity as the sale of hemp based CBD products was the sole reason of the defendants’ venture. Given the inherent illegality of the product and defendants’ intent to continue and expand those operations, the court held that Horn and his wife provided sufficient evidence to prove a pattern of racketeering activity. However, that did not end the discussion.

The court held there was a genuine issue of material fact on one necessary element: whether the defendants’ conduct proximately caused Horn’s injuries. “A plaintiff suing under RICO must establish that the RICO offense was the ‘proximate cause’ of the plaintiff’s injuries. Proximate cause requires some direct relation between the injury asserted and the injurious conduct alleged, and a link that is too remote, purely contingent, or indirect is insufficient.”

Horn’s biggest problem—there was a genuine dispute as to whether the defendants’ product resulted in his positive drug test and thereby caused him to lose his job. As such, this issue will need to be addressed during a trial with fact and expert witnesses. Horn’s wife’s RICO claims were dismissed as too remote and indirect to satisfy the requirement of proximate causation.[viii]

What does this mean going forward? 

These rulings provide an idea of how a federal district court may interpret such allegations. Keep in mind that while the 2018 Farm Bill legalized hemp-derived CBD, regulations are still being finalized. Certain iterations remain illegal, such as food infused with CBD. As a result, any person who purchased hemp-drived CBD oil prior to December 2018 could likely still bring suit alleging a violation of RICO. Depending on the court, it is possible that some plaintiffs may still try and bring such claims today, arguing that the 2018 Farm Bill has not been finalized. Companies engaged in these ventures should be very cognizant of the statements they make regarding their products. We recommend maintaining a record of all test results. Be cognizant of representations regarding what your product provides individuals who purchase it. Be aware of your specific state’s regulations and reach out to legal counsel if you have any questions.

 

[i] Ferri v. Berkowitz, 678 F. Supp. 2d 66, 72-73 (E.D.N.Y. 2009).

[ii] Flexborrow LLC v. TD Auto Fin. LLC, 255 F. Supp. 3d 406, 414 (E.D.N.Y. 2017).

[iii] DeFalco v. Bernas, 244 F.3d 286, 320 (2^nd Cir., 2001).

[iv] 18 U.S.C. Section 1961(1)(D).  Horn v. Medical Marijuana, Inc., 383 F.Supp.3d 114, 132 (W.D.N.Y., 2019).

[v] Safe Streets Alliance v. Hickenlooper, 859 F.3d 865, 882 (10th Cir. 2017)

[vi] McFadden v. United States, 135 S.Ct. 2298, 2304, 192 L.Ed.2d 260 (2015).

[vii] Reich v. Lopez, 858 F.3d 55, 61-62 (2^nd Cir., 2017).

[viii]  Horn v. Medical Marijuana, Inc., 383 F.Supp.3d 114, 133 (W.D.N.Y., 2019).