Just Blowing Smoke? Healthy Pharms Case Strikes at Cannabis Community

Commentary · September 27, 2017

The word “racketeering” usually conjures up images of mob bosses, blackmail, money laundering, and corrupt back-alley dealings.  However, the Racketeering Influenced and Corrupt Organizations Act (“RICO”) (18 U.S.C. §§ 1961-1968) may be seeing new life in an unexpected territory: lawsuits in federal courts targeting marijuana dispensaries in states that have legalized marijuana.  Although medical and recreational marijuana use is legal in Massachusetts, the possession, growth, and distribution of cannabis remains illegal under the federal Controlled Substances Act (21 U.S.C 812). This conflict between state and federal law appears to have provided an avenue for creative lawsuits designed to thwart marijuana legalization.

One such suit was brought earlier this month in U.S. District Court in MA by commercial property owner Crimson Galeria over a new dispensary site in Harvard Square at 98 Winthrop Street, Cambridge.  In Crimson Galeria v. Healthy Pharms, Crimson Galeria is suing an abutter, marijuana grower and dispensary to-be Healthy Pharms, claiming that Healthy Pharms committed a pattern of racketeering activity through which it operated an enterprise consisting of Healthy Pharms, its service providers, and government officials in Cambridge and Georgetown (where the medicinal marijuana is grown), which enterprise acted to violate the Controlled Substances Act.  Crimson Galeria claims this has caused a decrease in its property value.

The RICO statute was originally passed by Congress as a mechanism to combat organized crime’s infiltration of legitimate business.  RICO focuses on a pattern of racketeering activity, which includes a large number of criminal offenses traditionally associated with organized crime, including violations of the Controlled Substances Act.  Although RICO is a criminal statute, it contains a provision allowing individuals to bring a civil lawsuit if they suffer injury to business or property because of a RICO violation.  RICO has been described as the litigation equivalent of a “thermonuclear device” (Miranda v. Ponce Fed. Bank, 948 F.2d 41, 44 (1st Cir. 1991)), in which a successful plaintiff is entitled to recover mandatory treble damages and attorneys’ fees.  In the Healthy Pharms case, Crimson Galeria alleges that Healthy Pharms and others conducted the affairs of a number of RICO enterprises through a pattern of racketeering activity in violation of RICO Section 1962(c), resulting in injury to Crimson Galeria’s business or property, namely a diminution of property value.  Use of the civil provision of RICO in this way may pose a significant financial threat to those conducting medical cannabis businesses legal under state law, and may subject such business’ banks, insurance companies, and other service providers to similar liability.

While it is too early to determine how this RICO action might be resolved, similar lawsuits in other states may prove instructive.  In Colorado, a string of RICO and related cases were filed against a marijuana grow site that planned to sell its product to a dispensary in another town.  The claims were originally dismissed by the U.S. District Court because “the [plaintiffs] had not pled a plausible injury to their property that was proximately caused by the Marijuana Growers’ activities…and therefore failed to make the showing of damages that are clear and definite [as] required for RICO standing.”  Safe Streets v. Hickenlooper, 859 F.3d 881 (10th Cir. 2017) (internal quotations omitted).  However, the RICO claims were reinstated by the Tenth Circuit in July of this year because that Court found no evidence that such a high standard for RICO standing and pleading existed, and even so, “it is reasonable to infer that a potential buyer would be less inclined to purchase land abutting an openly operating criminal enterprise than she would be if that adjacent land were empty or occupied by a lawfully-operating retailer…” Id. at 888.

Here, it is expected that Crimson Galeria will have to overcome a similar hurdle in proving its claim that the Healthy Pharms dispensary will cause a diminution to its property value. This claim could be difficult to prove, given the ever-increasing property values in Harvard Square and the lack of comparable properties from which to assess such claims.  This essential showing could also be complicated by the fact that Crimson Galeria’s purported harm originated with the granting of zoning approvals to Healthy Pharms, in which case the exclusive remedy would be an appeal under the state Zoning Act, G.L. c. 40A.  There may also be an argument that Crimson Galeria’s complaint is merely an attempt to end run the Zoning Act’s deadlines and the requisite showing that it is aggrieved by the decision.  Under the Zoning Act, this requires “a plausible claim of a definite violation of a private right, a private property interest, or a private legal interest” that falls within the scope of interests that the pertinent zoning bylaw is intended to protect.  See Harvard Sq. Defense Fund, Inc. v. Planning Bd. of Cambridge, 27 Mass. App. Ct. 491, 493 (1989). This may be a more difficult standard to meet than that proposed by the Tenth Circuit in the Safe Streets case.

Industry observers and those looking to enter the marketplace will no doubt be following the development of Healthy Pharms for future guidance in navigating these unsettled waters.

If you have questions about any of the information in this alert, including how Prince Lobel can help your business navigate the legal complexities of the marijuana industry, please contact Joe Messina, an expert in RICO actions, at 617.456.8012 or jmessina@princelobel.com, or Julie Barry, an experienced zoning and land use attorney and member of Prince Lobel’s Cannabis Industry Group, at 617.456.8090 or jbarry@princelobel.com. For more updates on the Healthy Pharms case, don’t forget to register for Prince Lobel’s Cannabis Roundtable on the new recreational marijuana statute in Massachusetts, taking place tomorrow, September 28, at 5:30 pm.

With thanks and appreciation to law clerk Daniel Guenther (Northeastern University School of Law, 2018), for his assistance with this alert.

About Prince Lobel: Prince Lobel Tye LLP is a Boston law firm whose 80-plus attorneys handle matters of local, regional, national, and international reach.  We offer high-quality advice and cost-effective solutions in practice areas and industries including Construction, Corporate, Data Privacy and Security, Domestic Relations, Employment, Environmental, Insurance/Reinsurance, Intellectual Property, Litigation, Media and First Amendment, Nanotechnology, Real Estate, Renewable Energy, Social Media, Telecommunications, and Trusts and Estates.