Safe Streets Alliance v. Hickenlooper Provides Good News, Bad News, and Instructions to the Cannabis Industry and the Financial Institutions Serving It

by Bradley Arant Boult Cummings LLP
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For years, the “legal” cannabis industry – operating in states that have legalized cannabis under state law despite its long-standing prohibition under federal law – and the financial institutions that serve the industry have closely watched Safe Streets Alliance v. Hickenlooper. In Hickenlooper, Safe Streets Alliance, a “nonprofit organization devoted to reducing crime and illegal drug dealing,” and a family (Plaintiffs) that owned land surrounding a Colorado cannabis farm (Farm), sued the Farm and its dispensary customer (Dispensary) (collectively, Companies), alleging those entities were engaged in a racketeering operation by respectively growing and selling cannabis, which is illegal under the Controlled Substances Act (CSA). Plaintiffs alleged they were entitled to damages under the citizen-suit provision of the Racketeer Influenced and Corrupt Organization Act (RICO).

The cannabis industry breathed a sigh of relief on October 31, 2018, when a federal jury sided with the Farm, finding that Plaintiffs failed to prove the Farm’s operations damaged them. While this verdict was a clear win for the industry, Hickenlooper’s somewhat convoluted procedural history reveals potential pitfalls for cannabis businesses and the ancillary businesses providing services to them. In particular, the Tenth Circuit’s reversal of the United States District Court for the District of Colorado’s earlier dismissal of the case arguably provides a blueprint for alleging RICO claims against cannabis-related businesses that can survive a motion to dismiss, opening the door to discovery and a potential trial. This weaponized litigation is a tactic developed, and expected to be broadly used, by anti-legalization organizations like Safe Streets in an attempt to turn the tide against legalization.

This article analyzes Hickenlooper and provides several takeaways for the legal-cannabis industry and financial institutions that provide or are evaluating whether to provide financial services to the industry.

The RICO Claims

RICO provides private citizens with a federal cause of action for “injur[ies]” to their “business or property” caused by a pattern of racketeering activity. Under RICO, “racketeering activity” includes “any offense involving … the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance” as defined in the CSA, including cannabis.

To succeed on a RICO claim, the plaintiff must prove that (1) the defendant engaged in a pattern of racketeering activity; (2) the plaintiff’s business or property was injured; and (3) the racketeering activity caused the injury. In Hickenlooper, Plaintiffs alleged that by cultivating and selling cannabis, the Companies engaged in racketeering activity that devalued Plaintiffs’ land and interfered with their present use and enjoyment of it because the Farm invited crime, and the Farm’s “distinctive and unpleasant smell” was detectable on their land.

The District Court Grants the Companies’ Motion to Dismiss

The Companies moved to dismiss the RICO claims, arguing that Plaintiffs alleged only a “speculative injury” to their land’s value, rather than providing the “proof of a concrete financial loss” required under a heightened RICO pleading standard that the Companies argued applied. The district court agreed and granted the motion. While the court noted Plaintiffs’ allegation that the Farm’s odor invaded their land “permit[ted] a reasonable inference that” the land was devalued, it nonetheless dismissed their RICO claims because Plaintiffs “provide[d] no factual support” or “concrete evidence” to “quantify or otherwise substantiate their inchoate concerns as to the diminution in value of their property.”

The Tenth Circuit Reverses the Dismissal

The Tenth Circuit reversed the district court for improperly applying this heightened-pleading standard to dismiss adequately-pled RICO claims. Perhaps most importantly, the Tenth Circuit articulated what appears to be a per se rule that cultivating and selling cannabis is “by definition” a “racketeering activity” under RICO because, regardless of whether it is legal under the laws of the state where it occurs, it is illegal under the CSA. Further, the Tenth Circuit held that Plaintiffs adequately alleged the Farm and Dispensary formed an “association-in-fact enterprise” – an enterprise comprised of “a group of persons associated together for a common purpose of engaging in a course of conduct” – by alleging the Companies “pooled their resources, knowledge, skills, and labor” to grow cannabis on the Farm to sell at the Dispensary.

Next, the Tenth Circuit explained that Plaintiffs sufficiently pleaded that the Companies each had a part in conducting the unlawful enterprises’ affairs, noting the Companies “admit[ted] that they all ‘agreed to grow marijuana for sale’” at the Farm. The Tenth Circuit noted this same admission in holding that Plaintiffs adequately alleged the Companies were engaged in a “pattern of racketeering activity” by “plausibly stat[ing] the requisite patterns of predicate acts that present a threat of ongoing criminal activity.”

Turning back to the damages element, the Tenth Circuit held the district court erred by requiring “evidence of a ‘concrete financial loss’ (e.g., an appraisal quantifying the diminution in property value or comparator results of attempts to sell predating and postdating a RICO violation) to plausibly allege” an injury caused by the Farm’s operations. The Tenth Circuit explained it had “little difficulty” concluding that Plaintiffs “plausibly pled an injury to their property rights caused by the stench that the [Farm]’s operations allegedly produce,” and that it “need only draw an eminently reasonable inference to conclude that it is plausible that activities that interfere with one’s use and enjoyment of property diminish the value of that property.” The Tenth Circuit also noted that at the pleading stage, the district court was not “at liberty to disbelieve the [Plaintiffs] by ratifying the [Companies]’ speculation that the value of the [Plaintiffs]’ land has, perhaps, increased because of the now-booming market in Colorado for land on which to cultivate [cannabis].” Notably, the Tenth Circuit did affirm the dismissal of the RICO claims premised on other non-cognizable injuries, such as the speculative future decrease in value of Plaintiffs’ land and the alleged injuries that arose each time they viewed the Farm because it was “a constant reminder of the crimes occurring therein.”

The Tenth Circuit concluded by reversing the district court, but limited its holdings:

We are not suggesting that every private citizen purportedly aggrieved by another person, a group, or an enterprise that is manufacturing, distributing, selling, or using [cannabis] may pursue a claim under RICO. Nor are we implying that every person tangentially injured in his business or property by such activities has a viable RICO claim. Rather, we hold only that [Plaintiffs] alleged sufficient facts to plausibly establish the requisite elements of their claims against the [Companies] here.  [Plaintiffs] therefore must be permitted to attempt to prove their RICO claims.

The Companies Prevail at Trial

Plaintiffs failed to prove their claims at trial. The Farm established that its business is legal under state law, licensed by the state, and located on land zoned for agriculture. Because Plaintiffs’ land was also zoned for agriculture, the Farm argued that Plaintiffs should have expected the surrounding land would be used for that purpose. A chemical engineer testified that while he detected the Farm’s odor at a few discrete locations on Plaintiffs’ land using a Nasal Ranger detection device, the levels at each location were below the device’s lowest measurement. The jury also heard from several experts regarding the Farm’s impact on the value of Plaintiffs’ land. After trial, the jury found that Plaintiffs failed to prove damages, and judgment was entered in the Farm’s favor.

Takeaways

Hickenlooper is a blessing and a curse for the cannabis industry and the financial institutions that serve it. The cannabis industry obviously celebrates the jury verdict, which provides potential cannabis defendants with a roadmap of sorts for defeating the damages element of a RICO claim based on the alleged nuisance created by a cannabis business.

On the other hand rests the Tenth Circuit’s published decision establishing that – at least in Colorado, Kansas, New Mexico, and Oklahoma – “the manufacture, distribution, and sale of [cannabis] is, by definition, racketeering activity under RICO,” a holding that appears well supported by RICO’s plain language. The Tenth Circuit also seemed to set a low bar for pleading that several entities are part of an “association-in-fact enterprise” in this particular context, and courts have held that banks can be part of an association-in-fact enterprise in RICO suits arising in other contexts. To be part of such an enterprise, however, the Tenth Circuit explained that an entity “must have some part in directing the enterprise’s affairs” – “simply provid[ing], through its normal course of business, goods and services that ultimately benefit the enterprise” is not enough.

Fully mitigating the legal risk of transacting with cannabis-related businesses is not possible so long as cannabis remains illegal at the federal level under the CSA. Financial institutions that choose to do so may mitigate that risk by avoiding covenants that provide the institution with the ability to direct any part of the cannabis-related business’s operations to avoid being deemed an “association-in-fact enterprise” with that business in a RICO suit. To balance this concern with their standard business practices, financial institutions should consult outside counsel familiar with lending issues unique to the cannabis industry before entering this space.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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