Text Message Costs Cannabis Executive

Recently, the 11th Circuit upheld a district court ruling that decided George Russo, president of 3 Delta, Inc., is individually responsible to pay BrewFab, LLC roughly $365,000 in outstanding invoices. This ruling is premised upon a text message Russo sent to a BrewFab owner promising to pay the outstanding invoices.

In 2018, 3 Delta hired BrewFab to construct a machine to extract CBD oil. The parties initially proceeded under the oral agreement without issue until December 2019 when the 3 Delta stopped paying BrewFab’s invoices.

Next month, the parties had a conference call to discuss the outstanding invoices, and soon thereafter, George Russo sent a text message to Rick Cureton, one of BrewFab’s owners, which read, “As per our conversation on Jan 30 2020 I george (sic) Russo from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed upon work for 3 delta future forward. I thank you for your patience.”

As a result of the text, work resumed, but the invoices did not get paid, and in June of 2020, BrewFab brought suit against 3 Delta to recover the past due amount. The lawsuit contained a count against Russo, in his individual capacity, for breach of his personal guaranty stemming from the text message he sent to Cureton.

BrewFab asserted in its summary judgment motion that Russo’s text message was an unambiguous and enforceable personal guaranty. The district court agreed. Russo appealed.

On appeal, Russo attempted to argue that he did not send the guaranty text message in his personal capacity, but the Eleventh Circuit disagreed. The Eleventh Circuit, agreeing with the District Court, stated that the language in the text message merely identified Russo as the one sending the text message, which contained no language to indicate that Russo was sending the message in his capacity as 3 Delta’s president.

According to a report from Reuters this summer, commercial disputes make up about 1/3 of cannabis related lawsuits. These disputes cover the gamut of disagreements, and involve breach of contract lawsuits, landlord-tenant disputes, securities related litigation, and other business torts such as breach of fiduciary duty. One such lawsuit is discussed above, but should serve as a reminder to those operating in the cannabis industry that business disputes are prevalent, and to remain vigilant and cautious in all business related communications.

Wage Loss Claims Find Their Way Into PA

FarmaceuticalRX LLC, licensed to process cannabis in Pennsylvania and Ohio, describes itself as “bringing healthcare, science, and innovation to the medical marijuana sector.” FarmaceuticalRX LLC boasts a “world-class research and development team” tasked with studying the effects of the cannabinoid in the treatment of opioid addiction, to lung cancer, and tumor cell remediation.

A lawsuit was filed in the USDC for the WDPA by former FarmaceuticalRX LLC delivery drivers, classified as independent contractors, seeking lost wages for overtime pay under the FLSA and PA Minimum Wage Act resulting from a misclassification as independent contractors rather than employees. According to the Complaint, the drivers attempted on several occasions to raise this misclassification, but the issue was never fixed. And one at least one occasion, the drivers were told that changing the classification mid-year may raise red flags with the IRS. The Complaint further alleges that the defendants controlled the work schedule and provided the drivers company cars. The defendants put out an advertisement looking for replacement workers about a month before the plaintiffs were fired.

This is just another example of lawsuits that cannabis operators and those in the industry may face. As previously reported, products liability and class action suits resulting from alleged mislabeling were filed earlier this year. Additionally, RICO and consumer fraud claims have also been filed. In addition to plaintiffs seeking monetary compensation, cannabis businesses and operators are open to virtually any kind of litigation, such as landlord-tenant disputes and patent infringement claims. These lawsuits continue to highlight the importance of remaining vigilant in all aspects of business. As the industry continues to expand, it is likely that lawsuits will as well.

 

 

Another Reminder For Cannabis Manufacturers to Remain Vigilant

RICO, historically used by federal prosecutors to deter acts of crime syndicates, recently was used by private citizens to form the basis of a class action lawsuit filed in the United States District Court for the Eastern District of Arkansas, alleging that an Arkansas marijuana cultivator and testing lab were engaged in an enterprise where THC potency test results were inflated by twenty-five percent on average. Although RICO claims against Cannabis companies have largely been unsuccessful thus far, this lawsuit seeks an injunction to shut down the medical marijuana industry for the entire state, and also seeks the certification of a class on behalf of the named plaintiffs and other patients who have purchased medical marijuana in Arkansas.  The lawsuit also contains one count for fraud based upon the Defendants’ violation of the Arkansas Deceptive Trade Practices Act.

The Defendants’, by selling Plaintiff’s “Regular” marijuana for a “Premium” price, caused the Plaintiffs economic harm. The Cultivator Defendants’ met the Complaint with a Motion to Dismiss, arguing that dispensaries are the ones that sold the medical marijuana to the plaintiffs, the cultivator-defendants had no control over the prices the dispensaries charged thus defeating any causal link between the alleged RICO violation and the Plaintiffs’ harm. Without that causal link, Plaintiffs lack standing to bring the claims.

This is another example of the type of claims, and another styled class action complaint brought against a cannabis cultivator. In Oregon, two class action complaints stemmed from Curaleaf’s mix-up of CBD and THC, which allegedly resulted in unwanted “highs” and economic loss. These lawsuits should always be central to a cannabis manufacturer’s focus about their own products, including proper safety protocols, proper testing procedures, proper employee training, and strict adherence to all statutes and regulations.

Cannabis-Related Reimbursement Claims Hit Healthcare Insurers

Healthcare insurers are used to dealing with claims for reimbursement by hospitals, providers, and patients. Medical marijuana treatment provides another vehicle for such claims.

New Mexico passed the Behavioral Health Services Equity Act (BHSEA) last April, effective January of 2022, which mandates that health insurance must cover in full the cost of services or medication used to treat behavioral health services. In February, New Mexico Top Organics – Ultra Health sent a letter to several insurers and the Office of the Superintendent of Insurance seeking affirmation that the insurers will provide coverage as prescribed by the act for the 74,000+ patients currently enrolled in the medical marijuana program as a result of PTSD. The request was denied. Now, several New Mexico health insurance companies are defending against a class action lawsuit filed by New Mexico Top Organics – Ultra Health, and six medical marijuana patients, seeking “recovery for themselves, and for every other similarly situated behavioral or mental health patient unlawfully subjected to paying for the entire cost of medically necessary cannabis in violation of state law” for failing to pay for the cost of medical marijuana as provided under the act.

Other legislatures are discussing similar laws that provide for insurance coverage of medical marijuana programs. For example, New York has pending legislation that if passed, would define medical marijuana as a “prescription drug,” “covered drug,” or “health care service” that would qualify for coverage under public programs. The United States Supreme Court recently denied certiorari for a pair of cases concerning workers’ compensation for medical marijuana, an issue that has not been decided uniformly amongst the states. For example, Minnesota and Maine have determined that the Federal Controlled Substance Act preempts the state law requiring reimbursement for medical marijuana due to a work-related injury, while New Hampshire and New Jersey have ruled in favor of reimbursement regardless of federal preemption.

The passage of New Mexico’s Act mandating behavioral health coverage in full and subsequent lawsuit brings a new wrinkle into cannabis litigation, with broad implications across the healthcare industry. Indeed, early clinical reports and case studies have shown positive results from the use of medical marijuana to treat PTSD, a disorder that effects an estimated 12 million Americans, and with medical marijuana available in 37 states, the class action lawsuit seeking reimbursement under the BHSEA may serve as a preview of a type of cannabis-related litigation that may be brought against healthcare insurers.

Cannabis Product Safety Is Paramount

Last week, my colleague Seth Goldberg and I published a client alert highlighting a series of cases filed in Oregon federal court against Curaleaf for allegedly mislabeling THC products as containing only CBD, which allegedly caused consumers of those products to experience and unwanted “high” resulting from ingestion of the products. A consumer class action lawsuit seeking $200 for each consumer who purchased the products was filed by the same Plaintiffs’ counsel. This class action lawsuit further highlights the fact that cannabis manufacturers need to ensure that proper SOPS, protocols, and measures of compliance are in place to ensure the safety of their products, and it demonstrates the types of claims that can be asserted when cannabis product safety issues, such as labeling discrepancies, arise. Class action claims, given the number of potential class members who may potentially recover, raise the stakes of litigation resulting from product safety issues. In addition, there also may be regulatory action taken and statutory fines imposed.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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