Marijuana Businesses Deemed Criminal Offense By California Court of Appeals Citing RICO Act

A panel of judges at a California court ruled on Wednesday that operating a marijuana business is considered a crime.

According to Courthouse News Service, a three-member panel of the Ninth Circuit Court of Appeals confirmed an earlier ruling that prevented a California licensed cannabis grower from suing her former business partners for participating in a fraudulent scheme that led to her cannabis farm being in a state of disarray.

That ruling was based on the fact that Francine Shulman, a former apple farmer who ventured into the cannabis space, couldn't sue under the Racketeer Influenced and Corrupt Organizations Act (RICO), as it would allow her to take actions that are considered illegal on the federal level.

"Looking to RICO as a whole, it is clear that Congress did not intend 'business or property' to cover cannabis-related commerce," U.S. Circuit Judge Milan Smith Jr., a George W. Bush appointee wrote. "When Congress enacted RICO, it expressly defined 'racketeering activity' to include the 'manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in' cannabis."

The Background

Shulman, a California farmer, teamed up with Todd Kaplan, the founder and CEO of Vertical Cos., a seed-to-sale legal cannabis business, as she needed funding to expand her existing 1,100-acre Iron Angel ranch near Lompoc, where she already grew medical marijuana. With the legalization of recreational marijuana in Golden State, Shulman opted to jump on the opportunity, acquire new land and expand farming operations. To that end, Shulman entered into cultivation and lease agreements with Kaplan and his associates.

However, Kaplan and his partners tried to take over the farmer's property and grower licenses while refusing to abide by the contractual terms, Shulman claimed in a lawsuit filed under the RICO Act in 2019, as she sought to recover damages. However, California state law. U.S. District Judge André Birotte Jr., in October 2020, dismissed her federal law claims.

Shulman's lawyers were appalled by the judge's decision.

"According to the district court, those engaged in the cannabis industry — or any other activity legalized first by states — lose the protections afforded by federal laws and may never be able to recover damages in federal court," they said. "As more states legalize cannabis sale and use, the industry has grown and will continue to grow dramatically, and affirmance of the district court's decision could devastate the industry and its workers."

RICO Statutes Go Hand In Hand With Federal Ban

Interestingly, RICO statutes have been used against legalization efforts.

A federal lawsuit was filed in July 2022 in Little Rock, which sought to use federal RICO statutes - initially created in 1970 to target organized crime - to go after medical marijuana suppliers in Arizona that allegedly sold cannabis with lower-than-advertised potency.

The plaintiffs - Pete Edwards, Don Plumlee and Jakie Hanan - argued that at one point they bought medical marijuana that had THC 25% lower than what was advertised and sought a class action suit.

In addition, the plaintiffs argued that the marijuana business is subject to the federal RICO Act since large-scale marijuana production and sale is illegal under federal law.

Meanwhile, efforts like these continue to gain momentum as they stem from the fact that marijuana remains a Schedule I substance under the Controlled Substances Act.

"As long as cannabis remains federally illegal, there is always some risk that aggrieved individuals will seek to use the RICO statute as a basis for asserting claims against cannabis brands," Meg Nash, counsel for firm Vicente Sederberg recently told Benzinga.

Photo: Courtesy of AJEL, lindsayfox by Pixabay