Because "defective product claims" make terrific class actions, and due to marijuana's 100 percent federal illegality, marijuana-related businesses face an extreme risk of liability for such claims.

Steve Schain, Larry Mishkinand 2 more

October 29, 2018

5 Min Read
Preventing cannabis industry's ‘class action’ exposure

With Fortune Magazine placing a US$7.7 billion valuation on the global cannabis market, it's only a matter of time until massive lawsuits are brought against those touching the plant, i.e., anyone planting, cultivating, harvesting, processing/extracting, testing, packaging, disposing, transporting and dispensing cannabis ("marijuana-related businesses").  

Lawsuits range from a single plaintiff seeking personal injuries or property damage recoveries to class actions in which a group of similarly situated plaintiffs (having one or more common issues of law or fact) jointly assert claims in one proceeding. 

To maximize both the damages and attorney fees award, class action plaintiffs' lawyers scour for conduct affecting a group in a consistent manner. Because "defective product claims" make terrific class actions, and due to marijuana's 100 percent federal illegality, marijuana-related businesses face an extreme risk of liability for such claims.

Product liability law addresses defective product claims, including design defects, manufacturing defects and failure to warn of a product’s dangers. Although primarily seeking remuneration for personal injury, property damage or economic harm, product liability claims may also seek punitive relief to punish the defendant and redress harms allegedly done to society.    

By correctly deploying product warranties, launching safety programs, maintaining essential records, and performing claims triage, marijuana-related businesses can best protect against having their resources materially drained in defending class litigation.

Product Warranties and the Uniform Commercial Code

For sale-of-goods transactions, the Uniform Commercial Code (UCC) provides warranties and disclaimers, immunizing products from being exposed to liability claims. Growers could limit warranties to those expressly provided under UCC §2-313, exclude all other warranties, express or implied, or specifically exclude the implied warranties of merchantability and fitness for a particular purpose (UCC §§ 2-314 and 2-315).

Further, because the UCC permits contractual limitation of remedies available to a purchaser in a UCC §2-719 breach of warranty, a grower could also benefit from meaningful remedy limitations, including specifically defining available remedies as limited or exclusive or limiting/excluding consequential damages.

Safety Program

Comprised of a written safety policy, safety committee, audit program and communication protection, a safety program both decreases liability risks, and avoids or mitigates a lawsuit's exposure.

Shaped by legal requirements and the commercial context in which the company operates, a written safety policy establishes measurable and attainable goals, empowers employees to raise defect issues, and is disseminated in hard copy and online company publications and employee handbooks.

To fortify a safety policy's meaningfulness, the marijuana-related businesses must form a safety committee to establish criteria that supports the policy, practices and procedures, to gather prior event information and to apply lessons learned to future situations, and to handle regulatory reporting. 

Audit programs are initiated by the safety committee and help to identify potential defects before they reach customers and problematic products in the market and lead to claims. By administering regular audits, marijuana-related businesses can enforce compliance of safety rules and policies, develop a better understanding of liability risks, and prevent defects from becoming product liability claims.

After learning of an actual or potential liability issue, the safety committee must launch an internal investigation to understand the issue's nature and scope. Through shielding them from disclosure, the attorney-client privilege and work product doctrine encourage the flow of communication.  

Before and during any safety investigation, marijuana-related businesses must identify and protect the attorney-client privilege and work product doctrine by ensuring that: counsel guides the safety committee and other investigators; the investigation has a clearly articulated specific legal purpose and applies attorney-client privilege to investigation-related communications; and the investigative team restricts legal comments and advice to essential recipients.

Maintaining and Producing Essential Records

To achieve business objectives and prepare for claims, marijuana-related businesses should establish document policies that exceed applicable regulatory requirements, including:

·       Retaining vendor/purchaser specifications and product orders;

·       Developing written procedures and instructions describing the product flow through the supply chain and quality control (QC) steps; and

·       Establishing a document retention policy describing how to manage electronic, hard copy or other format information from creation through destruction according to applicable laws and a company's needs.

A marijuana-related business facing a liability claim should modify and/or suspend document retention to enable swift gathering of all required information, identifying and retaining all information (including electronically stored) necessary for an effective defense, and avoiding spoliation claims.

Triage—Tackling Issues Before They Become Claims

Successfully defending against litigation requires treating all failures as potential claims and quickly reacting to liability issues when they arise.

Risk-transferring documents shield an entity from claims and damages caused or contributed by the actions and omissions of third parties. “Hold harmless agreements” ensure third parties are contractually responsible for their own negligence. “Statements of financial responsibility" should confirm third parties have sufficient insurance and list marijuana-related businesses as an “additional insured.”

To thoroughly investigate pre-claim facts and options, an investigating team should be assembled, comprised of those knowledgeable of marijuana-related business operations, but not directly involved in growing, processing or selling. The investigative team inspects and performs a technical analysis of the product and surrounding scene of its failure; analyzes information that helps assess failure, including technical analysis, photographs and eyewitness statements; and examines marijuana-related products, the supply chain and the field.

Steve Schain, Larry Mishkin and Mathew Auric are attorneys at Hoban Law Group, and Darren Kaplan is law clerk.

Looking for an in-depth look at the current landscape of CBD and strategies to mature it as an industry? Join us for the "CBD and Hemp Extracts: How Do We Move Forward?" workshop on Wednesday, Nov. 7, at SupplySide West 2018. Bob Hoban of Hoban Law Group will be among the experts weighing in on CBD. This workshop is underwritten by CFH, CV Sciences, Elixinol, KGK Science, Neptune Wellness Solutions and RAD Extraction & Processing.

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