In what appears to be a first, a veteran commercial cannabis cultivator in Santa Barbara County has sued another cannabis cultivator for, among many other claims, violating the federal Racketeer Influenced and Corrupt Organizations Act (RICO). According to the complaint, the defendants defrauded the plaintiff as one of many business partners, investors, and otherwise unsophisticated persons and entities targeted in a fraudulent business scheme to wrongfully acquire financial and real estate assets. Two of the plaintiffs’ 25 causes of action cite RICO violations as grounds for relief.
As a refresher, RICO is a federal statute with both criminal and civil aspects, allowing private parties to sue for relief against enterprises engaged in federally illegal “racketeering” activity, which includes among its long list of enumerated crimes things like bribery, counterfeiting, extortion, numerous types of fraud, and, notably, “dealing in a controlled substance.” It is because of the latter inclusion that RICO has made a lot of recent news as a (mostly unsuccessful) means by which neighboring property owners have sued to try and shut down cannabis cultivation operations, even when they are legitimately operating pursuant to state and local law. The contradiction stems from the fact that cannabis remains illegal in any form under federal law.
The current case is unique because a California cannabis cultivator is suing another cannabis cultivator for violating RICO as a criminal enterprise. But what makes this case interesting is that it’s not because the defendants are cultivating cannabis; rather, it’s because, according to the complaint, the defendants are allegedly conducting a fraudulent criminal enterprise that happens to also be based on the business of cannabis cultivation. In other words, the legal question presented is not whether a person that’s engaged in “racketeering activity” (i.e. cannabis cultivation) can sue another for engaging in the same illegal behavior, but instead whether one person can sue under RICO for relief against separate racketeering activity despite the fact that both persons are already engaged in another kind of racketeering activity that is not at issue.
An even simpler distillation of the issue would be whether state-legal commercial cannabis businesses are excluded from the protections of federal law simply because they are themselves engaged in federally illegal activity—even though the federal Department of Justice has in recent years deprioritized enforcement against state-legal cannabis businesses. We know that the DOJ has taken the position that cannabis businesses are not entitled to bankruptcy protection, although that position has found its limits in actions involving businesses ancillary to cannabis such as landlords.
But here, the plaintiffs have brought serious fraud allegations that do not appear to depend on the fact that anyone was engaged in cannabis activity; rather, the alleged RICO violations seem to depend specifically upon mail fraud and wire fraud—both of which are enumerated types of “racketeering activity” under the statute—as part of the means by which the enterprise allegedly furthered its purported ultimate goal of “dup[ing] and tak[ing] advantage of unsuspecting affiliates and investors, before ultimately cashing out to leave its victims to sift through the wreckage.” It just so happens that both sides of the lawsuit were also engaged in federally illegal cannabis activity. It is not clear whether a plaintiff’s own racketeering activity would preclude a claim for a different type of racketeering activity under a civil RICO suit where an unclean hands-type defense is raised, but courts have generally found such arguments unavailing except in limited circumstances where the same activity at issue in the lawsuit is alleged by both sides.
For more on RICO cannabis litigation, check out the following posts: