With the continued growth of the cannabis industry, we have seen a growing prevalence of litigation across various venues and with varied claims. We previously discussed the potential for products liability class actions related to the vaping crisis as well as conducted a topical exam of potential litigation that could face the section of the industry focused on CBD. This is illustrated when taking a deeper dive into the claims being brought against those creating, manufacturing and distributing hemp-derived CBD products.
If you are operating a CBD company, be careful what you advertise. There has been a growing influx of lawsuits brought by individuals who claim violations of consumer fraud statutes and deceptive trade practices laws, as well as claims under the Racketeer Influenced and Corrupt Organizations Act (RICO).
How to approach defending these claims
Each state and federal district court may address such claims in a different manner. For example, in the Western District Court of New York, Douglas Horn and his wife, Cindy Harp-Horn, brought suit against defendants Medical Marijuana, Inc., Dixie Elixirs and Edibles, Red Dice Holdings, LLC, and Dixie Botanicals in the case of Douglas J. Horn, et al. v. Medical Marijuana, Inc., et al., 15 CV-701-FPG. This occurred after Douglas Horn lost his job following the purchase and use of a hemp-based CBD oil manufactured and distributed by the defendants. He claimed the oil caused him to fail a drug test administered by his employer. The plaintiffs sought recovery under claims of false advertising, deceptive business practices, fraudulent inducement, racketeering, and other claims. Following summary judgment motions, the court dismissed all but two claims – fraudulent inducement and civil RICO. Keep in mind that the plaintiff purchased his CBD oil in 2012, prior to the passage of the 2018 Farm Bill Act. As such, the product in question at the time of purchase constituted a controlled substance under the federal Controlled Substances Act.
The plaintiffs premised their fraudulent inducement claim on the alleged misrepresentations contained in a magazine article, representations contained within the defendants’ website(s), an online interview of one of the defendants’ executives and a customer-service phone call they conducted. The plaintiffs argued that the defendants falsely claimed that the product did not contain THC, that it was legal and safe to consume, and had health and wellness benefits. The plaintiffs also argued that the defendants stated the product was adequately tested and would not cause a positive drug test.
Under New York law
In order to prove fraudulent inducement under New York law, a plaintiff must show a defendant made a material false representation, intended to defraud the plaintiff as a result of that misrepresentation, that the plaintiff reasonably relied upon the representation and thereafter suffered damage as a result of such reliance[i]. All of these elements must be proven by clear and convincing evidence.
Clear and convincing proof means it is highly probable and leaves no room doubt. “The standard demands a high order of proof and forbids the awarding of relief whenever the evidence is loose, equivocal, or contradictory because fraud will not be assumed on doubtful evidence or circumstances of mere suspicion.”[ii]
This standard is very important for any company and the potential plaintiff. In Horn’s case, the court held that a number of his claims could not proceed, despite what at first blush looked like very convincing evidence. The court held that Horn’s claim for fraudulent inducement could not proceed based on representations that the product was legal, that it was safe to consume, that it had health and wellness benefits, that it was adequately tested or that it would not cause a positive drug test. The reasons? The plaintiffs failed to provide sufficient evidence to establish that, at the time the statements were made, the defendants knew they were false and intended to defraud consumers.
The court noted that Horn offered little evidence that illuminated the intent, state of mind, or beliefs of the defendants or their agents when they made such statements. The plaintiffs could not point to any deposition testimony, company emails or documents, or other evidence that the defendants knew their product was an unlawful controlled substance, was unsafe, and did not provide the purported wellness benefits. Given the absence of evidence related to the beliefs and knowledge of the defendants, their employees, and their agents, the plaintiffs’ fraud claim fails as a matter of law as to the above statements.
However, the court held the defendants’ statement that their product did not contain THC was actionable. The court pointed to the fact that defendants’ own testing revealed that the product contained detectible amounts of THC. The evidence revealed that Horn relied on this misrepresentation and following a drug test, lost his job because he consumed the product. The court pointed to explicit representations on the defendants’ website and in online videos regarding the absence of THC would allay consumers’ concerns about ingesting a product associated with marijuana.
Finally, the court found there was evidence that the defendants made the false statements with the requisite knowledge and intent. It pointed to online interviews in which one of their executives explicitly stated the product did not contain THC. However, as noted above, the defendants own testing found the presence of THC. Given the executive’s high position within all three defendant companies, a jury could reasonably infer that he knew the results of such testing. Similarly, online representations of the same nature on the defendants’ website also demonstrated an intent to defraud based on the knowledge of test results. The court also noted that all the defendants had a motive to defraud consumers because misrepresenting the THC content in the product would go a long way to dispelling consumers’ concerns, as it did in the plaintiffs’ case.
Ultimately, the court held that the plaintiffs’ fraudulent inducement claim was viable as to Horn’s claim for damages resulting from the defendants’ misrepresentation that the product did not contain THC, but that the defendants were otherwise entitled to summary judgment on the remaining portions of the claim.
What does this initial ruling in the case show us? Words matter. Companies must be very careful with the statements they make regarding their products. While many of the allegations claiming fraudulent inducement were dismissed, the claim survived based on the above discussion.
Despite the fact that hemp-derived CBD is now legal, certain industries, like transportation, do not recognize this position. Any commercial truck driver who uses CBD and subsequently tests positive for even trace amounts of THC will be removed from the road and likely fired from their company. Additionally, even if a company is successful in having claims dismissed, the work required to reach that point can prove costly, especially for new companies. If you have questions, speak with an attorney. The laws continue to change and enforcement positions vary. Companies need to keep this in mind when making statements and advertising for their products as more litigation regarding the use of CBD products continues.