RICO Liability for Marijuana Enterprises
Under, the Racketeer Influenced and Corrupt Organization Act (RICO), it is illegal “for any person through a pattern of racketeering activity… to acquire or maintain…any interest in or control of any enterprise which is engaged in, or the activities affect, interstate of foreign commerce”. Because marijuana remains illegal under the federal Controlled Substances Act, state-legal marijuana businesses, by definition, involve racketeering activity in violation of RICO. When the government employs RICO against a defendant, the prosecution must prove, under 18 U.S.C. § 1962, that a person: (i) through the commission of two or more acts (ii) constituting a pattern of racketeering activity (iii) directly or indirectly invested in, maintained an interest in, or participated in, an enterprise, (iv) the activities of which affected interstate or foreign commerce. In addition to criminal liability, RICO also provides a civil cause of action for a party injured by the racketeering activity; in a civil RICO claim, a plaintiff must prove the elements, an injury to property or business, and proximate cause.
RICO’s potential power lies in who can bring a RICO claim and what entities can be subject to a RICO violation. First, any person who is “injured in his business or property by reason of a [RICO] violation may bring a RICO claim. Second, that RICO claim can be filed against not only the enterprise that directly engages in the cultivation and sale of marijuana, but also against “any individual or entity capable of holding a legal or beneficial interest in property.” This means that banks, insurance companies, accountants, landlords, business attorneys and anyone else involved in the operation of the cannabis enterprise may be exposed to RICO liability; as long as the conspirator intends to further an endeavor which, if completed, would satisfy all of the elements of a substantive criminal offense. No overt act is required.
In Safe Streets Alliance v. Hickenlooper, 859 F.3d 865 (10th Cir. 2017), Colorado property owners situated next to a marijuana cultivation facility filed suit against the facility under RICO, alleging that the odor emitted by the facility interfered with the use and enjoyment of their property and diminished its value. As the 10th Circuit noted, “[I]t is reasonable to infer that a potential buyer would be less inclined to purchase land abutting an openly operating criminal enterprise than [he or she] would be if that adjacent land were empty or occupied by a lawfully-operating retailer.” Under RICO, however, injury to property “requires proof of concrete financial loss”; while recovery may be available for infringing on the use and enjoyment of the land, property owners bringing claims under RICO must be able to tie their damages to the value of the property. Because the plaintiffs were unable to demonstrate a cognizable injury to their property, and thus failed to establish their RICO claim, the jury found in favor of the marijuana-growing defendants. This suggests that property owners bringing a RICO claim against a marijuana operation will have to be diligent about establishing and recording the value of their property both before and after the existence of the facility in order to demonstrate that the diminution in value was a direct result of the facility.
Similarly, in, Ainsworth v. Owenby, 326 F. Supp. 3d 1111 (D. Or. 2018), the plaintiffs’ injuries were non-compensable because the federal court relied on Oregon state law to define “property”. In that case, a group of residential property owners were displeased with the effects of an alleged marijuana production and processing operation hosted on nearby land; they asserted both state-law nuisance claims and RICO claims against the facility. Oregon distinguishes between injuries to property and personal injuries in nuisance claims; interference with one’s rights to use and enjoy property is a personal injury, but decreased value or physical damage to property is considered to be an injury to property. The court stated that although the claims brought by the plaintiffs in Ainsworth, were “actionable under Oregon nuisance law, such harms to human comfort [were] not compensable under RICO”. If the resident-plaintiffs would have evinced their intent to monetize (or failed efforts to monetize) their land, and had established a tangible loss, they may have been successful in their claim.
Proving injury to a business will be just as difficult and will likewise depend on being able to demonstrate a tangible loss that is proximately caused by the actions of the marijuana enterprise. In Quillinan v. Ainsworth, 2018 WL 2151936 (N.D. Cal. 2018), a marijuana enterprise purchased a storage facility in which the plaintiffs had leased a storage unit for business purposes. The plaintiffs were evicted from their unit, and as a result, they were forced to sell their merchandise at deep discounts, give it away, or otherwise dispose of it. The court held that any injury that plaintiffs suffered was too attenuated and not “by reason of” the RICO violation. The court noted, “the plaintiff mistakenly relies on the presumed illegality of the operation, which several steps later resulted in his lease termination and the selling of business property at a loss”. While the plaintiff’s business losses may have been tangible, they were not a direct result of any RICO violative activity of the marijuana enterprise, and instead would have occurred regardless of the type of business that purchased the storage facility.
In New Vision Hotels Two, LLC v. Medical Marijuana of the Rockies, 2015 WL 13117160 (D. Colo. 2015), a Holiday Inn franchisee filed suit under RICO against a number of businesses who were providing services to a prospective marijuana shop; the hotel was concerned it would lose its youth patrons as a result of the shop opening. Not only did the shop never open (investors backed out as a result of the suit), but the franchisee was able to settle their claims for $70,000 from the prospective shop’s accountant and the underwriter of its tax surety bond.
In the years since that settlement, however, a federal trial court in Massachusetts has held that “[A]ssociation with conspirators and awareness of illegal activity alone are not sufficient to demonstrate conspiracy to violate RICO”. In that case, Crimson Galeria Limited Partnership v. Healthy Pharms, Inc., 337 F. Supp. 3d 20 (D. Mass. 2018), building owners near Harvard Square in Cambridge filed suit to challenge the opening of a nearby medical marijuana shop for its alleged negative effect on property value. The suit named six groups of defendants, including a bank. Regarding the claims against the bank that provided basic banking services to the planned medical marijuana shop, the court suggested that “providing basic banking services to a known medical marijuana dispensary in compliance with the Treasury Department’s guidance, without more, may be insufficient to state a [RICO] claim.” This suggests that indirect participants in a marijuana enterprise may escape liability under RICO if the services they provide to the operation do not extend past the basic services they usually provide for other entities, even if they can be characterized as a conspirator with intent to further an endeavor, which would satisfy all of the elements of the substantive criminal offense.
The availability of RICO as a tool for landowners to employ against marijuana operations adds another layer of complexity to an already complex and uncertain area of law. If a marijuana operation’s activity is the proximate cause of a provable injury to business or real property, a civil RICO suit may survive summary judgment. That said, the probability of successfully prosecuting a civil RICO action against a marijuana business remains low; there are difficulties in proving clear and definite injury to property or business beyond speculative proof, and most property owners will likely not be able to elevate their private state nuisance claims into a RICO action. Additionally, service providers and indirect participants in a licensed marijuana operation should find some solace in escaping potential RICO liability as long as the services they are providing do not extend beyond the normal course services they typically provide other clients (banking, accounting, construction, insurance, etc.).