There are many challenges confronting the cannabis industry -- lack of banking access, unfair taxation, burdensome regulations --  but one issue that isn't getting talked about is the threat litigation poses to marijuana businesses big and small. At a recent panel titled “Preparing for the Regulatory Future of Infused Products in America,” Hilary Bricken, an attorney with the Canna Law Group, detailed what she sees as an emerging issue for which all businesses need to prepare.

“As a startup, you want to insulate yourself from civil claims including products liability.”

Bricken began her presentation with “Products Liability 101.” Watch the video to get the full rundown, or read on to get the quick summary.

There are four theories of liability: Negligence, Strict Liability, Breach of Warranty, and State Consumer Protection Acts. We’ll detail those more below, but it’s important to understand that, under those four theories of liability, there are three sub-theories of liability:

1. Manufacturing Defects - Shoddy workmanship, the product itself is defective
2. Design Defects - The product is inherently dangerous based on its design. It fails to satisfy consumer expectations and the risks of the products outweighs its benefits
3. Failure to warn | Faulty labeling - The product has an inherently, non-obvious dangerousness that would be mitigated through adequate warnings. This is perhaps the most relevant to the cannabis industry.

As Bricken put it:

“Coming on the heels of the Maureen Dowd column... you can imagine some users of marijuana don’t always know the side effects or what happens when they mix marijuana with other substances. This can be mitigated through labeling. Faulty labeling is going to be a huge emerging area with marijuana, mark my word.”

Negligence

There is a four part test to prove negligence. A plaintiff must demonstrate all four of the following has occurred:

1. That all cannabis businesses have a duty to consumers to follow a certain standard of conduct, and it’s not just a duty to the person to whom they’ve sold their products, but to any reasonably foreseeable plaintiff, including innocent bystanders, such as children. Bricken notes that this is one of the most preventative areas of products liability.
2. That there has been a breach in that duty. For example, your business didn’t meet that standard set by the industry, you failed to abide by compliance, or you made a dangerous product.
3. That the breach of duty caused the injury or harmed the plaintiff in some way (known as causation).
4. That there are damages.

According to Bricken, there are two more issues under negligence which all businesses need to be aware of. The first is Negligence Per Se, which applies if a plaintiff can show the business has failed to comply with a relevant regulation. If the plaintiff can demonstrate that, they have already demonstrated both duty and breach.

The second is Res Ipsa Loquitur, which translates to “the thing speaks for itself.” In this case, there’s an inference of negligence in certain circumstances.

Strict Liability

The real focal point of Bricken’s presentation was strict liability and just how hard of a tort it is to fight, given the limited number of defenses available to businesses.

At a basic level, strict liability is not about the manufacturer’s actions, but about the product itself. Take for instance the now-famous case of the woman who spilled hot, McDonald’s coffee on herself, resulting in third-degree burns. A jury sided with her and awarded her $2.7 million in punitive damages, as well as $200,000 in compensatory damages. To think that courts would not do the same to cannabis businesses is not realistic.

As Bricken put it:

“That’s McDonald’s… it’s not beyond the pale of reason that a jury could rule against corporate marijuana.”

Breach of Warranty

Breach of warranty occurs when your business makes claims about the product at the time of the transaction that turn out to be untrue. In the cannabis industry, if you are making medical claims about the products you’re selling and they’re not true, you are liable for that.

State Consumer Protection Acts

The last theory to consider is State Consumer Protection Acts, where a state has enacted its own set of laws governing the responsibilities of consumers and businesses.

Bricken notes that these vary and it’s important to understand each states’ laws. She points out that Colorado has more than 40 potential violations for business owners and allows for treble damages, which triples the amount a plaintiff may be owed.

Defenses

While products liability is a plaintiff-friendly tort, it’s not all bad news, and businesses do have defenses available to them.

Businesses must first realize that the plaintiff has no duty to inspect the products they buy, and their failure to do so is not a defense. Businesses must make any dangers patently obvious. Otherwise they are not going to have the following defenses available to them.

Contributory/Comparative Negligence. In this case, the plaintiff has misused the product. This defense has a severe limitation, though. The misuse has to be unforeseeable or outrageous, a very high standard to meet to try to take advantage of this defense.

Assumption of Risk: “The plaintiff did it. They should have known.” This defense won’t work unless the plaintiff actually knew about the danger, not that they should have known. With cannabis products, which may have non-obvious dangerous side effects, businesses are not going to be have this defense available to them when it comes to a products liability plaintiff.

Bricken notes that it’s important to remember these are issues all businesses deal with and there are clear cut steps cannabis manufacturers can take to protect themselves:

“Any business in this nation has had to deal with these issues and marijuana is no longer immune, especially in an adult-use market where you’re going to have consumers of all types, of all competency levels using your branded product. In order to ensure your own financial well-being, to avoid a lawsuit, and to preserve your reputation, I highly recommend exploring products liability to ensure your standard operation procedures meet that standard.”

If you’d like to learn more, consider attending the Cannabis Tax and Law Symposium in San Diego, January 21-22. This two-day conference will educate accountants, lawyers, and business owners about the complexities of doing business in the cannabis industry. Best practices will be presented by experts in the industry who have weathered the legislative storm and have an inside view of the current legal environment.