RICO and Prohibition Walk Into a Bar – The Ironic Application of Racketeering Law to Legal Cannabis

A potent federal statute designed to take down organized crime looms large over the legal cannabis industry. The Racketeer-Influenced and Corrupt Organizations Act (RICO) was enacted in the 1970s to fight the mob with a declared purpose to “seek eradication of organized crime in the United States.” RICO has been used to prosecute the Mafia, the Hells Angels, and the once-corrupt Key West Police Department.

Not just a criminal statute, RICO also created a powerful private right of action that allows anyone whose business or property is injured by “racketeering” – a pattern of criminal activity – to sue the offender for three times their actual damages.[1]

The “legal” cannabis industry may seem an unlikely target for RICO claims, but even in states where it’s legal, marijuana is still prohibited by federal law as a Schedule 1 narcotic. Here we look at a recent case in which federal prohibition with a dose of RICO was a potent downer for the industry – legal cannabis companies should be aware of the risks.

The U.S. Court of Appeals for the Tenth Circuit found that cannabis production conducted in compliance with state law can still constitute a pattern of criminal activity that satisfies RICO’s definition of racketeering.[2] In that case, two landowners brought RICO claims against an adjacent grow operation claiming that the operation reduced the value of their property. The Tenth Circuit found this injury sufficient, and further that cultivation of marijuana in violation of the federal Controlled Substances Act constituted racketeering. This precedent sets the stage for anyone whose business or property is arguably harmed by a legal cannabis business to bring a RICO claim seeking treble damages.

RICO suits have since been brought against cannabis companies for a wide range of injuries, including a vineyard whose grapes were “tainted” by the cannabis farm next door,[3] and a business owner who claimed that he lost profits because of the smell wafting from a neighboring grow operation.[4]

The good news for legal cannabis companies is that as of this publication, no plaintiffs have succeeded in recovering RICO damages from a legal cannabis company, and several suits have been dismissed (including on remand the Tenth Circuit case that held legal cannabis constitutes racketeering).  No appellate circuit beyond the Tenth has held that legal cannabis business constitutes racketeering under RICO, and a federal court in Massachusetts held the opposite - that plaintiffs cannot bring RICO claims against legal cannabis business.[5] Most courts presented with the issue have side-stepped the racketeering question and dismissed plaintiffs’ claims on grounds of inadequate injury.[6]  These decisions indicate there is a strong argument that the simple presence of a grow operation without any plausible financial impact upon neighbors is not a sufficient injury.[7]

Still, with the only federal appellate authority holding that RICO does apply, and limited authority to the contrary, the door is open for plaintiffs throughout the country.

There is some irony to using RICO – a statute designed to counteract the criminal elements that thrived on illicit markets formed largely during alcohol prohibition – to attack those who are seeking to bring cannabis out of the shadows by complying with state law in the highly regulated cannabis industry. Hopefully federal courts will appreciate this poor fit and reject the Tenth Circuit interpretation, but as long as cannabis is illegal under federal law, it is a risk for which all legal cannabis companies should be prepared.