No RICO Standing for Cannabis LLCs

In business litigation, a plaintiff will sometimes assert a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), a federal statute at 18 U.S.C. §1961 et seq.?RICO provides that it is "unlawful for any person through a pattern of racketeering activity ... to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce" and forbids conspiracy to do the same.

RICO was famously used to allow criminal prosecutors to go after mafia-related crimes en masse, rather than in individual one-off prosecutions.?RICO also provides for civil remedies arising from a pattern of racketeering (i.e., criminal) activity, including treble (triple) damages.

While the elements of RICO are often difficult for a civil plaintiff to satisfy (especially the "pattern" element, which requires a showing of an ongoing threat of criminal activity), when provable a RICO claim can be a "big gun" changing the leverage of a case.

Can a cannabis LLC assert a claim under RICO, in light of slow-to-evolve federal law which still declares cannabis to be an illegal substance?

In an opinion recently published by the federal Ninth Circuit Court of Appeal -- Shulman v. Kaplan -- the court addressed this issue.

Facts: cannabis LLC asserts RICO claim against business partner

Francine Shulman formed an LLC and a corporation through which she operated her cannabis businesses, focused on the growing, marketing, and sale of cannabis in California.?After California law implemented?a ballot proposition legalizing the sale of cannabis for recreational use, Shulman expanded her operations and engaged Todd Kaplan as a business partner.

The parties had a falling out, and Shulman accused Kaplan of unlawful, fraudulent conduct (mail and wire fraud) that injured her cannabis businesses and diverted profits to Kaplan.?Shulman and her business entities sued Kaplan for several claims, two of which arose under RICO.

Kaplan filed a motion to dismiss, arguing that the claims lacked standing under RICO.

Trial court: claims dismissed for lack of standing

The district court granted Kaplan's motion and dismissed the claims, holding there was no standing under RICO.

Shulman and her entities appealed.

Court of Appeal: affirmed; no standing for cannabis business

The Ninth Circuit affirmed.

The court first observed that under RICO, a plaintiff must show injury to his "business or property" resulting from conduct outlawed by the statute.?Without harm to a specific business or property interest, there is no injury to "business or property" within the meaning of RICO.

Shulman argued that under RICO, courts normally look to state law to determine whether a particular interest amounts to property, and because cannabis cultivation and sale was legal in California, her businesses qualified under RICO.

The court disagreed, stating that "state law does not control where RICO's statutory purpose or congressional intent in enacting the statute conflicts with the relevant state law."?The court held that such a conflict existed here, finding "it is clear that Congress did not intend 'business or property' to cover cannabis-related commerce."?Congress' definition of "racketeering activity" included the manufacture and sale of federally illegal drugs, including cannabis.?As such, "it would be inconsistent to allow a business that is actively engaged in cultivation of and commerce in cannabis to recover damages under RICO for injury to that business."

The court also pointed to language from the federal Controlled Substances Act -- passed the same year as RICO -- stating that all substances produced in violation of that Act "shall be subject to forfeiture to the United States and no property right shall exist in them."?Thus, the court held, "it is evident that Congress would have considered a cannabis business to be a form of organized crime and that Congress would not have intended RICO to provide damages for injury to interests in which it explicitly disclaimed the existence of any property rights."

Lesson

Under the holding of the Shulman case, a cannabis business lacks standing to assert claims under RICO.