cannabis insurance litigation

Insurance is a key part of any business, including cannabis businesses. As Jonathan Bench has explained:

Insurance in the cannabis industry is big business, and business owners need to know what policies are available and what those policies cover. Why? Because in insurance policies, like all other business contracts (e.g. leases), the risk of a business venture is divided between the contracting parties. Your insurance policies are contracts where you pay your insurer to take some of the risk of your business venture away from you – for a fee, of course.

Among the most important aspects of an insurance policy are the circumstances in which it requires an insurer to defend and indemnify the policyholder from a lawsuit by a third party. Disagreements between the insured and insurer may result in lawsuits between the insured and insurer, often over enormous sums of money.  The lawsuits typically arise from a simple set of facts: (1) the insured is sued or threatened with a lawsuit, (2) the insured notifies its insurer (“tenders the claim”) and asks for defense and indemnity, (3) the insurer informs the insurer of its coverage position, i.e. that it will not defend or indemnify, or that it will defend but with a reservation of rights, (4) the insured disputes the coverage position and cannot reach a resolution with its insurer, and (5) the insurer or insured files an action for declaratory judgment asking a court to rule whether the insurer has a duty to defend and indemnify.

These kinds of lawsuits—typically referred to as “coverage actions,” require a close reading of the insurance policy and relevant case law alongside the complaint filed against the insured. The resolution of a coverage dispute may drastically effect settlement and may result in financial ruin for an insured whose claim is deemed outside the insurer’s duty to defend and indemnify.

Last summer I wrote about a multi-million lawsuit filed by Big Bush Farms against Boones Ferry Berry Farms arising out of a hemp production contract. Briefly, Boones agreed to plant, grow, dry, and harvest 27,000 plants for Big Bush. Boones agreed to pay all costs relating to the grow and Big Bush agreed to pay $25/lb for all the hemp harvested from the 27,000 plants, plus a bonus of $1/lb for every 2% CBD oil content over 10%. Payment for the crop was due at several intervals on or after the delivery of the crop. Big Bush alleges that Boones harvested 108,000 lbs of dried biomass which tested at 14.5% cannabidiol (“CBD”) oil content. Boones apparently delivered only around 4,200 lbs of the crop even though Big Bush had prepaid $150,000. Big Bush claims that Boones failed to deliver the remaining 103,747 lbs of hemp and failed to deliver other hemp grown pursuant to an oral agreement.

Last fall, I noted that American Family Insurance had filed a lawsuit in the federal district court of Oregon seeking a declaration from the court that it has no duty to extend to a defense to Boones Berry Ferry Farms, LLC and others (together “Boones”). The gist of the federal lawsuit is that American Family contends the claims against the insureds in the underlying state-court lawsuit do not give rise to a duty to defend or indemnify. Although the state-court lawsuit continues, the federal district court recently ruled in favor of American Family on the coverage question when it affirmed the report and recommendation of a federal magistrate.

Let’s take a look at this coverage dispute. Whether an insurance provider has a duty to defend is a question of law, typically determined by analyzing the insurance contract and the complaint. In most states, where a complaint is unclear but may be reasonably interpreted to include an incident within coverage, then the insurer has a duty to defend. Here, the Policy provided that American Family would provide a defense and pay damages because of “property damage” caused by a covered “occurrence.” The Policy defines “property damage” as “physical injury to tangible property. This includes loss of use.” The Policy further provided that property damage does not mean physical injury to “marijuana or cannabis plants, or any equipment or material used to grow, harvest, or cultivate marijuana or cannabis plants, even if legal in your state.”

American Family argued, among other things, that the complaint against Boones failed to allege “property damage” as defined by the complaint. American Family reasoned that the only property described in the complaint was “industrial hemp,” which is a product of “cannabis plants” and excluded from the definition of “property damage.” Thus, said American Family, there was no duty to defend because there was no property damage under the Policy.

Boones countered that the complaint did not allege physical damage to cannabis plants but rather harm from the “loss of use of tangible property” in the way of deprivation of the possession of industrial hemp. Boones contended that because the first part of the Policy defines property damage as including “loss of use,” American Family had a duty to defend.

The magistrate was not persuaded by Boones:

The Court reviews the Policy “presuming that words have their plain, ordinary meanings.” The Policy states that: “‘Property damage’ means ‘physical injury’ to tangible property. This includes loss of use.”. Under the plain language, “property damage” is “physical injury.” Given that the two are synonymous under the Policy, “[t]his” refers to both “property damage” and “physical injury” and both include “loss of use.” The Policy further provides: “Property Damage does not mean physical injury to . . . cannabis plants[.]

Because the Policy expressly excludes physical injury to cannabis plants, the Policy excludes “loss of use” of cannabis plants.

Consequently, the magistrate ruled that American Family had no duty to provide Boones a defense in the state-court lawsuit. Boones sought review of the ruling by the district court.

The district court agreed with the magistrate. Boones argued that the policy was ambiguous and must be interpreted in their favor. (This is an argument made by nearly every insured). The court disagreed. Although Oregon interprets insurance contracts against the insurer, said the court, Boones was not entitled to the benefit of that rule unless an ambiguity remained at the end of a three-step analysis. Under Oregon law, a court must:

(1) examine the text of the policy to determine whether it is ambiguous, that is, whether it is susceptible to more than one plausible interpretation (2) examine the disputed terms in the broader context of the policy as a whole; and (3) only if ambiguity remains, construe the policy against the drafter.

Boones, ruled the court, did not clear the first step of the analysis because the Policy plainly excluded coverage for loss of use of cannabis plants. So Boones has to carry on in the state-court lawsuit without any expectation that its insurer will pay for its defense or indemnify it from a damages award. And the plaintiffs in the state court cannot count on reaching into the pockets of the insurance company.

We expect coverage lawsuits involving hemp to become more commonplace, just as they are in other industries. My advice to hemp business owners is threefold:

Make sure you have insurance and that you understand what loss(es) the insurance is intended to cover.
Notify of your insurer (and your coverage lawyer) of any potential claim as the failure to do so can often result in a denial of cover.
Retain an experienced coverage lawyer to review the policy and the insurance company’s coverage position and don’t wait long to do it. Your lawyer may convince the insurance company to change its position and save you thousands in defense costs and damages. In the best case scenario, you may not need a coverage action at all.

For more on cannabis insurance, check out the following:

Anatomy of a Cannabis Insurance Policy, Part 1: The Basics
Anatomy of a Cannabis Insurance Policy: Exclusions
Cannabis Business Basics: Liability Insurance is a Non-Negotiable Priority
Cannabis and Insurance Litigation
Yes, Washington, You Really Need Cannabis Business Insurance

The post Hemp Insurance Litigation: Oregon Federal Court Rules Insurer Has No Duty to Defend or Indemnify Hemp Farmer for Plant Loss appeared first on Harris Bricken.

Original Source: harrisbricken.com

cannabis litigation

On August 5th, Harris Bricken attorneys Griffen Thorne, Jihee Ahn and Jesse Mondry presented a webinar entitled Cannabis Litigation – Trends And Q&A. If you missed the live webinar, we will publish a replay tomorrow here on the blog.

The webinar was well attended, and we received numerous questions from the audience. In this post, I respond to a few questions we did not have time to answer.

Can you speak about requesting information from the Oregon Liquor Control Commission through a FOIA request? What is the procedure? What types of information can be requested? Sales data? Employee data?

A wide variety of records are available from the OLCC. Under Oregon’s Public Records Law, “every person” has a right to inspect any nonexempt public record of a public body in Oregon. See ORS 192.410 – 192.505. This right extends to any natural person, any corporation, partnership, firm or association. The law is similar to the federal Freedom of Information Act (FOIA) in some ways, but is a separate law, with its own provisions. So when making a request, don’t refer to it as an FOIA requests. The law favors disclosure, but the OLCC must be careful not to release sensitive information – e.g. social security numbers, bank account numbers, and so forth.

Typically, the OLCC receives requests from licensees or attorneys following the issuance of charging document. But the law does not require the records request be tied to a pending administrative matter. Responding to these requests may impose a significant burden for overworked and underpaid OLCC staff. So responses may take time and the OLCC may charge fees for responding to public records requests. Making a request is straightforward. The OLCC has a webpage with instructions that explains how to do so and what fees may apply.

With regard to membership and partnership disputes, is there anything especially different about litigating disputes in the cannabis industry? Do you have any practical advice about how to bring these cases to a swift resolution?

Litigating membership and partnership disputes in the cannabis industry is much like any other industry. But there are a few quirks.

When a partner or member decides to leave the business, one of the first questions is: What is that person’s interest in the business worth? Cannabis businesses present different considerations in terms of the marketability of an interest. This is because of licensing requirements, IRC §  280E, lack of access to financing and banking, insurance risks and costs, and the overarching problem that marijuana is a schedule I controlled substance.

Another difference is that most states require tracking marijuana products to the gram gram through tools such as METRC. Access to this information can provide non-managing or minority interest holders a powerful tool in the event a forensic accounting becomes necessary. On the other hand, dispensaries operate on a cash-only business on the retail side, which can make an accounting difficult.

A final significant concern is whether the facts and issues of the partnership/membership dispute concern violations of the state regulatory scheme. It may not be in the best interest of the business (or its owners) to engage in a public lawsuit that concerns allegations of financial fraud, diversion into the illegal market, hidden investors or investments, and so on. These kinds of facts may result in the business losing its ability to operate in the cannabis industry and leave the owners with letters of reprimand in their files that restrict their ability to operate in the industry in the future.

As far as ending disputes quickly, the best advice I can give is to thoroughly paper everything. By this mean cannabis businesses should hire transactional lawyers with expertise in cannabis at the outset of any business venture as well as to review contracts and deals throughout the life of the business.

Could you talk about class action litigation trends in cannabis and CBD

We spoke about this during the webinar, but one concept that was not addressed was the doctrine of primary jurisdiction. This is a doctrine increasingly used, and with increasing success, by defendants in CBD class actions. The basic concept is that courts may stay (pause) litigation when the claims involve issues that fall within the special competence of an administrative agency. In such cases, courts may wait for the agency to issue rules or guidance that may substantially affect the outcome of the case. The primary jurisdiction doctrine, then, is a form of judicial abstention. See Litigation Update: Who Decides Whether You Can Ship Hemp Through Idaho? and The Rise of Cannabis Litigation Against Foreign Entities – Where Will You Litigate?

Our colleague, Nathalie Bougenies, has also written on this topic and it is one worth watching

Hemp-CBD: More Federal Courts Stay CBD Cases Until the FDA Issues Regulations
Patchwork Of Judicial Decisions Exacerbates Confusion On Legality Of CBD Products

Thanks to everyone who attended.  Please note that our next FREE Q & A webinar is Thursday, September 17, 2020 from 12pm to 1pm PDT, during which our transactional hemp attorneys will field questions on all aspects of hemp and CBD. Register is available for that one here.

We will be back tomorrow with a replay of Cannabis Litigation Q&A webinar, as well.

The post Cannabis Litigation Q&A Webinar – A Few More Questions and Answers appeared first on Harris Bricken.

Original Source: harrisbricken.com

international cannabis

In prior blog posts (see here, here, and here), I described how we field regular inquiries regarding international cannabis, both from companies inside the U.S. looking internationally and from international companies looking to the U.S. market. This post deals with geography issues for international companies seeking to enter the U.S. market.

Where to locate your business?

If you have spent any time in the U.S., you know that it is very easy to travel from one state to another and that, except for weather, geography and regional cultural differences, the U.S. feels quite homogeneous. That means that as a business owner you will want to focus on where your customer base will be and whether you need to be near your customer base or can do your business from a nearby state.

For retail businesses, you will need to set up shop where your customer base is. For wholesale or e-commerce companies, you have more flexibility on where to set up your base of operations. Even retail businesses can set up operations in another region or state if it makes sense.

For instance, if California were a sovereign nation, its economy would be the 5th largest in the world. That makes California extremely attractive to businesses. But California also comes with a host of potential negative issues in both the cannabis and non-cannabis realms, whereas Nevada, which is next to California, has more favorable cannabis laws and regulations and a favorable enforcement history. Nevada’s employment laws favor employers, with much fewer regulations (including business tax levies) to deal with than California.

Ease of transportation logistics.

Most products in the U.S. travel by semi-trailer truck. If your cannabis-hemp business will have multiple locations in multiple states, or if you will be shipping directly to customers in multiple states, then you will want to consider locating close to good road transportation infrastructure. Las Vegas is situated on the I-15 freeway corridor and is only 6-8 hours from the major California and Arizona markets; 12 hours from Colorado, and 18 hours from Washington.

Looking to the eastern US, locations such as Nashville, Tennessee and Atlanta, Georgia are strong candidates for a logistics hub because each is within 12-18 hours of retail markets from Boston, Massachusetts) to Miami, Florida and many midwestern US states.

U.S. employment generally.

Each U.S. state has its own employment laws, with some states heavily favoring employee rights and others more favoring the employer. This is generally reflected in state employment tax and insurance requirements.

As noted above, Nevada is very employer-friendly, while California is extremely employee-friendly. Tennessee and Georgia are each employer-friendly states.

Depending on your business needs, you should consider whether the location of your business center or your logistics hub will be more important than the location of your employees. Consider the roles of your employees. You may prefer to have an employee based in a different geographic area than your retail locations or your logistics hub.

When you are considering employees, it is generally best to hire in an employer-friendly state as you test the U.S. market for your products.

Is state registration required?

Once you determine the geographic scope of your business, you need to determine whether you need to register to do business in a particular U.S. state, even if you are only storing product and conducting e-commerce in that state.

Each state will have its own department of labor (regarding employee matters), department of revenue (regarding taxation matters), department of commerce (regarding general business matters), and cannabis regulatory department (which could be under a state’s department of agriculture, department of alcohol and tobacco, or another specialty department).

Your particular activities within each state will dictate with which departments you need to register. You will find that most state departments are extremely accommodating, so you should plan to reach out early in your decision process. That is especially true if you are undecided as to which U.S. states will be optimal for your initial business operations.

The post International Cannabis: Guidance for Companies Entering the U.S. Market, Part 4 –  Geography Matters appeared first on Harris Bricken.

Original Source: harrisbricken.com

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