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Preparing for Marijuana Industry Lawsuit Tidal Wave: Limiting Exposure (Part 2)

Lawsuits range from a single plaintiff seeking damages for personal injuries or property damage to class actions in which a defect is common to an entire group of claimants. Due to marijuana’s 100 percent federal illegality, even more is at risk. The Comprehensive Drug Abuse Prevention and Control Act of 1970 prohibits marijuana’s manufacture, distribution, dispensation and possession and lists it next to heroin as a Schedule I controlled substance having “a high potential for abuse,” 21 U.S.C. Sections 801, et. seq (1970) (Controlled Substance Act). Thus, claims may be brought against anyone in the marijuana industry’s supply chain touching the item prior to sale to the consumer; i.e., anyone planting, cultivating, harvesting, processing/extracting, testing, packaging, disposing, transporting and dispensing marijuana (hereafter, collectively referred to as marijuana related businesses).

Each year defective, faulty or misused products cause serious injuries, property damage and business interruption. Products liability law addresses defective product claims including design defects, manufacturing defects and failure to warn of a product’s dangers. Although primarily seeking remuneration for personal injury, property damage, or economic harm, products liability claims may also seek punitive relief to punish the defendant and redress harms allegedly done to society.

Defending litigation or settling claims can materially drain a company’s resources requiring additional regulatory requirement compliance, developing/disseminating product warnings, instituting a product recall, deploying employee time to investigate/mitigate claims, investigating/testing products and assessing risk, and hiring expert consultants and attorneys.

Because even the most standard claim could crash any insufficiently prepared marijuana related businesses (MRBs), the second of this two-part article examines steps to take to avoid, mitigate and defend against liability and claims. By correctly launching safety programs, maintaining essential records, deploying product warranties, and “performing claims triage,” MRBs can best protect against having their resources materially drained in defending litigation.

Safety Program

Comprised of a written safety policy “safety committee,” “audit program,” and “communication protection,” a safety program both decreases liability risks and avoids or mitigates lawsuit’s exposure.

A written safety policy is formed by assimilating a company’s resources, management and accountability structures and shaped by legal requirements and commercial context in which the company operates. The policy establishes measurable and attainable goals, empowers employees to raise defect issues, and is widely disseminated in hard copy and online company publications and employee handbooks.

To fortify a safety policy’s meaningfulness, the MRBs must form a working group, i.e., the safety committee, establishing criteria, best practices and procedures supporting the policy, gathering information from prior events and applying lessons learned to future situations, and handling regulatory reporting.

Audit programs are initiated by the safety committee and cover production policies (identifying potential defects before reaching customers) and warranty claims (identify products suffering problems in the field before it turns into claims). Through administering regular audits, MRBs can enforce safety rules and policies’ compliance, better grasp liability risks, and prevent defects from becoming products liability claims.

Through shielding them from disclosure, the attorney-client privilege and work product doctrine encourage the flow of communication. After learning of an actual or potential liability issue, the safety committee must launch an internal investigation to understand an issue’s nature and scope.

Before and during any safety investigation, MRBs must identify and protect the attorney-client privilege and work product doctrine by ensuring that: counsel guides the safety committee and other investigators; the investigation has a clearly articulated specific legal purpose and applies attorney-client privilege to investigation-related communications; and the investigative team restricts legal comments and advice to essential recipients.

Document Production and Retention Policies

To achieve business objectives and prepare for claims, MRBs should establish document policies exceeding applicable regulatory requirements:

  • Retaining vendor/purchaser specifications and product orders.
  • Developing written procedures and instructions describing the product flow through             supply chain and quality control steps.
  • Establishing a document retention policy describing how to manage electronic, hard copy or other format information from creation through destruction according to applicable laws and the company’s particular needs.

A liability claim facing MRBs should modify or suspend document retention to enable swiftly gathering all required information, identifying and retaining all information (including electronically stored information) necessary for an effective defense, and avoiding spoliation claims.

Product Warranties and the Uniform Commercial Code

If accompanied by conspicuous, prominent and comprehensive warnings written in plain language and understandable to the average user and sufficient to alert a reasonably prudent person, a product is less likely to be the subject of a liability claim.

For sale-of-goods transactions, the Uniform Commercial Code (UCC) provides warranties and disclaimers immunizing products from being exposed to liability claims. Growers could limit warranties to those expressly provided under UCC Section 2-313, exclude all other warranties, express or implied, or specifically exclude the implied warranties of merchantability and fitness for particular purpose (UCC Sections 2-314 and 2-315).

Further, because the UCC permits contractual limitation of remedies available to a purchaser in a UCC Section 2-719 breach of warranty, a grower could also benefit from meaningful remedy limitations including specifically defining available remedies as limited or exclusive or limiting/excluding consequential damages.

Triage—Tackling Issues Before They Become Claims

Successfully defending against litigation requires treating all failures as potential claims and quickly reacting to liability issues when they arise.

A risk-transfer program shields from claim and damages caused or contributed by third parties’ acts and omissions by documenting these decisions in writing and at a business relationship’s inception. Risk transferring documents include “Hold Harmless Agreements” (ensuring that third parties are contractually responsible for own negligence or errors and omissions) and “statements of financial responsibility” such as certificates of insurance which confirm both that third parties have sufficient insurance and list MRBs as an additional insured.

Once aware of an actual or potential claim’s existence, an MRB must retain expert consultants including technical advisers, outside counsel, public relations agencies, and consumer-inquiry-fielding call centers. During claim’s initial investigation, consultants can offer low-cost advice and experts typically charge nothing or very little to be retained. Further, in an industry making unique products with few competitors and for which only a few qualified expert consultants exist, locking up appropriate claim-defending support may be decisive.

To thoroughly investigate pre-claim facts and options, an investigating team should be assembled comprised of those knowledgeable of MRBs’ operations but not directly involved in growing, processing or selling. The investigative team inspects and performs a technical analysis of the  product and surrounding scene of its failure, analyzes factual information that helps assess failure including technical analysis, photographs and eyewitness statements, and examines products currently in the MRB’s possession, the supply chain and the field.

The investigating team should carefully preserve the believed-to-be-defective product and any other item involved in product’s failure or related loss. The investigating team should also assess the liability concern to determine the claim’s viability and extent including confirming that actual product is potential claim’s focus, determining whether the product was properly used or applied, maintained or altered/modified, establishing whether the product met required specifications, ensuring that the product complies with key internal product documents (i.e., quality control documents), and determining conformance with any applicable regulatory requirements.

In Case You Missed It

Steven SchainSteven Schain

Steven Schain

Winner of National Law Journal’s “2019 Finance, Banking, & Capital Markets Trailblazer” award, Steve Schain is Counsel to national Cannabis, Hemp and Hallucinogens law firm Smart-Counsel, LLC, is admitted to practice in PA and New Jersey and represents entities, governments and individuals in litigation, regulation and compliance, license applications, and entity formation.  Reach Steve at [email protected]

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