Eaze has become embroiled in a lawsuit alleging that the cannabis delivery company orchestrated an unlawful system to conceal cannabis purchases in order to work with credit and debit card companies, which offers it an unfair advantage in the marketplace.
The 72-page complaint was filed June 4 by Oakland, Calif.-based Herban Industries in the San Francisco Superior Court, and was first reported by Mashable and Leafly. The lawsuit accuses Eaze of using “seemingly innocuous” names to hide cannabis transactions in order to work with credit and debit card companies—most of which prohibit the purchase of cannabis products due to federal law. The complaint alleges that Eaze disguises cannabis purchases as transactions for dog toys, dive gear, carbonated drinks, drone components, face creams and other items in order to obtain approval from credit and debit card companies. Herban Industries alleges that the Eaze partnered with Cyprus- and UK-based shell corporations that claim to sell these products, accusing the delivery company of using those recorded sales to disguise the cannabis transactions.
Read the full civil complaint below.
Herban Industries is owned by DionyMed Brands, a Canadian firm that formerly partnered with Eaze before splitting off to form Chill, a rival cannabis delivery service, Mashable reported. Herban Industries’ complaint claims that Eaze’s sales are approximately 300-percent higher than Chill’s due to Eaze allowing customers to pay via credit or debit card, and that Eaze has committed bank and wire fraud to allow customers this payment option.
"The complaint alleges Eaze’s processing of debit and credit cards is fraudulent and illegal, and gives Eaze an unfair competitive advantage over Chill and other compliant operators," DionyMed Brands CEO Edward Fields said. "We are completely committed to operating in a compliant way and it’s important that there’s a level playing field for all participants in the cannabis ecosystem. We also believe investors have to have a reasonable expectation that all participants are subject to the same rules. Regulators, especially in California, cannot afford to put investor capital at risk by allowing illicit operators to break the law.”
The lawsuit—filed under California’s unfair competition law—ultimately aims to stop Eaze from offering these payment options.
“Violation of Business and Professions §17200 is part of California’s unfair competition laws, which prohibits, among other things, businesses from engaging in illegal activity to obtain a business advantage,” Robert Finkle, senior counsel for Greenspoon Marder’s Cannabis Law Practice Group, told Cannabis Business Times.
Eaze offers on-demand delivery in California and Oregon, and ships hemp-derived CBD products to most other U.S. states, according to its website. The company denied the lawsuit’s allegations in a statement to Leafly.
“This lawsuit is a thinly-veiled attempt by publicly traded Canadian company [DionyMed] to gain an advantage through litigation, prop up their failing stock price, and publicize their new delivery platform,” Eaze Senior Director of Corporate Communications Elizabeth Ashford told the outlet. “The allegations are false and their attempts to hide their true motives are obvious.”
Finkle said Herban Industries’ lawsuit has a few significant flaws; namely, that it will be extremely difficult to show that Eaze’s operations specifically have damaged Chill’s business, which much be shown for Herban Industries to have standing to sue. In addition, Herban Industries admits in the lawsuit that it is also involved in cannabis sales, which exposes its own federally illegal activity, Finkle added.
“Generally speaking, courts will not reward a bad actor, or an actor with unclean hands,” he said. “One could argue that all cannabis companies have an unfair advantage because they are all technically acting illegally under federal law.”
In any case, the lawsuit marks the first time that one cannabis business has sued another for violating federal law, and it will likely have significant implications for the cannabis industry as a whole, according to attorney Habib Bentaleb, founder of The Law Office of Habib Bentaleb in San Francisco, Calif.
“This lawsuit will have many reverberations,” he told Cannabis Business Times. “We’ve seen criminal and civil actions initiated by the government against cannabis companies. We’ve seen cannabis businesses sue each other for breach of contract and misappropriation of intellectual property. We’ve seen shareholders sue directors for breaching their fiduciary duty. But what we have not seen is a cannabis company publicly alleging that another is actively and purposefully violating federal wire and bank fraud.
“I think this could be a blow to the industry’s movement to pass the SAFE Banking Act,” Bentaleb continued. “Fortunately, Jeff Sessions is no longer in office, but there’s no guarantee that the Department of Justice won't take notice of this lawsuit. Historically and up until a few years ago, cannabis operators didn't have to worry about other cannabis businesses suing them for violating federal law. Those days are clearly over, and this lawsuit may open up Pandora's Box.”
Finkle echoed the same sentiment. “It’s … a misguided lawsuit coming from a cannabis company because it could open Pandora’s Box,” he said. “It’s not hard to imagine that a bar might believe it’s losing business to the cannabis retail shop right next door; could that be considered unfair competition?"
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