Cannabis Marketing 101: Why Businesses Should Think Before They Text
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Cannabis Marketing 101: Why Businesses Should Think Before They Text

Knowing and following these rules can help insulate your business from large-scale liability.

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Hardly a day goes by without a report of another lawsuit—almost invariably one that claims to be a class action—against another cannabis-related business for allegedly violating the federal Telephone Consumer Protection Act (TCPA), most often through the business’s text-based marketing. Not surprisingly, the bulk of these cases are being filed in jurisdictions such as California, Colorado and Washington where cannabis legalization is broadest. But with an increasing number of states permitting both medicinal and recreational use of cannabis, these cases have been and will be brought throughout the U.S.

With the prospect of uncapped damages awards tied to the number of text messages sent, the TCPA has created a literal cottage industry of plaintiffs’ lawyers. They are eager to capitalize on the missteps of entrepreneurs that are frequently so focused on growing their businesses that they overlook or ignore the legal niceties separating a TCPA-compliant, text-based marketing program from one that can lead to a ruinous financial judgment. Knowing and following all of the rules can help insulate your business from large-scale liability, but the one Golden Rule is quite simple: Think before you text.

What is the TCPA?

The TCPA is a statute passed by Congress in 1991 to combat the perceived scourge of so-called robocalls and unwanted faxes from telemarketers. Fax machines were what passed for cutting-edge technology at the time, while cellphones were in their relative infancy (and about as big as an infant). Owners of cellphones often incurred expensive per-minute charges for all calls, whether incoming or outgoing. Text messaging did not yet exist.

Generally, the TCPA prohibits the making of any call to a cellphone using an automatic telephone dialing system (ATDS) or an artificial or prerecorded voice without the prior express consent of the called party. The TCPA also prohibits the making of any call to a residential landline using an artificial or prerecorded voice without prior express consent. For those who send faxes, the TCPA prohibits sending unsolicited advertisements unless the recipient has an established business relationship with the sender or voluntarily provides their fax number; all faxed advertisements also must contain information allowing the recipient to opt-out of receiving future faxes.

Despite regular efforts of business organizations and other affected groups to amend the TCPA to reflect the sea changes in technology that have occurred in the last three decades, Congress has failed to act, leaving to the Federal Communications Commission (FCC) and the courts the task of interpreting and applying the statute to modern realities. For instance, while there is no indication that lawmakers even contemplated text messaging when the TCPA was passed, the FCC and the courts have agreed that SMS and MMS text messages are the equivalent of a “call” for TCPA purposes, subjecting them to the same rules and restrictions as voice calls.

Likewise, what constitutes an ATDS remains an absolute muddle. Although the TCPA defines an ATDS as equipment with “the capacity … to store or produce telephone numbers to be called, using a random or sequential number generator; and … to dial such numbers,” the FCC and the courts are hopelessly divided as to what this means, leading to a dispute in nearly every TCPA case.

Why should cannabis-related businesses care about the TCPA?

The reason cannabis-related businesses need to care about the TCPA is simple: violating it can be expensive. Very, very expensive. Millions and millions of dollars expensive. Company-threatening expensive.

The TCPA prescribes a penalty ranging from between $500 and $1,500 for each violation of the statute. That’s $500 to $1,500 for each and every call, text or fax that runs afoul of the statute. What’s more, the TCPA contains no cap on the amount of damages that can be awarded, and there have been any number of TCPA verdicts and settlements in the single millions, tens of millions, even hundreds of millions of dollars. For a cannabis-related business that might engage in a modest text-based marketing campaign involving, say, 10,000 messages, getting it wrong could mean potential liability of between $5 million and $15 million. And even though some courts recently have become more receptive to claims that uncapped TCPA liability can be so disproportionate as to violate a company’s fundamental right to due process, there is no guarantee that an offending company can count on a constitutional argument to mitigate the effects of its violation.

Furthermore, many commercial general liability and other business insurance policies explicitly or implicitly exclude coverage for TCPA claims. Not only do cannabis-related businesses that violate the TCPA face the prospect of ruinously large awards, but they often must do so without an insurer to defend or indemnify them in an environment that presents certain unique hurdles to obtain insurance in the first place.

What should cannabis-related businesses do about text-based marketing?

The TCPA legal landscape is ever-shifting, and the only certainty is uncertainty. (Currently, the U.S. Supreme Court is considering a case seeking to throw out the entire TCPA as a violation of the First Amendment right to free speech.) It is impossible for cannabis-related companies to insulate themselves completely from potential liability, especially when so much of their marketing depends on text-based campaigns direct to consumers, whether by the companies themselves or third-party marketers on their behalf. Observing the fundamental rule of thinking before texting, however, can go a long way toward mitigating TCPA risk. To that end:

  • Always get consent. The key to sending marketing text messages to consumers lies in obtaining prior express written consent. There are many ways to do this, but it is critical that a consumer affirmatively consents to receiving promotional or mixed promotional/informational text messages. Giving consumers the option to “opt out at sign-up,” where subscribers must uncheck a box to opt out of receiving promotional materials, can be riskier than requiring an affirmative check at sign-up, for example.
  • Keep records of consent up to date. Just as consumers can give consent to receiving text messages, they can revoke their consent in any “reasonable” manner, according to the FCC, although there is no precise definition of what is considered “reasonable.” Cannabis-related businesses must have a process in place to capture and implement revocations of consent. Regularly scrub databases against the National Do-Not-Call Registry. And be mindful of reassigned cellphone numbers; TCPA liability can apply to calls/texts to the holder of a reassigned number even if the previous holder of the number gave their express consent.
  • Do not blindly rely on third-party marketers. Cannabis-related businesses that outsource their text-based campaigns to third-party marketers may still be liable for TCPA violations for texts sent on their behalf. Carefully vet the third-party marketer and its practices, including insurance; verify their own practices for obtaining consumer consent; insist on adequate and enforceable indemnification.
  • Check insurance coverage. While often excluded under standard business insurance policies, coverage for TCPA-related claims is available. Cannabis-related businesses should check with their brokers. If a company intends to engage in text-based marketing, the cost of TCPA coverage may be well worth it.

The TCPA presents a huge pitfall for unwary companies, and cannabis-related businesses are no exception. Indeed, as plaintiffs’ lawyers have set their sights on the burgeoning cannabis industry, it is more important than ever to be guard against becoming the next target. When it comes to marketing to consumers, cannabis-related businesses are well advised to think before they text.


Joshua Horn
 
is a partner and co-chair of the Cannabis Law Practice at Fox Rothschild LLP and is nationally ranked by Chambers USA as a leading lawyer in cannabis law. He leads a national team that serves the needs of businesses in the legalized cannabis and hemp sector on employment, licensing, banking, real estate and corporate financing and other services for emerging and established businesses. He can be reached at jhorn@foxrothschild.com.


Jerry Arth
is a partner in the Litigation Department at Fox Rothschild LLP. He handles complex commercial
litigation on behalf of both plaintiffs and defendants and is a thought leader on a variety of topics including class action defense, TCPA and electronic discovery. He can be reached at garth@foxrothschild.com.