On a street with few residents in rural southern Colorado, about 1,800 marijuana plants are growing in a warehouse that Alternative Holistic Healing opened last year.
Horses live next door, on a property owned by Michael and Phillis Reilly. The Reillys don’t live there, but they visit to ride the animals on the plots of land they bought in 2011.
The Reillys disapproved of their horses’ new neighbors before they even arrived, and the couple turned to federal court in 2015 after failing to convince the Pueblo County Commission to deny the cannabis business a license.
In a surprise to both cannabis companies and legal scholars, an appeals court panel sided with the Reillys on a key standing dispute on June 7, and allowed them to sue under the Racketeer Influenced and Corrupt Organizations Act.
The 1970 law, commonly called RICO, is known for mob prosecutions, but it also allows ordinary citizens to sue criminals who cause them financial harm. The Reillys say RICO allows them to potentially gain compensation for damage to their property value, and in a more ambitious and dubious legal claim, they also say they can win an injunction to shut down the neighboring grow operation.
Without reviewing the accuracy of the couple’s property value claims, a panel of the U.S. Court of Appeals for the 10th Circuit found that growing cannabis for sale in violation of federal law “is by definition racketeering activity” and—crucially—that it was plausible the property lost value.
The panel found it plausible that alleged odor from the facility, as well as the open violation of federal law, could make the couple’s property less valuable, sending the case back to district court, where the accuracy of the claims will be tested.
“Virtually every marijuana business in Colorado faces liability under the reasoning of this decision,” says David Thompson, an attorney for the Reillys, who are working with the anti-drug group Safe Streets.
The case is far from settled, however, and the Reillys still could lose when it returns to district court.
Attorney Matthew Buck—who represents the cultivators—intends to ask for summary judgment, where he will argue that the Reillys’ property value actually increased, as indicated by online records maintained by the Pueblo County Assessor’s Office.
Buck says the grow facility employs active odor management tools and that no smell seeps from the building. Odor can be measured using handheld devices, but it’s unclear if the Reillys have performed such testing. A member of the family’s legal team said they didn’t know if odor measurements had been taken.
“Any assertion that odor is impacting property value is ludicrous, considering the Reillys have animals openly defecating on their land,” Buck adds. “That is much more of a nuisance.”
Buck believes Colorado’s rising land prices gut the Reillys’ case.
“In Colorado, where our property values are skyrocketing, how can you prove your property [wouldn’t] go up x percent more?” he says. “When everyone’s property value is going up, it’s the wrong time to sue.”
Brian Barnes, another attorney for the Reillys, disagrees. He says the increase in assessed value is not important.
“The question is not how the value of the plaintiffs’ property has changed over time as the Colorado real estate market has recovered from the recession,” Barnes says. “Instead, the question is what the plaintiffs’ property would be worth today if the defendants were not operating an odorous and federally illegal drug conspiracy next door.”
What Are the Stakes?
RICO allows successful plaintiffs to collect three times their financial damages, but those damages must be suffered by property and must be directly related to the defendant’s conduct. Attorney fees, potentially much larger than any damages, also are in play.
Buck says RICO is not a serious threat to his clients. Even if neighbors’ property values decreased, Buck says the damages available could be paid without having to sell the farm.
“Worst case scenario, I have that much in my pocket,” he jokes.
“This is not going to have widespread ramifications. This is not going to result in more RICO cases. There is just no money to be made,” Buck says. “The Reillys should be thanking my clients. … My clients showed them their land was worth anything at all.”
Vanderbilt University law professor Robert Mikos says, “It’s not a big deal yet, although the [appeals court] ruling was a bit of a surprise.”
“This plaintiff might still fail to prove the claims that they put forth, that their land value has decreased, and that it’s directly caused by the defendant and not by third-party vendors or buyers,” he says. “I’m not sure they are going to be able to withstand the next part of their case, summary judgment, where you will have to show evidence. This could get derailed before trial in the next year or two.”
“There’s a risk out there, but it’s too early to say how big that risk is,” Mikos says. ”It’s plain that all these [cannabis] businesses are violating the RICO statutes, but it’s difficult to pin down who would be capable of suing them.”
One of the most devastating theoretical consequences for marijuana businesses sued under RICO is not having to pay triple damages and attorney fees, but an injunction against their law-breaking behavior.
It’s not clear that ordinary citizens can get an injunction against businesses under RICO. But that hasn’t kept the Reillys from asking.
Mikos points to a RICO manual for attorneys on the Justice Department’s website states that “the statute makes it clear that Congress did not authorize private parties to bring actions for equitable relief,” which would include injunctions against businesses.
“It’s possible that the court would deny the injunction, even if it awarded the plaintiffs in this case damages and fees,” he says.
Can You Protect Yourself?
An Oregon couple on June 13 filed a RICO lawsuit against a facility near Portland, and Thompson says he has received interest from people who want to launch more Colorado lawsuits. So, should cannabis businesses be worried?
The answer is maybe, though the precise impact of the appeals court ruling—whether it will inspire a flood of costly RICO lawsuits, or an unsuccessful trickle—remains unclear.
“It will add risk to an already risky industry. Risk generally tends to keep money sidelined,” says Andrew Freedman, Colorado’s former director of marijuana coordination, regarding fallout from the ruling in states within the 10th Circuit.
“I don’t have different advice other than to say that ensuring you are maintaining a culture that respects public health and public safety is important,” says Freedman, who co-founded Freedman & Koski, Inc. to advise state and local governments on marijuana legalization.
Joshua Kappel, a partner at the Vicente Sederberg cannabis law firm, says “I don’t see this novel claim having direct impact on cannabis businesses at this point in the litigation.”
“Until federal law changes or clarity is provided on this case, there isn’t much that can be done to avoid potential liability,” he adds. “However, ensuring your business is 100-[percent] compliant is the best way to stay out of the federal cross-hairs.”
Mikos says that the threat of a RICO lawsuit is yet another reason to carefully select business locations, and that it’s also wise to limit odor—which can be done with various technologies—and take other action to limit liability.
“That’s really the only hope a defendant has: making sure they haven’t injured someone who is capable of suing them,” he says.
