A dispute between neighbors has the potential to derail Massachusetts’ entire marijuana industry.
Cambridge neighbors of the medical marijuana dispensary Healthy Pharms have sued the dispensary in federal court.
The neighbors, led by Crimson Galeria, argue that federal law, under which marijuana is illegal, should pre-empt state law, which allows it. They are using the RICO statute, a law crafted to address mob-related racketeering, to argue that Healthy Pharms and the businesses that support it are involved in illegal marijuana crimes, which are lowering neighborhood property values. If a judge agrees with their argument, Massachusetts could have to reconsider its medical and recreational marijuana programs.
“This case certainly has broad and far-reaching implications for the marijuana industry in general,” said Scott Schlager, lead counsel for Crimson Galeria and an attorney with Nathanson and Goldberg.
Emma Quinn-Judge, a partner at Zalkind, Duncan and Bernstein who represents Healthy Pharms, agreed that the consequences could be significant.
“It should be concerning to the citizens of Massachusetts that you could have a case in federal court that completely undermines something Massachusetts voters voted on repeatedly and various levels of state government have put a lot of work into figuring out,” Quinn-Judge said.
Healthy Pharms opened in late December in the high-rent Harvard Square neighborhood. It closed temporarily in February after a pesticide was found in its product, and it remains closed today while under investigation by the Department of Public Health.
Several commercial real estate businesses that own neighboring properties brought two lawsuits to keep Healthy Pharms out. The first is a zoning appeal, which is pending in state court. The second is the federal RICO suit filed in U.S. District Court in Massachusetts.
RICO, the Racketeer Influenced and Corrupt Organizations Act, is a federal law that provides increased penalties for crimes committed as part of a criminal organization. It was written to deal with mob crime, but has since been expanded to a wide range of uses.
RICO has been used in only a handful of other cases involving state-licensed marijuana businesses, in Oregon and Colorado.
Those cases either settled or are still pending. So far, the only major judicial ruling came out of Colorado, where neighbors claimed they were harmed by the odor of a marijuana grow facility. A U.S. District Court judge ruled that it was not appropriate to use the RICO statute to prosecute a state-licensed marijuana business. But the 10th Circuit Court of Appeals reversed that, deciding that RICO can be used. The case is continuing in U.S. District Court.
It is possible that once these cases make it through the judicial process, one of them could end up before the U.S. Supreme Court.
In Massachusetts, neighbors sued Healthy Pharms, its top officials, real estate company, advisers and insurers, as well as the state, the city of Cambridge and the town of Georgetown, which licensed Healthy Pharms. The neighbors argue that their properties will lose $27 million in value due to Healthy Pharms’ operations.
“Extensive evidence shows that marijuana retail sale is an odorous and stigmatized activity and that foul smelling, stigmatized activities reduce nearby property values,” the neighbors wrote in their complaint.
Brian Barnes, a partner at Cooper and Kirk in Washington, D.C, who is consulting with Crimson Galeria and was involved with both Colorado cases, said the advantage to the plaintiffs of using RICO is it lets someone sue a business owner personally, not only the corporation. It also allows for stiff penalties – triple damages and attorneys’ fees. This can lead to settlements from someone eager to avoid legal risk. Before one of the Colorado cases settled, an accountant and insurer both paid settlement money to get the plaintiffs to dismiss them from the case.
The potential for a RICO suit could also scare off other businesses – such as insurers or banks – from getting involved with marijuana.
Former Massachusetts Supreme Judicial Court Justice Robert Cordy, now an attorney at McDermott, Will and Emery, represents Century Bank in the case. Century Bank was sued because it provides banking services to Healthy Pharms.
“A lot of banks are watching this case,” Cordy said.
Banks don’t want the liability of a potential federal marijuana lawsuit, Cordy said, but banking services are needed for the marijuana industry.
Cordy said if a judge rules that banks can face federal liability for providing services to state-sanctioned marijuana companies, the result would be a lack of banking services that would leave millions of dollars in cash flowing through the industry.
“I’m very hopeful the federal court will act on this and make it clear that to the extent there are residual issues here, they really are political issues that Congress needs to resolve,” Cordy said. “Abuse of the civil RICO statute is an unacceptable method of trying to tear apart or upset the medical marijuana regime which has been fully enacted and regulated by the state.”
Healthy Pharms and other defendants have filed motions to dismiss the suit. U.S. District Court Judge Allison Burroughs, who is presiding over the case, has not yet ruled.
Quinn-Judge, representing Healthy Pharms, said she believes the use of the RICO statute is “a stretch,” and she does not believe the neighbors will be able to prove that property values in Harvard Square are tanking due to the dispensary.
“The ambition of the case is to shut down the entire licensing scheme as well as my clients’ particular dispensary,” Quinn-Judge said.
But Barnes and Schlager, representing the neighbors, said it is not about ideology but location.
“This isn’t really an ideological fight,” Barnes said. “If they had located a marijuana store someplace else that wouldn’t have this dramatic adverse affect on surrounding property values, we wouldn’t be where we are.”
Schlager said marijuana dispensaries have an obligation to evaluate where they choose to open facilities.
“When you site them next to valuable properties or in populated areas, there’s always a risk that you’re going to offend or harm your neighbors,” Schlager said.