Metropolitan News-Enterprise


Thursday, January 19, 2023


Page 1


Ninth Circuit:

RICO Suit May Not Be Maintained by Cannabis Grower

Illegality Under Federal Law of Harvesting, Distributing ‘Marihuana’ Precludes Affording Forum in Federal Courts to Businesses That Are Operating Lawfully Under California Laws


By a MetNews Staff Writer


A cannabis farmer, operating lawfully under California law, cannot maintain an action in the U.S. District Court for mail and wire fraud that allegedly harmed her two businesses because the sale of her product is a criminal offense under federal law, the Ninth U.S. Circuit Court of Appeals held yesterday

Francine Shulman and her Santa Barbara companies on June 20, 2019, sued the Los Angeles-based Medical Investor Holdings LLC and others in the Central District of California seeking “treble damages and punitive damages for fraud, amounting to no less than $200 million.” She proceeded under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and other bases.

District Court Judge Andre Birotte Jr. dismissed the action without leave to amend based on a lack of standing under the RICO statute, as well as under the Lanham Act, and declined to retain jurisdiction over state claims. It was only the RICO claim that was the subject of the appeal.

Smith’s Opinion

“[F]or Appellants to establish RICO standing,” Circuit Judge Milan D. Smith Jr. said in the opinion affirming the dismissal, “the statute’s use of the term ‘business or property’ must encompass businesses and property engaged in the cultivation, sale, and marketing of cannabis—an enterprise that is legal under California law. but illegal under federal law.”

He observed:

“This presents us with the following question: do either the statutory purpose of RICO or the congressional intent animating its passage conflict with the California laws recognizing a business and property interest in cannabis? We conclude that they do.”

Smith noted that Congress enacted RICO and the Controlled Substances Act (“CSA”)—which renders the manufacturing or distribution of “marihuana” a crime—the same year (1970).

Congressional Intent

The jurist wrote:

“Since RICO and the CSA were enacted almost contemporaneously, it is clear that Congress did not intend the term ‘business or property’ in RICO to include cannabis businesses or property. Congress enacted RICO as part of a comprehensive legislative package aimed at combating the influence of organized crime on interstate commerce….Considering the laws in tandem, it is evident that Congress would have considered a cannabis business to be a form of organized crime and that Congress would not have intended RICO to provide damages for injury to interests in which it explicitly disclaimed the existence of any property rights.”

He continued:

“Although some states, such as California, have changed their legal regimes pertaining to the use. cultivation, distribution, and sale of cannabis since the enactment of RICO and the CSA. these activities are still clearly illegal under federal law. Indeed, were we to substitute a drug like heroin for cannabis for the purposes of our analysis, the conclusion seems obvious: Congress could not have intended to allow a heroin dealer to recover RICO damages from someone who. by mail and wire fraud, stole a shipment of heroin. Otherwise, RICO would serve to protect the same variety of conduct it was intended to combat. For these reasons, we hold that Appellants lack a statutory right to bring a claim under RICO.”

Allegations of Complaint

Shulman, a grandmother who, in addition to farming cannabis, grew organic crops, “including beans, corn. tomatoes, lettuce, beets, carrots, pumpkins, raspberries, and hundreds of apple trees,” according to her pleading. She alleged that she was the “victim of a fraudulent scheme” perpetrated by Todd Kaplan and his companies.

The complaint described Kaplan as “an admitted felon” who would suddenly turn into a “raging ‘tyrant’ and ‘bully.’ ”

After the Adult Use of Marijuana Act was passed in 2016—scheduled to go into effect on Jan. 1, 2018—Shulman realized the potential for the growth of her existing cannabis business and perceived the need to acquire a business partner, the complaint sets forth. She teamed with Shulman, it is recited, asserting that he cheated her out of her share of the profits.

The case is Shulman v. Kaplan, 20-56265.


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