Why Exposure to Federal Civil RICO Liability Varies Across States
Every state-licensed marijuana supplier is violating not only the federal Controlled Substances Act (CSA) – which prohibits manufacturing and distributing marijuana – but also the federal RICO statute (18 USC 1961 et seq.). The RICO statute makes it a separate and distinct federal crime to engage in a pattern of “racketeering activity,” and the statute defines “racketeering activity” to include both manufacturing and distributing marijuana. To be sure, the risk that any state licensed marijuana supplier would be criminally prosecuted by the federal Department of Justice (DOJ) – either for violations of the CSA or for violations of the RICO statute -- is quite small right now. But unlike the CSA, which may be enforced only by the DOJ, the RICO statute may be enforced by private parties as well. Namely, it creates a civil cause of action that certain private plaintiffs may bring against RICO violators. Importantly, the statute allows these private plaintiffs to bring their civil RICO claims, whether or not the DOJ ever criminally prosecutes the RICO defendant. Furthermore, the RICO statute provides some encouragement for private parties to bring suit because it awards successful plaintiffs treble damages. (I discuss the elements of civil RICO and its application to marijuana suppliers in more detail on pages 400-406 of my book and on pages 649-656 of my article, A Critical Appraisal).
At first glance, then, state-licensed marijuana suppliers would appear to face steep liability under the RICO statute. Indeed, several civil RICO lawsuits have already been brought against state-licensed marijuana suppliers.
In this post, I will discuss decisions in two recently litigated civil RICO cases brought against the state-licensed marijuana industry. Interestingly, the decisions in these two cases suggest that even though RICO is a federal statute, the marijuana industry’s exposure to civil RICO liability may vary from state to state across the country.
The main reason for this variability is that federal courts disagree about what constitutes a cognizable RICO injury. To spare the federal courts from being flooded by RICO litigation, the RICO statute limits who may file a suit. In particular, the plaintiff must demonstrate that she has suffered injury to her “business or property” (i.e., not her person or her psyche) that was directly (i.e., proximately) caused by the defendant’s racketeering activity. 18 U.S.C. 1964. As will be seen in the discussion of cases below, federal courts have reached different conclusions about what counts an injury to “business or property” for purposes of the RICO statute.
Safe Streets Alliance v. Hickenlooper (10th Circuit 2017)
In Safe Streets Alliance v. Hickenlooper, the RICO claim was brought by private citizens who own a ranch in Pueblo County, Colorado. The plaintiffs were aggrieved when the defendants opened their licensed marijuana grow facility (Alternative Holistic Healing) on neighboring property. Among other things, the plaintiffs claimed that the facility was emitting foul odors and attracting crime. The allegations could have been brought as a run-of-the-mill state law nuisance claim, but the plaintiffs instead choose to pursue a federal civil RICO action against the facility. I’m only speculating, but the plaintiffs might have made this choice because: 1) civil RICO provides treble damages; and 2) civil RICO claims can be brought in federal court.
There was little doubt the defendants in this case were violating RICO. But when the suit was initially filed, it was unclear whether these plaintiffs had suffered a cognizable injury caused by the defendant’s racketeering activity. Indeed, the federal District Court for the District of Colorado thought none of the injuries alleged in the complaint satisfied this test. It granted the RICO defendants’ motion to dismiss. But the Tenth Circuit subsequently reversed. It held that plaintiffs had alleged three cognizable injuries to their “business or property”:
That defendants had impaired the plaintiffs’ enjoyment of their property (e.g., hiking and horseback riding) because they emitted a foul smell from their facility
That defendants had reduced the market value of plaintiffs’ land for similar reasons (i.e., because of the smell)
That defendants had also reduced the market value of plaintiffs’ land because their facility attracted crime to the area
See Safe Streets Alliance v. Hickenlooper (June 2017). The Tenth Circuit thus resuscitated the RICO claims and allowed the case to proceed to trial, suggesting that state-licensed marijuana suppliers face at least some exposure to civil RICO liability.
Ainsworth v. Owenby (D. Colo. 2018)
As in Safe Streets, the plaintiffs in the second case -- Ainsworth v. Owenby -- were landowners who were aggrieved by the defendants’ licensed cultivation of marijuana on neighboring property (this time in Oregon). In particular, as described by the District Court, the plaintiffs alleged that,
“Since the . . . commencement [of the Defendant’s operation], a greenhouse ‘equipped with large, commercial exhaust fans’ has operated on the [Defendant’s] property ‘24 hours a day, seven days a week.’ . . . . In addition, [Defendants] have “regularly burn[ed] marijuana debris, trash[,] and discarded items from the [M]arijuana [O]peration, creating thick, noxious smoke.’ . . . Traffic traveling to and from the [Defendant’s property], moreover, has transformed the two dead-end roads on which Plaintiffs live into ‘busy, and at times unsafe, commercial roadways.” . . . Plaintiffs ‘no longer feel safe in their homes and on their properties,’ citing the presence of ‘pit bull guard dogs’ roaming loose in the neighborhood, ‘unknown vehicles entering their properties at all hours of the day and night,’ and at least two reports of ‘prowling and break-ins’ on nearby properties. . . . Plaintiffs allege that, as a result of the ‘persistent stench of marijuana,’ ever-present fan noise, and increased traffic, the Marijuana Operation has interfered with the ‘use and enjoyment of their properties.’ . . . They note, for example, that they are no longer able to open the windows in their homes, sit outside on their decks and patios, or recreate in their yards. . . . Plaintiffs further allege that the odors, noise, and traffic created by the Marijuana Operation, along with the very fact of the operation’s existence, make each of their properties ‘worth materially less than they otherwise would be’ and ‘harder to sell at any price.’ . . . . Finally, Plaintiffs allege that, fearing ‘the presence of a drug trafficking operation in their neighborhood,’ they have ‘formed a neighborhood watch group, . . . purchased and installed cameras and security systems, purchased and installed fencing and gates, and purchased firearms.’”
Ainsworth pages 3-4 (quoting from the Complaint). The District Court later summarized these facts as alleging three injuries nearly identical to those claimed in Safe Streets:
“diminished use and enjoyment of their properties,
reduction in the fair market value of their lands, and
expenditures on additional security measures”
Ainsworth page 11.
In a major departure from Safe Streets, however, the Ainsworth court found that these three injuries were NOT actionable under RICO. It thus dismissed the plaintiffs’ claims in an August 2018 ruling. (It issued a similar ruling in March 2019. All of the quotes below are from the August 2018 ruling.)
The District of Oregon is located in the Ninth Circuit; the conflict between Ainsworth and Safe Streets thus tees up a potential circuit split regarding the scope of marijuana suppliers’ liability under the federal RICO statute. (I say “potential” because the Ninth Circuit might yet reverse the district court’s decision in Ainsworth and thereby reconcile the two cases.)
So which court got it right?
Ultimately, I think the Tenth Circuit’s decision is a more reasonable (though hardly inescapable) interpretation of RICO law, at least with respect to the first two claims. Let me discuss and evaluate the conflicting decisions regarding each injury in turn.
1. Diminished use and enjoyment of property
Regarding the first alleged injury—the diminished use and enjoyment of plaintiffs’ land—the Ainsworth court relied on ostensible differences in state nuisance laws to distinguish the Ainsworth lawsuit (which originated in Oregon) from the Safe Streets lawsuit (that originated in Colorado):
“[A]s a matter of law, Plaintiffs’ impaired use and enjoyment of their land is a non-compensable personal injury. . . . [C]ourts generally define ‘property’ by reference to state law. . . . In Oregon, interference with a possessor’s ‘use and enjoyment’ of her real property is redressable by an action sounding in nuisance. . . . Oregon courts have long distinguished between nuisance claims arising from ‘injury to property’ and those arising from ‘personal injury.’ . . . A defendant’s interference with a possessor’s ‘comfort and enjoyment’ of her property is a ‘personal injury,’ whereas damage to the physical condition or ‘value’ of her land is an ‘injury to property.’ . . .
As relevant here, a plaintiff unable to enjoy the use of her property due to an odorous nuisance suffers injury to a personal interest. . . .
Although actionable under Oregon nuisance law, such harms to human comfort are not compensable under RICO.”
Ainsworth pages 11-13.
The court acknowledged that Safe Streets had found “interference with [the] use and enjoyment of . . . land” constitutes an “injury to property” for purposes of RICO. Ainsworth page 13. Nonetheless, the court suggested that Safe Streets was “easily distinguishable” because
“it relied upon Colorado nuisance law as the source of the plaintiffs’ protected interest, explaining that the defendants [in Safe Streets] had failed to cite any state ‘authority suggesting that a landowner’s complaints about a neighbor’s recurrent emissions of foul odors are conceptually unmoored from the owner’s property rights.’ . . . As discussed above, that is not the case here—Oregon law does draw a distinction between nuisance claims arising from personal and proprietary injuries.”
Ainsworth page 13-14.
In other words, the Ainsworth court suggests that the term “property” in the federal RICO statute is defined by state law—and even more particularly, by the nomenclature the state uses to describe an injury (i.e., whether a state labels it a “proprietary” versus a “personal” injury). This means, of course, that the exact same injury could be considered actionable for RICO purposes in one state but not-actionable in another state.
I am skeptical of the Ainsworth court’s reasoning here. For one thing, it’s not even clear that Colorado and Oregon actually disagree about how to classify the loss of use of property for purposes of state nuisance law. The point the Safe Streets court made—in the very language quoted by Ainsworth—is that the injury the plaintiffs had suffered was necessarily tied (i.e., moored) to the plaintiff’s property rights and thus should be considered an injury to property for RICO purposes, regardless of how Colorado might label the injury. (The full Safe Streets opinion is linked above; the relevant discussion of state nuisance law can be found on pages 24-25 of that opinion.)
Even more importantly, I think the Ainsworth court puts too much emphasis on state law in determining whether there is an actionable injury to property for purposes of federal RICO law. To be sure, the Ainsworth court is correct the RICO statute uses state law to determine whether a plaintiff has suffered an injury, such as whether a plaintiff has a right to breathe odor-free air on her land. But I doubt the RICO statute (or the Ninth Circuit interpretations thereof) also uses state law to classify those injuries as “proprietary” or “personal”, as the Ainsworth court suggests.
On this issue (i.e., whether an injury is to property), I think the Safe Streets approach—focusing more on the nature of the injury rather than the label a state applies to it –makes more sense. For one thing, it seems odd to say (as Ainsworth does) that if you destroy my property (say, by burning down my house) I have suffered an injury to my property, but if you merely prevent me from using that same property (say, by building an insurmountable wall around my house) I have instead suffered an injury to my person. In either case, the loss I have suffered is the same – I can’t use my property (i.e., my house).
It also seems odd to allow a state to expand the scope of civil RICO liability, simply by labeling injuries a particular way. For example, the logic of Ainsworth seems to suggest that a state could make assault and battery actionable under RICO simply by relabeling quintessential “personal injuries” (like a broken arm) as “injuries to property” (say, by declaring that you have a property interest in your arm). I doubt Congress wanted to enable this when it carefully circumscribed RICO liability.
In sum, I don’t think the Ainsworth court satisfactorily distinguished Safe Streets regarding this first injury. Of course, the District of Oregon and the Ninth Circuit don’t have to follow out-of-circuit precedent; but I don’t see a good reason here for rejecting the Tenth Circuit’s reasoning.
2. Reduction in the fair market value of their lands
The Ainsworth court provided a different rationale for holding that the plaintiffs’ second injury—the alleged reduction in the fair market value of their land—was not actionable under RICO. Regarding this type of injury, it suggested that the Ninth Circuit (unlike the Tenth) requires plaintiffs to attempt to monetize the devalued property interest (e.g., through an attempt to sell their property) to suffer an injury to property under RICO.
The Ainsworth court explained:
“[A] reduction in the fair market value of land is an injury to property. . . . [H]owever, a RICO claimant must also ‘show proof of concrete financial loss, and not mere injury to a valuable intangible property interest.’ . . . The corollary to this principle is that a plaintiff’s alleged financial loss cannot be ‘purely speculative.’
Ainsworth page 16. To demonstrate this concrete financial loss, the Ainsworth court held that a plaintiff must either allege prior attempts to sell (or rent) a property or else “must plausibly allege at least a present intent or desire to do so. . . .” Ainsworth page 17.
“Plaintiffs are not required to offer detailed statics, appraisals, or other information quantifying their losses at this stage in the litigation, but they must do more than allege that, in an abstract sense, their lands are worth less. They must make good faith allegations that they attempted or currently desire to convert those interests into a pecuniary form.”
Ainsworth page 19.
The Ainsworth court then held that the plaintiffs had failed to satisfy this requirement:
“Plaintiffs allege no past or present intent to rent, sell, or otherwise monetize their property interests. To the contrary, as currently drafted, the Complaint suggests that the burdened lands house private residences which Plaintiffs have no desire or intent to rent or sell. Although it is certainly reasonable to infer that their fair market values have dropped, that is an abstract harm.”
Ainsworth page 19. (In its March 2019 ruling, the court used similar reasoning to dismiss the plaintiff’s amended complaint.)
The Ainsworth court once again sought to distinguish Safe Streets:
“In Safe Streets, the court held that an alleged reduction in the fair market value of the plaintiffs’ lands was a compensable injury to property. . . . As in the present case, the panel found it plausible that a prospective buyer would be willing to pay less for land burdened by the odors and presence of a neighboring crime syndicate. Unlike the present case, however, the court reasoned that this fact alone—that is, the abstract reduction in the fair market value of the plaintiffs’ lands—was sufficient to state a claim. . . . In doing so, it expressly ‘refuse[d] to follow’ the rule adopted in [the Ninth Circuit] that, as part of any civil RICO claim, ‘a plaintiff must plead a concrete financial loss.’ . . . This Court, unlike the Tenth Circuit, is not at liberty to disregard the Ninth Circuit’s repeated admonitions that “concrete financial loss’ is an indispensable element of a RICO claim. Plaintiffs therefore fail to plead a compensable injury to property under the civil RICO statute and must amend their Complaint accordingly.
Ainsworth page 19-20.
Assuming the Ainsworth court accurately describes the Ninth Circuit rule, its holding regarding the second injury is likely correct. In particular, it appears that the Ninth and Tenth Circuits simply disagree about whether a drop in the value of one’s property is, by itself, enough to demonstrate an injury to one’s property. One might disagree with the Ninth Circuit’s interpretation of RICO – after all, it does seem harsh to say that a plaintiff must sell property (e.g., a family home) to recover for a reduction in its value – but a district court is not free to ignore its own circuit’s holdings on such matters, regardless of what it (or others) might think of them.
3. Expenditures on additional security measures
The Ainsworth court also rejected the plaintiffs’ third alleged injury—expenditures against increased neighborhood crime they attributed to defendants’ marijuana operation—as not actionable:
“Plaintiffs’ out-of-pocket expenses for firearms, fencing, gates, and security cameras derive from personal injuries and are therefore not compensable under RICO. It is undisputed that a plaintiff’s ‘emotional distress’ is not an injury to property within the meaning of the civil RICO statute. . . . Importantly, a plaintiff cannot transform a ‘fundamentally personal injury’ into a proprietary one by expending financial resources or incurring ‘economic losses’ therefrom. . . . A plaintiff who purchases a home security system to protect against threats arising from a defendant’s racketeering activity does not suffer an injury to property. . . . Here, Plaintiffs’ investments in security measures do not transform their distress over neighborhood safety into an injury to property. . . . Plaintiffs in the present case cannot transform their apprehension of third-party prowlers into a compensable RICO injury simply by reaching for their wallets.”
Ainsworth pages 14-15.
Although the court again broke from the Tenth Circuit regarding whether this type of injury is actionable under RICO, it did not spend much ink trying to distinguish Safe Streets on this count. Instead, it appears the court simply believed that the Ainsworth plaintiffs took their precautions only to address the “apprehension” and “emotional distress” they had experienced due to an alleged increase in criminal activity caused by defendants’ marijuana operation. Since “apprehension” and “emotional distress” are quintessential personal injuries, the court found that spending money to avoid these injuries could not constitute an injury to property (even though it involved property).
Assuming the court correctly described the motives for the plaintiffs’ expenditures, I think the court reached the right result here – and that other federal circuits (including the Tenth Circuit) would probably agree with that result.
The problem, however, is that the plaintiffs may have also taken these precautions to prevent damage to or theft of their property. After all, the court (in language quoted earlier) described how the plaintiffs had alleged an increase in “prowling and break-ins” – criminal activity that might not cause “apprehension” and “emotional distress”, but that might also result in damage to or theft of property (say, a broken window or the theft of a car). Perhaps the plaintiffs’ complaint did not mention this possibility—i.e., perhaps plaintiffs alleged that the only reason they took precautions was to address their fears. If that is the case, the court was right to reject this injury as beyond the scope of civil RICO liability; but if not, or if the plaintiffs are allowed to amend their complaint (it was dismissed without prejudice), this portion of plaintiffs lawsuit might be revived.
However, let me note that both courts should have rejected this particular injury on other grounds—namely, that the defendants are not the proximate cause of this injury. In civil RICO cases, plaintiffs must allege not only that they suffered an injury to property but that the defendants were the proximate—i.e., the direct—cause of that injury. To be sure, the Tenth Circuit found that plaintiffs had satisfied the proximate cause test in Safe Streets. But I think the Tenth Circuit erred in so doing. In both Safe Streets and Ainsworth, the defendants did not directly cause this injury–i.e., the defendants were not prowling around the neighborhood and breaking into homes; rather, unsavory characters attracted by the defendants’ operations were the proximate (i.e., the direct) cause of plaintiffs’ injuries.
In sum, I think the Safe Streets court probably reaches the more defensible conclusion, at least with respect to the first two alleged RICO injuries.
So how much should state licensed suppliers be worried about RICO?
On the one hand, the (net) impact of Safe Streets could be small, even in the Tenth Circuit. Notwithstanding the decision, there still aren’t many plaintiffs who can satisfy the RICO injury requirements, and most of those (presumably) could have brought a state law nuisance claim against a marijuana supplier anyway. To be sure, RICO increases the damages suppliers would have to pay (because of trebling). But the same pro-active steps suppliers already take to reduce exposure under state nuisance laws – e.g., abating odors and carefully siting facilities – should help reduce their exposure under RICO as well. It’s also worth noting that the plaintiffs in Safe Streets – later renamed Reilly v. 6480 Pickney, LLC --ultimately lost because they failed to convince a jury that they had actually suffered the aforementioned injuries. See UPDATE: Plaintiff Loses Colorado RICO Lawsuit (Safe Streets).
On the other hand, decisions like Safe Streets might open the door a crack to so-called nuisance suits against marijuana suppliers. Here’s the reasoning: Even if they’d struggle to satisfy RICO’s injury requirements, plaintiffs might file RICO claims if the cost of filing a suit is lower (to them) than the cost (to the defendant) of responding. In such cases, plaintiffs might expect defendants to offer modest settlements (above plaintiffs’ filing costs, but below defendants’ litigation costs) to make any suit (brought or threatened) just go away.