As the cannabis industry continues to grow and expand at a rapid pace, successful operators could become the targets of labeling class actions that have plagued the traditional food and beverage industry for decades, especially in plaintiff-friendly jurisdictions like California. Suits related to advertised delta-9 tetrahydrocannabinol (“THC”) content are already being filed, and we expect them to increase materially into next year.
What You Need to Know:
- The testing and certification of THC content has come under attack in recent years.
- As a result, Saul Ewing sees a potential rise in class action litigation against cannabis operators relating to advertised THC content.
- This alert explores that trend, as well as the potential technical challenges that plaintiffs may encounter in pursuing these claims.
Cannabis product pricing generally correlates to THC content – generally, the higher the THC concentration, the more expensive the product. In the last few years, cannabis labs and manufacturers have both been accused of overstating THC levels in order to increase profits. Some states have investigated these claims and implemented regulations to prevent this alleged practice. But state regulatory efforts have varied, and there is of course no federal oversight of these issues. Plaintiffs’ attorneys may see this gray area as an opportunity for class action lawsuits. At least five class actions relating to THC content were filed against cannabis manufacturers in 2022. We will likely see more cases in 2023.
As required by state regulations, cannabis manufacturers send their products to independent third-party laboratories in order to certify, among other things, the THC content advertised on the product (beyond cannabinoid content, labs also test for, among other things, pesticides, heavy metals, and mold). A series of recent articles have alleged that some labs have generated different testing results for THC content when testing the same cannabis samples. There could be a variety of reasons for this phenomenon, including the use of different protocols for THC testing, as well as the inherent variabilities of testing plants. These articles, however, accuse certain labs of manipulating THC levels in order to satisfy customer demand and drive business. Along these lines, studies have identified irregularities in THC testing data which suggests that labs may be trying to reach pre-determined THC thresholds, such as 20 percent, in order to drive sales. Cannabis manufacturers have likewise been accused of engaging in “lab shopping” where they allegedly go from lab to lab in search of labs willing to certify the highest percentage of THC possible.
Some states have actively investigated these lab-shopping allegations. In Michigan, the Michigan Cannabis Regulatory Agency conducted an investigation into one of the leading laboratories in the State and accused it of promoting lab-shopping. The Agency ultimately mandated the recalling of 64,000 pounds of cannabis worth approximately $229 million. Oregon’s Heath Authority conducted an audit of cannabis testing procedures throughout the State. The audit report determined that there was no mechanism for verifying cannabis lab tests and also noted that state agencies are “receiving complaints from labs, including accusations that competitors are not following testing rules or are manipulating potency results to retain and attract customers.”
In response to these audits and investigations, some states have begun to implement rules and regulations designed to prevent lab-shopping. For example, Pennsylvania has implemented measures that will require separate certifications from two separate labs. Oregon recently followed suit with its own dual-lab process, which will go into effect in 2023. California’s Department of Cannabis Control has also undertaken efforts to create regulations that would create a standardized testing method to be used by all licensed labs in the State. In Washington, the State’s Liquor and Cannabis Board has suspended testing licenses after alleging that certain labs had inflated THC levels.
Adding further confusion to this patchwork of state regulatory efforts is the fact that states allow for a different margin of error when testing cannabis.In Arizona, for example, the margin of error for medical cannabis is 20 percent.In Michigan, the margin of error for cannabis products is 15 percent. In California, the margin is 10 percent.
Against this backdrop of uncertainty, some plaintiffs’ attorneys have seen an opportunity for class action litigation. Earlier this year, a group of plaintiffs filed a class action in the Eastern District of Arkansas that touched on THC testing issues. The case was more focused, however, on far-fetched criminal and Racketeer Influenced and Corrupt Organizations (RICO) Act theories of liability and was subsequently dismissed.
In the months that followed, the Dovel & Luner law firm filed four class action complaints in California state court against cannabis manufacturers in cases that directly target the THC testing issue. These cases read more like traditional food labeling class actions, which include the same California statutory and common law causes of action seen in countless class actions pending against food manufacturers across the State. The plaintiffs in the Dovel-filed cases allege that the defendants overstated THC content by amounts that exceed the 10 percent margin of error allowed under California law.
The Dovel cases remain pending. Given the copycat nature of class action litigation, we expect to see similar cases filed in 2023. We will continue to monitor this litigation trend, including whether the plaintiffs’ claims can withstand technical scrutiny. None of the California plaintiffs actually tested the cannabis they consumed and instead rely entirely on a separate third-party study to allege that the THC content of what they purchased was overstated. The problem is that this study was conducted by a cannabis publication that only tested nine products for seven separate brands. The study concluded that all products tested had overstated THC to varying degrees (THC inflation varied from 14 percent to over 500 percent), but cautioned that “the results are not sufficient to apply to any individual brand, company, product or testing lab” and that testing involves many variables that were unaccounted for, including “how long product had been on shelves, its temperature exposure, the potential for testers’ bias, human error,” among others. Plaintiffs are nevertheless attempting to import these findings broadly to apply an inference of mislabeling to all of the products associated with a particular brand. Whether plaintiffs will be able to successfully extrapolate this fairly limited study to a wide range of products remains to be seen.
As the number of cases continues to rise, we encourage clients to consider proactive steps that they can take to limit exposure to class actions. This may include a review of THC testing procedures, the use of class action waivers, when possible, and development of marketing and advertising best practices (e.g., using a disclaimer when advertising THC content so that consumers understand the number could be higher or lower than advertised so that expectations are met).
If you would like assistance in limiting exposure to cannabis labeling related lawsuits, or if you have any questions regarding an issue raised in this alert, please let us know.