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Cannabis grower can’t use RICO statute to sue for fraud, Ninth Circuit affirms

The panel said that growing marijuana is included in proscribed racketeering activity and not commerce that's protected under the RICO statute.

LOS ANGELES (CN) — A California licensed cannabis grower can't avail herself of the federal racketeering statute to sue a group of former business partners because, a panel of the Ninth Circuit Court of Appeals said, under that statute operating a cannabis business is considered a crime.

The three-judge panel on Wednesday unanimously affirmed a judge's ruling from over two years ago that Francine Shulman, an apple farmer turned cannabis cultivator, can't sue under the Racketeer Influenced and Corrupt Organizations Act because it would provide her a remedy for actions that are unequivocally illegal under federal law.

"Looking to RICO as a whole, it is clear that Congress did not intend 'business or property' to cover cannabis-related commerce," U.S. Circuit Judge Milan Smith Jr., a George W. Bush appointee, wrote. "When Congress enacted RICO, it expressly defined 'racketeering activity' to include the 'manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in' cannabis."

An attorney for Shulman didn't immediately respond to a request for comment on the ruling.

California is one of 18 states that have legalized recreational marijuana, creating a multibillion-dollar industry. Shulman, a successful, elderly California farmer, already was growing medical marijuana on her 1,100-acre Iron Angel ranch, named after her motorbike, near Lompoc in Central California. She saw an opportunity when recreational marijuana was made legal in the state her attorneys said in their opening brief with the court of appeals, and acquired new land, expanded her farming operations, and began to cultivate cannabis in an operation licensed by California law.

Since she needed financial backing and legal and regulatory guidance, she teamed up with Todd Kaplan, a self-described serial entrepreneur and the founder and CEO of Vertical Cos., a "seed-to-sale" legal cannabis business.

Kaplan and his associates, Shulman alleges, have forced their way into the California cannabis industry by subjecting numerous victims to a similar fraudulent scheme as she fell prey to by misrepresenting their acumen and skill in the cannabis industry, entering into business partnerships, and then refusing to abide by the contractual terms and instead trying to take over the victims’ business for themselves.

Shulman entered into cultivation and lease agreements with Kaplan and his associated business entities, which she claims were ultimately used to try to defraud her out of her property and grower licenses. In the end, she alleges, her cannabis farm was left in shambles.

An attorney for Kaplan didn't immediately respond to an email seeking comment.

Shulman sued Kaplan in federal court in 2019, bringing numerous claims under federal RICO, which has the potential to recover treble damages, and trademark law as well as under California state law. U.S. District Judge André Birotte Jr. in October 2020 threw out her federal law claims, saying he couldn't remedy her injuries because doing so would result in an illegal mandate.

The judge didn't want to assume jurisdiction over her state law claims and said these should be brought in state court.

Birotte Jr.'s decision produced alarming consequences that chills one of the hallmarks of the federal system: the ability of states to act as “laboratories” for democratic experiments, Shulman's lawyers said in their appeal.

"According to the district court, those engaged in the cannabis industry — or any other activity legalized first by states — lose the protections afforded by federal laws and may never be able to recover damages in federal court," they said. "As more states legalize cannabis sale and use, the industry has grown and will continue to grow dramatically, and affirmance of the district court’s decision could devastate the industry and its workers."

The Ninth Circuit panel also included U.S. Circuit Judge Ryan Nelson, a Donald Trump appointee, and U.S. District Judge Gerswhin Drain of the Eastern District of Michigan, a Barack Obama appointee, who was sitting by designation.

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