Reputation matters in business. It takes years to gain a customer's trust and build your brand. A product liability lawsuit can be incredibly costly for business owners in terms of diminished brand equity, and lost revenue, in addition to the litigation costs.
The negative impact can be even more devastating for new companies trying to gain a foothold in the market. Experts say the still-emerging and changing California cannabis industry may be more at risk for these claims as too many business owners are unaware of their legal obligations or don't think they need to be taken seriously.
All Parts of the Cannabis Supply Chain are at Risk
Cannabis is illegal under federal law. And no federal product liability laws governing cannabis currently exist. Therefore, California claims are based on the three main categories of product liability under state law:
- Defective design
- Manufacturing defect
- Lack of adequate warnings or instructions
Liability for defective products can potentially affect every part of the supply chain, including:
- Retailers
- Manufacturers
- Distributors
- Packaging companies
- Businesses that support other cannabis businesses
- Companies that produce and sell ingredients for infused products
- Test laboratories
Ensure High-quality Production Standards
Retailers, manufacturers, cultivators, and others can more readily avoid product liability claims by ensuring they design and produce products that meet or exceed California's cannabis compliance standards. However, even complete compliance does not guarantee complete protection from potential liability.
It's also essential to painstakingly vet all partners, vendors, testers, or others involved to ensure that their actions and products also comply with state regulations as well as generally accepted cannabis industry standards.
Consider Disclaimers to Avoid Problems with Regulators
Many claims targeting cannabis businesses involve false or misleading statements and inaccurate labeling. These can result from health claims made on labels, in ads, and on websites. Drafting a disclaimer, such as – "This product contains THC" – can be an easy and cost-effective way to reduce risk.
Other common disclaimers made on cannabis products and dispensary websites include: "Not safe for children" and "Health risks may be associated with the consumption of this product." Acknowledging these risks can actually enhance protections for business owners.
Proposition 65
The Safe Drinking Water and Toxic Environment Act of 1986, also known as "Prop 65" places strict requirements on California businesses to provide warnings to consumers about exposure to chemicals that cause cancer, birth defects, or other reproductive harm.
Prop 65 requires the governor to publish a list of chemicals known by the state to cause cancer, birth defects or other reproductive harm at least once per year. This list is known as the "Prop 65 list." On June 19, 2009, the Prop 65 list was updated to include "Cannabis (Marijuana) Smoke" as causing cancer. Additionally, the state released to the public a report detailing their findings of the carcinogenicity of Cannabis Smoke.
On January 3, 2020, the Prop 65 list was revised to include Cannabis Smoke and Tethrahdrocannabinol (Δ9-THC) as causes of developmental toxicity. This has created a lot of confusion and potential liability for cannabis product manufacturers and retailers for product created prior to 2020.
Don't Count on Insurance Alone for Protection
While insurers offer product liability coverages for cannabis businesses, these policies often have pitfalls, and many insurance companies have failed to pay for a portion or all of some claims. Still, it's a good idea not to shortchange coverage options even though this type of insurance is in its early days.
One of the best ways for businesses to protect themselves is to work with an experienced cannabis law attorney. Working with a lawyer who understands the complex state and federal regulations governing all aspects of the cannabis industry can not only help you comply with regulations but devise innovative strategies to avoid product liability and other risks.
Originally published Aug 17, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
