Los Angeles Cannabis Litigation: Cannabis Tenant Prevails

Cannabis litigation is growing as the industry matures. Recently, we’ve seen a suit related to false advertising, but we’re also seeing more traditional business litigation around partnership issues and contract breaches. In Los Angeles, the repeal of Prop. D and implementation of Measure M caused a lot of industry infighting, some of which led to litigation. In particular, the initial rush for eligible real property in the city led many landlords to lease to the highest bidder. Out of that rush is now springing more landlord/tenant cannabis litigation.

CJ World’s cannabis litigation

In the case of CJ World v. 147-151 W. 25th St LLC (which was consolidated with 147-151 W. 25th St. LLC v. GRG Collective), the allegations between the parties centered around Phase II licensing in the City of Los Angeles. Specifically, plaintiff CJ World alleged that 147-151 W. 25th St. LLC (the “landlord”):

. . . saw an opportunity to nearly double the monthly rent [it was] collecting from [its] long-time tenant, CJWorld-LA (“CJ World”), a cannabis cultivation business. This opportunity came in the form of Downtown Natural Caregivers, Inc. (“DNC”), a competing cannabis business that approached [the landlord] about leasing the property for its own cultivation operation.

Basically, CJ World, a pre-existing Phase II cultivator in L.A., alleged that its landlord leased CJ World’s property out from under it to DNC, a Phase I “existing medical marijuana dispensary” (“EMMD“), that was willing to pay more rent. Under Measure M, EMMDs were allowed to seek licenses before non-retail applicants, like CJ World. And on October 23, 2018, DNC secured temporary approval from L.A.’s Department of Cannabis Regulation (“DCR”) at CJ World’s location while CJ World still held a lease to cultivate at that property. CJ World was represented by Arash Sadat and Brie Mills of Mills Sadat Dowlat LLP.

CJ World’s cannabis litigation claims

In L.A., it is not unusual to encounter situations where multiple cannabis operators claim to have leased the same location in an effort to secure an annual approval license from the City. What’s less customary is to see a cannabis litigation matter actually go to trial over that issue. In its case, CJ World argued that:

  • The landlord and DNC worked together to unlawfully force CJ World to vacate the leased premises prior to expiration of lease term so that the landlord could re-let the property at substantially higher rent. And that this conduct included:
    • the landlord secretly leasing the property to DNC without informing CJ World (the “Secret Lease”);
    • Making false and misleading statements to the City of Los Angeles and the State of California to allow DNC to obtain temporary approval to cultivate at the property, thus precluding CJ World from obtaining such approval;
    • Filing a baseless and unsuccessful unlawful detainer action against CJ World which the landlord ultimately abandoned; and
    • After the landlord’s eviction efforts proved unsuccessful, changing the locks at the property without CJ World’s consent or knowledge and without a court order.

In its trial brief, CJ World surmised that the landlord:

. . . acting in concert with DNC pursuant to a signed lease agreement and evidenced by written correspondence, deprived CJ World of the ability to obtain approval from City to cultivate cannabis at the property under a newly enacted regulatory framework, then attempted to evict CJ World on the basis that it was operating unlawfully.

Ouch. CJ World inevitably had to ask the DCR to re-locate its operations. Upon its successful re-location, it eventually received temporary approval as a Phase II applicant at its new spot.

Educating the Court on cannabis

In full disclosure, one of our cannabis lawyers was hired by CJ World’s counsel as an expert in this case, and tasked with educating the jury about Measure M, L.A.’s licensing phases (in particular, Phase II), and the status of enforcement against cannabis operators back in 2018. It’s probably one of the first times that an expert has taken the stand in open court and been admitted to describe L.A.’s licensing regime for Phase I and Phase II (Measure M wasn’t even a law until March 2017).

What’s great here is that courts and juries are going to learn more and more about cannabis laws and rules as cannabis litigation increases.

Recall that the parties sued each other in this consolidated matter. While CJ World had a laundry list of claims against the landlord, the landlord claimed that CJ World breached its lease by failing to pay rent in the month of September 2019.

The jury found that CJ World breached its lease for failure to pay September rent, and it awarded the landlord $17,500, but $0 for other damages claimed by the landlord. Regarding CJ World’s claims, the jury found that the landlord and its officers committed fraud, breach of written contract, breach of the implied covenant of good faith and fair dealing, breach of the implied covenant of quiet enjoyment, wrongful eviction, and trespass to chattels. Regarding damages, the jury awarded CJ World the following:

  • Lost plants: $ 20,250.00
  • Lost profits: $ 337,609.00
  • Emotional Distress: $ 30,000.00

What’s next for cannabis litigation?

Without a doubt, more cannabis litigation is on the horizon. Cannabis operators are no longer fearful of vindicating their rights in open court (state court, anyway) given the way political winds are blowing. And state courts are inclined to hear these cases given legalization at the state level. As a result, I am confident that we’ll see more plaintiffs like CJ World emerge in L.A. and beyond.

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