Paramount PicturesLike stoners, cannabis investors seem euphorically oblivious to marijuana risks.
Weed smokers face health risks. Investors in companies including Tilray TLRY, -3.09% Canopy Growth CGC, -1.80%Cronos CRON, -3.32% and Green Thumb Industries GTBIF, +0.31% are taking on serious litigation risk.
Marijuana-stock investors could see their investments tank if lawyers launch legal assaults based on product-liability claims. Lawsuits could easily arise out of the health risks and for several other reasons.
But how is that possible? After all, we know that selling risky products doesn’t necessarily get a company in trouble. Cigarette companies like Philip Morris International PM, +0.51% and Altria MO, +0.11% sell “cancer sticks.” Anheuser-Busch InBev BUD, -0.47% and Constellation Brands STZ, +0.94% sell beer and booze, which have obvious health risks. Kraft Heinz KHC, +0.67% and Coca-Cola KO, +1.58% sell sugar-packed foods, contributing to diabetes and obesity.
Cannabis-product liability law is unclear because there is no body of case law, making it harder for weed companies to know how to operate within the law.
The catch is that those companies have some inherent protections against legal claims. Cigarette companies get a pass because they disclose health risks, and federal law guides them on how to do this to stay out of trouble. Next, wherever risks are widely known, as with alcohol and sugar, companies get off the hook because of the “assumed risk” doctrine in law. Consumers assume the risk when they use the products. So any downside is their fault.
But none of those exemptions offer much protection for publicly listed marijuana companies. And plenty of other sources of litigation risk could create a buzz kill for weed investors by making pot stocks significantly lag the benchmark S&P 500 Index SPX, +0.85% Here’s a look.
1. Confusion about health risks
You wouldn’t know it because of all the claims that marijuana and cannabidiol (CBD) oil are magic cures for everything from depression to cancer. But studies reveal growing evidence of serious health risks in pot.
“There is a considerable body of evidence that marijuana use can produce psychosis,” says Alex Berenson, author of “Tell Your Children: The Truth About Marijuana, Mental Illness, and Violence.” Temporary psychosis caused by marijuana is serious because it causes hallucinations, delusions and paranoid thoughts “severe enough to land people in the emergency room,” he says.
There’s also near-conclusive evidence that cannabis can produce schizophrenia in some people, says Berenson. And there’s evidence marijuana can cause depression, a lower IQ and erode motivation.
But it’s hard to argue those risks are widely known, considering the growing popularity of marijuana, the claimed health benefits, the legalization wave and the hoopla for pot stocks. Berenson, for example, tells me his book’s warning about the dangers of marijuana has gotten considerable pushback by the media. I’d guess that’s probably because so many people have jumped on the weed-legalization bandwagon. Weed is cool. And it cures cancer. So what the heck could Berenson be talking about?
The bottom line: Given all the confusion about health risks, it’s not at all clear that marijuana companies will get the “assumed risk” pass that protects alcohol sellers from product-liability claims.
2. There are no clear guidelines on how to warn
Cigarette makers got a break decades ago when the federal government established guidelines on how to warn about health risks. Following those guidelines protected cigarette companies from legal liabilities. Marijuana companies don’t have a get-out-of-jail-free card from the federal government.
What’s worse, states are setting up their own rules, and many are going about it differently. This creates confusion, making it easier for marijuana companies to run afoul of state guidelines. Adhering to disclosure guidelines can be part of a defense against legal claims. But not if you break the guidelines.
“Product safety is going to change from state to state, and this makes it easier for cannabis companies to make mistakes,” says Hilary Bricken, who specializes cannabis-regulation law at the law firm Harris Bricken.
3. Warnings won’t be enough
Safety warnings won’t be enough because product liability isn’t just about disclosure. It’s also about whether products are defective or inherently dangerous because of design flaws and manufacturing mistakes, says Bricken.
There’s plenty of room for problems to crop up for marijuana companies. First, a lot of marijuana contains dangerous levels of pesticides, solvents, heavy metals and fungi. This opens up marijuana companies to breach of warranty claims.
Next, it’s hard to know how much of the active ingredient THC is in bud, let alone edibles. Consume too much, which is pretty easy given that product strengths vary and are not at all clear, and the risk of temporary psychosis and related violence increases dramatically.
That has already created legal problems in the weed industry. Consider the Colorado civil case “Kirk v. Nutritional Elements.” A father killed the mother of the couple’s children in front of them after he consumed edibles. Guardians of the children sued a dispensary and an edibles manufacturer, claiming the defendants didn’t adequately warn about side effects of edibles.
“Edibles are particularly risky because consumers don’t know how much THC they are getting, and it is harder to control compared to smoking,” says University of Michigan Law School professor Mark Osbeck, who teaches classes on marijuana law. “With edibles, you don’t know for an hour later, and then it is too late.”
A big part of the problem is that THC level tests are often inaccurate, points out Bricken. We also don’t know much about how THC affects people of different height and weight, or drug interactions. “Potency levels are a potential defect,” says Bricken. “We have very little data about what consumer safety means in terms of cannabis.”
4. It’ll be tempting for weed companies to cross the line
For years, cigarette makers got off the hook because federal law said if they adequately disclosed risks, they were immune to many product-liability claims.
But that wasn’t good enough for cigarette makers. Instead, they got into trouble by hiring experts to claim health risks were overstated, even though the companies knew otherwise. That exposed cigarette makers to fraud claims, points out Robert Rabin, a Stanford Law School professor who is an expert in tort law. “The silver bullet was evidence from tobacco-company files about efforts to misrepresent the risks associated with smoking,” says Rabin.
Given the temptation to use purported health benefits of marijuana in marketing, the same thing could happen to pot companies. If they down-play warnings while playing up purported health benefits, this could serve as the basis for fraud claims, says Osbeck at the University of Michigan.
5. Cannabis-liability law is uncharted territory
Weed vendors have never made good targets in lawsuits because they operate in the shadows and it is hard to pinpoint their assets or learn much about their businesses. The upshot here is that cannabis-product liability law is unclear because there is no body of case law, says Bricken. This makes it harder for weed companies to know how to operate within the law, which could expose them to legal risks.
6. The black-swan risk for weed investors
While states charge ahead with legalization, weed is still illegal at the federal level. The Trump administration doesn’t seem to care much about enforcement. But who’s to say that won’t change? There could be a backlash against marijuana, especially given the potential for psychosis-related violence by people who binge on edibles. Concerns about the opioid-abuse problem could spill over to other drugs.
There’s another risk here. Under Department of Justice guidelines, federal prosecutors around the country have the discretion to enforce federal marijuana laws as they see fit. “There could be selective and varied enforcement,” says Bricken. “If one of them wants to go off on a campaign, they are free to do so. It could happen at any time.” She thinks the odds are low because the Trump administration doesn’t give cannabis high priority.
But the risk is still there. “If the federal government wanted to shut it down, they could pretty easily,” says Osbeck. “If they arrested the owners of the 100 largest businesses, you would see a dramatic turn in the industry.”
This may seem unlikely. After all, the current “social narrative” is favorable toward marijuana, points out Stephen Sugarman at Berkeley Law, and he is right. But these days, cultural attitudes shift quickly — witness the “Me Too” movement, the Arab spring and the current round of overthrows of longstanding leaders in various Africa countries. There’s no guarantee a similar shift won’t happen with marijuana.
