Products Liability in the Cannabis Industry | KTL Cannabis Series: Part 2

October 17th, 2018

PART II: Legalization Brings Liability: Which is Good for the Consumer?

The legalization of cannabis is drastically changing the landscape surrounding the business, and one important change has come in the form of products liability.

Before, if an edible contained harmful products, or a vape pen battery was to melt or explode in a pocket, who could be held liable?

Often times, the true source of the edible was unknown, and faulty vape pens were being shipped from China with zero oversight or QA testing by young entrepreneurs trying to jump into the market before anyone else. When a person was then injured, these people could either not be found or had no money to pay for the extreme medical bills for pumping a stomach or treating third degree burns. Besides, attempting to sue them would mean admitting to using an illegal drug.

Legalization has brought reliability and consistency to the market, but serious injuries can still occur. The good news for the consumer is that this reliability and consistency translates to the availability of recovery when injured by products in the chain of distribution of the cannabis industry.

“Products liability” generally refers to the idea that responsibility is due when someone is harmed from use of a product. That liability might fall on the manufacturer, distributor, or retailer for improperly making the product with a defect, for improperly designing a non-defective product, or for failing to adequately warn about the product’s potential dangers.

It seems obvious that a business that acts negligently and selling a defective product that causes harm should lead to liability for that business, however, even if the manufacturer or seller is not actually negligent, they may still be liable for the injuries.  This is referred to as “strict liability.” It is based on a public policy interest of protecting the consumer. The chain of liability created by this policy of strict liability is to ensure the victim can be properly compensated by increasing the potential pool for recovery. Liability is placed on the businesses since they are better positioned to prevent problems than the consumer is. For the victim of a defective product, this means even when the fault of the defect can be traced to a particular supplier in the chain of distribution, each entity in the chain is still available as a source of recovery for the damages caused.

Of course, even strict liability may not extend automatically to all parties in the chain from grower to consumer. Some states follow the “innocent seller” doctrine, which provides an out for non-negligent sellers in a products liability dispute when there are other parties like manufacturers for the plaintiffs to pursue. In California, lack of proof of knowledge of the danger can be exculpatory in “failure to warn” cases.

Even where strict liability is not an avenue for recovery for a victim, the “Risk-Benefit” test may apply.  Under the Risk-Benefit Test, an injured consumer need only establish a prima facie case of causation, or evidence that a design feature of the product was a substantial factor in causing the injuries. If the consumer makes that showing, the burden shifts to the defendant to establish that on balance, the benefits of the challenged design outweigh the risk of danger inherent in such design. This would be a fact intensive inquiry that will likely require retaining an expert witness. A common way to defeat a defense of benefits outweighing the risks is for the injured consumer to show safer alternatives exist with the same or similar benefits as the product at issue.

While products liability litigation involving the cannabis industry has been very rare in the past, there is certainly potential for an increase in claims as more and more states and businesses enter the legal marijuana market. The variety of hybrid crops, manufactured edible products, and intake products like vape pens, has grown rapidly, and thus potential risks associated with new products will continue to rise. Some anticipated risks might be those associated with vaporizers, pesticides, contamination by mold or fungus, or intoxication. As the industry grows, so will the quality and number of safeguards to prevent injury to the consumer, but mistakes are bound to happen. An edible containing allergens, for example, will require an appropriate warning on the packaging about the nature of the product. There are already instances of vape pen batteries catching fire or even exploding leading to serious injury. The ensuing products liability lawsuit can implicate multiple parties: the manufacturer if it was made improperly from the start, the carrier if it was damaged during transport in a way that caused the malfunction, or the distributor/retailer for simply putting the defective product into the market.

Recently, insurance coverage for product liability and product recall has become available in California. This is good news for the consumer, and even for the licensed cultivators, manufacturers, distributors, retailers, and businesses with medical marijuana licenses. The consumer can recover damages more easily without the need to go to trial in most cases when an insurance provider is paying, and those in the chain of distribution can protect themselves from surprise costs that result from product liability damage caused by others’ negligence in the chain of distribution. According to Phil Skaggs with the American Association of Insurance Services, as of May 2018, available insurance packages will provide “a fairly robust product liability package,” to address things like “lots of pesticide and quality assurance issues that have arisen with cultivation.” As Skaggs notes, “when you have a product liability lawsuit you sue everyone in the chain, all the way from the farm to the business that’s selling the product,” meaning that insurance for products liability claims should be a serious consideration for cannabis businesses in every part of the market.

As the cannabis industry grows, so will the number of risks associated with the new and technical products made in a market that will often favor efficiency, even at the cost of quality. Fortunately for the consumer, the newly legal businesses will be able to engage in standard practices for capitalization and insurance that will help make sure there is adequate recovery for those who are injured by the inevitable entry of defective products into the market.

KTL assists clients in many aspects of the cannabis industry including products liability, intellectual property and business disputes as well as business formations including partner and investor agreements, licensing and intellectual property protection. The firm also provides plaintiff-side personal injury litigation services outside of cannabis products liability as well as comprehensive litigation services ranging from breach of contract, trademark and trade secret infringement, unfair business practices and more. To make sure you are protected, contact KTL today.