5 Cybersecurity Tips for Cannabis Cultivators and Distributors

As confirmed coronavirus cases have passed 500,000 in the U.S. and the country enters a likely recession, lawyers around the country are filing civil complaints against businesses, citing hardships from the coronavirus outbreak or related actions that businesses took—or didn’t take—in response. Among them are allegations on behalf of cruise passengers who had contracted COVID-19, eventgoers that haven’t received refunds for canceled events and travel; and an employee of a Walmart near Chicago who died after contracting the virus.

Kent Schmidt, a partner at Dorsey & Whitney and author of the Left Coast Law blog, said he receives an alert whenever a lawsuit including the words “coronavirus” or “COVID” is filed in the country. Although he hadn’t received any filings related to cannabis and the coronavirus as of April 9, he said he receives about 20 alerts per day.

Cannabis Business Times spoke with Schmidt and Mike Sampson, partner in Reed Smith’s Insurance Recovery Group and co-vice chair of its Cannabis Law Team, about some of the most common types of claims that have come up in recent weeks and that could affect the cannabis businesses.

Consumer claims

Businesses need to be aware of decisions that could lead to injury, Sampson said. “If the state says you can only have no more than 10 people gathering, but you decide that you don’t care about that and there’s 100 people in your store at a time and somebody gets sick, that’s the type of bad judgment that can lead to a third-party claim,” he said.

If a consumer becomes ill after using a certain product and makes a product liability claim, Sampson said it’s likely that dispensaries, cultivators and other brands and companies in the supply chain could get sued.

To protect themselves against these claims, businesses need product liability insurance, which is sometimes a component of commercial general liability (CGL) insurance.

In the cannabis industry, certain exclusions could limit coverage available under a policy, Sampson said. There could also be a buyer’s exclusion or other type of claim “that could be read to bar coverage for coronavirus-related claims,” he said.

“It really turns on the policy language, and that’s why, if you do get a claim, consult with counsel, consult with your broker, look at your insurance policies, because there may be coverage,” Sampson said. “Do not just assume because you’re a cannabis-related company, or because this is a coronavirus-related claim, that you don’t have coverage. Look at the policies.”

Employment claims

On the topic of employment claims, Schmidt said, “there’s a lag time, because employment claims are still unfolding. All of this is really unfolding, but I think in particular, there’s going to be employment claims that will be filed even after things have gotten back to whatever the new normal is going to be. So, there haven’t been a ton of employment claims so far, but those cases are coming.”

If companies are conducting layoffs, they need to make sure they aren’t being discriminatory against certain employees because of age or other protected classes, Schmidt said.

“Let’s say you have a mandate from senior management to reduce your salesforce from 100 to 60 just so you can survive this huge economic downturn, and someone comes along after the fact and says, ‘Well, the average age of the employees that were retained is 28. The average age of the employees that were laid off is 52,’” Schmidt said. “I think there’s going to be a lot of scrutiny on the process of downsizing.” 

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While business executives don’t want to pay for legal advice they don’t think they’ll need, they should speak with an employment lawyer before conducting a round of layoffs or furloughs, Sampson said.

“I am not an employment lawyer, but the advice I would give, because I’m not an employment lawyer, is before taking an action like that, to consult with counsel because there will be states and/or federal laws that apply to what you can or can’t do and how you document employment decisions,” Sampson said.

Shareholder claims

Shareholders may try to bring claims because of revenue not meeting projections, although public companies have safe harbors for forward-looking statements that protect them to an extent, Schmidt said. In addition, businesses can make other types of misrepresentations that could result in shareholder claims.

“In the shareholder space, we’re seeing lawsuits brought relating to companies’ failure to be candid about the virus and their response to the virus and therefore, reducing shareholder value because directors and officers were not discussing the situation with sufficient candor with their shareholders, their customers and the public,” Schmidt said.

An example of this, he said, is a recent class action suit brought against Norwegian Cruise Lines, which allegedly used the coronavirus as part of its sales pitch. A civil complaint filed in the U.S. District Court for the Southern District of Florida quotes the alleged pitch from Norwegian that “‘Scientists and medical professionals have confirmed that the warm weather of the spring will be the end of the Coronavirus.’”

Not only are public companies liable to shareholder lawsuits, but private companies are as well, Schmidt said.

Another example of a claim that could fall under the securities category is a misrepresentation of the practices that the business is following, Sampson said. If a dispensary were to claim that they have been cleaning for a certain period of time or at a certain frequency, but they really haven’t, the business could face liability under different legal theories, he said. This type of claim may be covered under a directors and officers (D&O) policy.

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“We always advise clients to be forthright—in any industry, but especially in the cannabis industry—because it is so heavily regulated, and there’s so many eyes on it,” Sampson said. “And we advise people not to cut corners for that same reason.”

Whistleblower claims

Because cannabis is a highly regulated industry, Schmidt said, executives may be interested in learning about whistleblower claims.

Whistleblower claims are “really embedded into the national consciousness” because of both the coronavirus pandemic and the impeachment of President Donald Trump, Schmidt said. In this type of claim, former employees may refer to things they pointed out as problematic and argue that they were terminated because of whistleblowing.

What’s more, it’s possible that many businesses haven’t been entirely compliant as regulations have continuously changed in various municipalities and states over the past several weeks. “The regulations and the orders and everything being issued right now relating to coronavirus makes 100% compliance and strict adherence to all state, federal and local regulations very difficult,” Schmidt said.

If a business and someone who said they have been injured by that business can’t come to an agreement out of court, Sampson said it’s “the party that says it was injured” that would decide whether to seek civil action.

“By the time these claims start to mature more and reach litigation, presumably, the courts will be open and will be back to business as usual,” Sampson said. “But it’s the party that said they’re injured that’s going to have to bring an action. … if somebody comes to you and says there was something bad that’s happened as a result of an action you’ve took, it does make sense to call counsel, it does make sense to retain counsel, because you need to be aware that what you say—depending on the circumstances—could be evidenced later.”