Cannabis Home Delivery Tech Platform Accused of Conspiring with California Retailers to Commit Credit Card Laundering and Fraud

On June 4, 2019, Eaze Technologies Inc. (Eaze) was sued in San Francisco County Superior Court by its competitor Herban Industries CA LLC (Herban), alleging a conspiracy between Eaze and numerous California cannabis dispensaries to commit payment and credit card laundering, wire fraud and bank fraud.

Eaze is a market leader in the direct-to-consumer cannabis delivery market. It operates a well-known technology platform that connects licensed cannabis dispensaries with consumers online and facilitates cannabis home delivery.

Background

Eaze is accused of illegally enabling the purchase of cannabis by credit and debit card on its platform, even though payment card companies prohibit cannabis-related transactions. According to the complaint, by illegally offering card payments “Eaze has been able to increase its sales volume, increase its market share, and further cement itself as a dominant technology platform facilitating the delivery of cannabis to California consumers, to Herban’s detriment.”

Specifically, Eaze is accused of disguising the payment card transactions to appear as payment for permissible goods and services such as “for dog toys, dive gear, carbonated drinks, drone components, and face creams.” It is further alleged that Eaze created Cyprus- and UK-based “shell corporations” that purport to sell mundane products but in fact exist to misrepresent the underlying cannabis transactions. To ensure that the payments sent by various banks to the retailers are not flagged by payment card companies or other financial institutions, Eaze is accused of creating a complex system of transfers between various overseas entities and money conversions between U.S. dollars and euros. To create an alleged “audit trail,” the complaint states that “Eaze executives used encrypted messaging programs to direct dispensaries to create phony invoices.” Eaze is further accused of broadcasting its alleged fraud to its customers by stating that the customer will receive a receipt from an entity other than the actual merchant from whom the product was purchased. According to the complaint, “Eaze’s explanation to the customer is effectively a promise to commit fraud that Eaze makes good on.”

Applicable Law

Based on these alleged acts, Eaze is accused of violating federal wire and bank fraud statutes, as well as criminal fraud under California law:

• Under 18 U.S.C. § 1343, a defendant commits wire fraud by executing a scheme to defraud, using the wires in furtherance of that scheme, and acting with a specific intent to deceive or defraud.
• Under 18 U.S.C. § 1344(1), a defendant commits bank fraud by knowingly executing or attempting to execute a scheme to defraud a financial institution insured by the FDIC.
• California Penal Code § 532 makes it illegal for a defendant to defraud another person or entity out of money, property or services by making false or fraudulent representations or pretenses.

Herban relies on California’s powerful Unfair Competition Law (UCL), codified at California Business & Professions Code §17200. The UCL prohibits any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. The purpose of the UCL “is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.”

The UCL allows for monetary damages, restitution, disgorgement of profits and injunctive relief, including penalties of up to $6,000 per day for intentional violations of an injunction. Herban is specifically requesting an injunction “to prevent Eaze from continuing to harm Plaintiff Herban and violating federal and state law.”

Analysis

Although Eaze is the only defendant presently named in the lawsuit, the nature of the conspiracy allegations raises the question of whether certain well-known cannabis retailers in California may find themselves pulled into the litigation.

The claims against Eaze are unproven allegations, but the story nonetheless represents a cautionary tale of an industry facing unprecedented growth in the face of regulatory uncertainty and operators who may be tempted to take shortcuts to keep the sales flowing. The lack of adequate banking and other financial services remains a primary challenge for the cannabis industry. Indeed, even less risky CBD companies have recently faced the loss of card payment processing when U.S. Bank subsidiary Elavon stopped handling payment processing for companies that sell CBD products on May 15, 2019.

Square, the digital payments company, is starting to provide the service for CBD transactions, but options remain essentially nonexistent for marijuana transactions. Many now are looking to the Secure and Fair Enforcement (SAFE) Banking Act to provide a safe harbor for banking services, including credit card processing. That bill now has more than 200 cosponsors in Congress, but faces an uphill battle in achieving a floor vote in the Senate.