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Court Dismisses Civil RICO Suit Against Marijuana Supplier, Tees Up Potential Circuit Split

Posted by on Monday, August 27, 2018 in News, Updates.

[Updated 8/30 to add two new sources with useful background on these lawsuits.]

Last week, the US District Court for the District of Oregon dismissed a civil RICO lawsuit brought by a landowner against a neighboring marijuana supplier. The full decision in Ainsworth v. Owenby is available here; page citations below are to the linked version of the decision. Last summer, the Tenth Circuit allowed a strikingly similar civil RICO lawsuit to proceed in Colorado. (I discuss civil RICO liability and the Tenth Circuit case, Safe Streets v. Hickenlooper, in the book (see pages 400-406) and in this prior blog post here.) The District of Oregon is located in the Ninth Circuit; the conflict between Ainsworth and Safe Streets thus tees up a potential circuit split regarding the scope of marijuana suppliers’ liability under the federal RICO statute. (I say “potential” because the Ninth Circuit might yet reverse the district court’s decision in Ainsworth and thereby reconcile the two cases.)

In this post, I’ll provide some background on the Ainsworth and Safe Street cases, evaluate the Ainsworth court’s reasons for dismissing the RICO suit, and then make a broader observation concerning civil RICO in the marijuana law field.

The Background

The plaintiffs in Ainsworth filed their suit in December 2017, a few months after the Tenth Circuit allowed the Safe Streets lawsuit to proceed. I suspect the timing is not coincidental: the allegations in Ainsworth appear quite similar to those in Safe Streets, suggesting the Ainsworth plaintiffs may have been modeling their lawsuit on the Safe Streets litigation.

In both cases, the plaintiffs are landowners who were aggrieved by the defendants’ commercial cultivation of marijuana on neighboring property. Because cultivating marijuana clearly constitutes a RICO violation, the main contestable issue in both cases was whether the plaintiffs had suffered an actionable injury as a result of the defendants’ RICO violations. As discussed in the book (pages 400-406), the civil RICO statute authorizes recovery only for injuries to one’s “business or property” (18 USC section 1964(c)) – i.e., not for injuries to one’s person.

As I discussed in the post linked above, the Safe Streets court found that at least three injuries alleged by the plaintiffs in that case satisfied the RICO standard:

1. That defendants had impaired the plaintiffs’ enjoyment of their property (e.g., hiking and horseback riding) because they emitted a foul smell from their facility

2. That defendants had reduced the market value of plaintiffs’ land for similar reasons (i.e., because of the smell)

3. That defendants had also reduced the market value of plaintiffs’ land because their facility attracted crime to the area

The Tenth Circuit thus held that the plaintiffs’ allegations in that case were enough to survive a motion to dismiss. (It’s important to note that the Safe Streets plaintiffs still need to prove these injuries to win any judgment – the case is ongoing in the District of Colorado.)

The plaintiffs in Ainsworth blamed a neighboring marijuana cultivation facility for very similar injuries. In particular, as described by the district court, the plaintiffs alleged that,

“Since the . . . commencement [of the Defendant’s operation], a greenhouse ‘equipped with large, commercial exhaust fans’ has operated on the [Defendant’s] property ‘24 hours a day, seven days a week.’ . . . . In addition, [Defendants] have “regularly burn[ed] marijuana debris, trash[,] and discarded items from the [M]arijuana [O]peration, creating thick, noxious smoke.’ . . . Traffic traveling to and from the [Defendant’s property], moreover, has transformed the two dead-end roads on which Plaintiffs live into ‘busy, and at times unsafe, commercial roadways.” . . . Plaintiffs ‘no longer feel safe in their homes and on their properties,’ citing the presence of ‘pit bull guard dogs’ roaming loose in the neighborhood, ‘unknown vehicles entering their properties at all hours of the day and night,’ and at least two reports of ‘prowling and break-ins’ on nearby properties. . . . Plaintiffs allege that, as a result of the ‘persistent stench of marijuana,’ ever-present fan noise, and increased traffic, the Marijuana Operation has interfered with the ‘use and enjoyment of their properties.’ . . . They note, for example, that they are no longer able to open the windows in their homes, sit outside on their decks and patios, or recreate in their yards. . . . Plaintiffs further allege that the odors, noise, and traffic created by the Marijuana Operation, along with the very fact of the operation’s existence, make each of their properties ‘worth materially less than they otherwise would be’ and ‘harder to sell at any price.’ . . . . Finally, Plaintiffs allege that, fearing ‘the presence of a drug trafficking operation in their neighborhood,’ they have ‘formed a neighborhood watch group, . . . purchased and installed cameras and security systems, purchased and installed fencing and gates, and purchased firearms.’”

Ainsworth pages 3-4 (quoting from the Complaint).

The district court later summarized these facts as alleging three very familiar sounding injuries:

“(1) diminished use and enjoyment of their properties,

(2) reduction in the fair market value of their lands, and

(3) expenditures on additional security measures”

Ainsworth page 11.

The Holding in Ainsworth

In a major departure from Safe Streets, however, the Ainsworth court found that these three injuries were NOT actionable under RICO. Let me discuss and evaluate its reasoning regarding each injury in turn.

1. Diminished use and enjoyment of property

Regarding the first alleged injury—the diminished use and enjoyment of plaintiffs’ land—the court relied on ostensible differences in state nuisance laws to distinguish the Ainsworth lawsuit (which originated in Oregon) from the Safe Streets lawsuit (that originated in Colorado):

“[A]s a matter of law, Plaintiffs’ impaired use and enjoyment of their land is a non-compensable personal injury. . . . [C]ourts generally define ‘property’ by reference to state law. . . . In Oregon, interference with a possessor’s ‘use and enjoyment’ of her real property is redressable by an action sounding in nuisance. . . . Oregon courts have long distinguished between nuisance claims arising from ‘injury to property’ and those arising from ‘personal injury.’ . . . A defendant’s interference with a possessor’s ‘comfort and enjoyment’ of her property is a ‘personal injury,’ whereas damage to the physical condition or ‘value’ of her land is an ‘injury to property.’ . . .

As relevant here, a plaintiff unable to enjoy the use of her property due to an odorous nuisance suffers injury to a personal interest. . . .

Although actionable under Oregon nuisance law, such harms to human comfort are not compensable under RICO.”

Ainsworth pages 11-13.

The court acknowledged that Safe Streets had found “interference with [the] use and enjoyment of . . . land” constitutes an “injury to property” for purposes of RICO. Ainsworth page 13. Nonetheless, the court suggested that Safe Streets was “easily distinguishable” because

“it relied upon Colorado nuisance law as the source of the plaintiffs’ protected interest, explaining that the defendants [in Safe Streets] had failed to cite any state ‘authority suggesting that a landowner’s complaints about a neighbor’s recurrent emissions of foul odors are conceptually unmoored from the owner’s property rights.’ . . . As discussed above, that is not the case here—Oregon law does draw a distinction between nuisance claims arising from personal and proprietary injuries.”

Ainsworth page 13-14.

In other words, the Ainsworth court suggests that the term “property” in the federal RICO statute is defined by state law—and even more particularly, by the nomenclature the state uses to describe an injury (i.e., whether a state labels it a “proprietary” versus a “personal” injury). This means, of course, that the exact same injury could be considered actionable for RICO purposes in one state but not-actionable in another state.

I am skeptical of the Ainsworth court’s reasoning here. For one thing, it’s not even clear that Colorado and Oregon actually disagree about how to classify the loss of use of property for purposes of state nuisance law. The point the Safe Streets court made—in the very language quoted by Ainsworth—is that the injury the plaintiffs had suffered was necessarily tied (i.e., moored) to the plaintiff’s property rights and thus should be considered an injury to property for RICO purposes, regardless of how Colorado might label the injury. (The full Safe Streets opinion is linked in my prior post; the relevant discussion of state nuisance law can be found on pages 24-25 of that opinion.)

Even more importantly, I think the Ainsworth court puts too much emphasis on state law in determining whether there is an actionable injury to property for purposes of federal RICO law. To be sure, the Ainsworth court is correct the RICO statute uses state law to determine whether a plaintiff has suffered an injury, such as whether a plaintiff has a right to breathe odor-free air on her land. But I doubt the RICO statute (or the Ninth Circuit interpretations thereof) also uses state law to classify those injuries as “proprietary” or “personal”, as the Ainsworth court suggests.

On this issue (i.e., whether an injury is to property), I think the Safe Streets approach—focusing more on the nature of the injury rather than the label a state applies to it –makes more sense. For one thing, it seems odd to say (as Ainsworth does) that if you destroy my property (say, by burning down my house) I have suffered an injury to my property, but if you merely prevent me from using that same property (say, by building an insurmountable wall around my house) I have instead suffered an injury to my person. In either case, the loss I have suffered is the same – I can’t use my property (i.e., my house).

It also seems odd to allow a state to expand the scope of civil RICO liability, simply by labeling injuries a particular way. For example, the logic of Ainsworth seems to suggest that a state could make assault and battery actionable under RICO simply by relabeling quintessential “personal injuries” (like a broken arm) as “injuries to property” (say, by declaring that you have a property interest in your arm). I doubt Congress wanted to enable this when it carefully circumscribed RICO liability.

In sum, I don’t think the Ainsworth court satisfactorily distinguished Safe Streets regarding this first injury. Of course, the District of Oregon and the Ninth Circuit don’t have to follow out-of-circuit precedent; but I don’t see a good reason here for rejecting the Tenth Circuit’s reasoning.

2. Reduction in the fair market value of their lands

The Ainsworth court provided a different rationale for holding that the plaintiffs’ second injury—the alleged reduction in the fair market value of their land—was not actionable under RICO. Regarding this type of injury, it suggested that the Ninth Circuit (unlike the Tenth) requires plaintiffs to attempt to monetize the devalued property interest (e.g., through an attempt to sell their property) to suffer an injury to property under RICO.

The Ainsworth court explained:

“[A] reduction in the fair market value of land is an injury to property. . . . [H]owever, a RICO claimant must also ‘show proof of concrete financial loss, and not mere injury to a valuable intangible property interest.’ . . . The corollary to this principle is that a plaintiff’s alleged financial loss cannot be ‘purely speculative.’

Ainsworth page 16. To demonstrate this concrete financial loss, the Ainsworth court held that a plaintiff must either allege prior attempts to sell (or rent) a property or else “must plausibly allege at least a present intent or desire to do so. . . .” Ainsworth page 17.

“Plaintiffs are not required to offer detailed statics, appraisals, or other information quantifying their losses at this stage in the litigation, but they must do more than allege that, in an abstract sense, their lands are worth less. They must make good faith allegations that they attempted or currently desire to convert those interests into a pecuniary form.”

Ainsworth page 19.

The Ainsworth court then held that the plaintiffs had failed to satisfy this requirement:

“Plaintiffs allege no past or present intent to rent, sell, or otherwise monetize their property interests. To the contrary, as currently drafted, the Complaint suggests that the burdened lands house private residences which Plaintiffs have no desire or intent to rent or sell. Although it is certainly reasonable to infer that their fair market values have dropped, that is an abstract harm.”

Ainsworth page 19.

The Ainsworth court once again sought to distinguish Safe Streets:

“In Safe Streets, the court held that an alleged reduction in the fair market value of the plaintiffs’ lands was a compensable injury to property. . . . As in the present case, the panel found it plausible that a prospective buyer would be willing to pay less for land burdened by the odors and presence of a neighboring crime syndicate. Unlike the present case, however, the court reasoned that this fact alone—that is, the abstract reduction in the fair market value of the plaintiffs’ lands—was sufficient to state a claim. . . . In doing so, it expressly ‘refuse[d] to follow’ the rule adopted in [the Ninth Circuit] that, as part of any civil RICO claim, ‘a plaintiff must plead a concrete financial loss.’ . . . This Court, unlike the Tenth Circuit, is not at liberty to disregard the Ninth Circuit’s repeated admonitions that “concrete financial loss’ is an indispensable element of a RICO claim. Plaintiffs therefore fail to plead a compensable injury to property under the civil RICO statute and must amend their Complaint accordingly.

Ainsworth page 19-20.

Assuming the Ainsworth court accurately describes the Ninth Circuit rule, its holding regarding the second injury is likely correct. In particular, it appears that the Ninth and Tenth Circuits simply disagree about whether a drop in the value of one’s property is, by itself, enough to demonstrate an injury to one’s property. One might disagree with the Ninth Circuit’s interpretation of RICO – after all, it does seem harsh to say that a plaintiff must sell property (e.g., a family home) to recover for a reduction in its value – but a district court is not free to ignore its own circuit’s holdings on such matters, regardless of what it (or others) might think of them.

3. Expenditures on additional security measures

The Ainsworth court also rejected the plaintiffs’ third alleged injury—expenditures against increased neighborhood crime they attributed to defendants’ marijuana operation—as not actionable:

“Plaintiffs’ out-of-pocket expenses for firearms, fencing, gates, and security cameras derive from personal injuries and are therefore not compensable under RICO. It is undisputed that a plaintiff’s ‘emotional distress’ is not an injury to property within the meaning of the civil RICO statute. . . . Importantly, a plaintiff cannot transform a ‘fundamentally personal injury’ into a proprietary one by expending financial resources or incurring ‘economic losses’ therefrom. . . . A plaintiff who purchases a home security system to protect against threats arising from a defendant’s racketeering activity does not suffer an injury to property.
. . .
Here, Plaintiffs’ investments in security measures do not transform their distress over neighborhood safety into an injury to property. . . . Plaintiffs in the present case cannot transform their apprehension of third-party prowlers into a compensable RICO injury simply by reaching for their wallets.”

Ainsworth pages 14-15.

Although the court again broke from the Tenth Circuit regarding whether this type of injury is actionable under RICO, it did not spend much ink trying to distinguish Safe Streets on this count Instead, it appears the court simply believed that the Ainsworth plaintiffs took their precautions only to address the “apprehension” and “emotional distress” they had experienced due to an alleged increase in criminal activity caused by defendants’ marijuana operation. Since “apprehension” and “emotional distress” are quintessential personal injuries, the court found that spending money to avoid these injuries could not constitute an injury to property (even though it involved property).

Assuming the court correctly described the motives for the plaintiffs’ expenditures, I think the court reached the right result here – and that other federal circuits (including the Tenth Circuit) would probably agree with that result.

The problem, however, is that the plaintiffs may have also taken these precautions to prevent damage to or theft of their property. After all, the court (in language quoted earlier) described how the plaintiffs had alleged an increase in “prowling and break-ins” – criminal activity that might not cause “apprehension” and “emotional distress”, but that might also result in damage to or theft of property (say, a broken window or the theft of a car). Perhaps the plaintiffs’ complaint did not mention this possibility—i.e., perhaps plaintiffs alleged that the only reason they took precautions was to address their fears. If that is the case, the court was right to reject this injury as beyond the scope of civil RICO liability; but if not, or if the plaintiffs are allowed to amend their complaint (it was dismissed without prejudice), this portion of plaintiffs lawsuit might be revived.

However, let me note that the court could have rejected this particular injury on other (safer) grounds—namely, that the defendants are not the proximate cause of this injury. In civil RICO cases, plaintiffs must allege not only that they suffered an injury to property but that the defendants were the proximate—i.e., the direct—cause of that injury. To be sure, the Tenth Circuit found that plaintiffs had satisfied the proximate cause test in Safe Streets. But as I explained in my earlier blog post, I think the Tenth Circuit erred in so doing. In both Safe Streets and Ainsworth, the defendants did not directly cause this injury–i.e., the defendants were not prowling around the neighborhood and breaking into homes; rather, unsavory characters attracted by the defendants’ operations were the proximate (i.e., the direct) cause of plaintiffs’ injuries.

Oddly, even though it had already rejected this injury as non-cognizable, the Ainsworth court proceeded to find that the plaintiffs had satisfied the proximate cause test:

“On the issue of causation, the Court finds the Tenth Circuit’s reasoning persuasive and adopts it here. . . . Defendants point to no persons more directly injured by their alleged racketeering activities.”

This holding is odd for two reasons. First, it was unnecessary for the district court to address the proximate cause issue, given that it had already rejected the injury as non-cognizable. Second, I think the court’s reasoning misstates the proximate cause test. The inquiry is not (or not just), as the court suggests, whether there is someone “more directly injured” by the defendants’ racketeering activities. Rather, the main test for proximate cause is whether there is someone—other than defendants—who was a more direct cause of plaintiffs’ injury. And, as I just explained, it appears that there is—the prowlers and vagabonds the defendants have allegedly attracted to the neighborhood.

In sum, I think the Ainsworth court’s decision is vulnerable on appeal, especially as to the first injury (lost use or enjoyment of property).

Final Observation

Let me make one final observation about civil RICO lawsuits in this field: It is very difficult (if not impossible) to calculate the expected RICO liability of marijuana suppliers. For one thing, we do not yet have a lot of data points to work with. Apart from Safe Streets and Ainsworth, there are only a few other civil RICO cases now pending against marijuana suppliers. While the low number of suits—not to mention the fact that none of these plaintiffs has yet won a verdict (a few cases have apparently settled)suggests that expected liability for the industry may be low, individual RICO suits can involve very large damages (especially after trebling). In one case in Massachusetts, for example, a commercial real estate owner (Raj Dhanda) has filed a RICO suit against a medical marijuana dispensary (Healthy Pharms), apparently claiming $27 million in lost property value. The original complaint can be found here (Dhanda Complaint); for a news account of the suit, see this story from the local NBC affiliate, Cambridge Marijuana Dispensary Faces Federal Lawsuit. In addition, the potential circuit split discussed in this post further complicates any predictions.

[Update 8/30: Readers have forwarded two new sources that provide more details on the status of and people involved in the Ainsworth, Safe Streets, and other civil RICO lawsuits:

That’s it for now. I’ll keep you posted with any major developments in these (or other RICO) cases. Always feel free to email me if you have any other cases you think worthy of note.

h/t to Doug Greene for passing along the Ainsworth decision

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