The last decade has witnessed a dramatic increase in consumer protection legislation and activity across industries and across the country. To date, all 50 states have enacted consumer protection laws prohibiting unfair or deceptive acts and practices likely to mislead consumers. Recent cases brought by state attorneys general have achieved historic settlements and, due to the hefty and cumulative fines levied for consumer protection violations, have transformed enforcement actions into “bet-the-company” cases – meaning a single class action or multistate action can, and has, bankrupted businesses.
The nascent medical and recreational marijuana industry, tepidly welcomed by legislators and already subject to intense state regulation, is likely to become a prime target for consumer protection scrutiny. A strong compliance plan promoting adherence to applicable consumer protection laws and employing proper substantiation procedures is vital to protecting a marijuana business’s investments and avoiding costly regulatory intervention.
What do marijuana businesses need to know to avoid running afoul of consumer protection laws?
Standardized prices for dispensaries and product suppliers are imperative to avoiding consumer protection enforcement actions.
Even in jurisdictions that do not heavily regulate the price of marijuana, dispensary owners should be cautious of offering discounts, rebates, or otherwise marking down the price of their product. Well-intentioned discounts to repeat or indignant customers may nonetheless violate consumer protection laws mandating fairness in commerce, and invite regulatory scrutiny. While some retail jurisdictions may allow price deductions for marijuana products, these should be offered infrequently – otherwise, the business runs the risk of diluting the benefit provided to the consumer. If a price reduction is offered too frequently, the implied claim that a consumer is saving money by purchasing at the discounted price could be found deceptive.
Businesses should avoid offering free or promotional material in conjunction with purchases, where the “free” item is typically included and the consumer does not receive any true additional benefit.
For example, if a vendor consistently offers a “free” t-shirt in conjunction with the purchase of some other item, the repeated pairing may dilute the added benefit and render the t-shirt part of the standard product offering. Thus, a description of the t-shirt as “free” could be construed as deceptive. Businesses should, instead, describe such items as being “included” with a standard purchase or as being provided “at no additional cost.”
Marijuana entities should be cautious of making specific medical claims regarding the efficacy or quality of their products and services.
To avoid potentially being found deceptive, a claim that, for example, a particular strain of marijuana “helps with insomnia” would need evidentiary support legitimizing the statement – a difficult task given the federal prohibition of marijuana and the limited state of peer-reviewed medical research. Additionally, some states such as Ohio prohibit making qualitative statements in conjunction with the purchase of marijuana, and only permit listing the quantitative CBD and THC content of a particular strain. Marijuana businesses should also avoid broad descriptors of their product that can’t be substantiated. While stating that a product is “top-quality” may be permissible as puffery, a recreational-retail dispensary’s claim that it offers “the lowest prices around” must be corroborated by evidence referencing the relevant market area in order to avoid making a false or misleading claim.
Prohibitions on false or misleading claims also apply to ancillary marijuana entities.
With limited exceptions, consumer protection laws broadly apply to any business affecting commerce, including ancillary marijuana entities. Training colleges and employment agencies should be prepared to substantiate any claims about the effectiveness of their training or the placement of their employees. A logistics company claiming it is “the most secure marijuana transportation service” must be ready to demonstrate that it is indeed more secure than its competitors. Suppliers of cultivation equipment should avoid making comparative statements about the potency of their products unless they can demonstrably prove the contrast they are claiming.
Vendors should be cautious of environmental claims regarding marijuana products.
In particular, the Federal Trade Commission (FTC) has noted that wide-ranging statements such as “eco-friendly” are so vague that they are difficult to substantiate, and in most cases would likely violate consumer protection laws. While the FTC is a federal body, state agencies often view federal guidance as instructive. Similarly, indefinite environmental claims such as “all natural,” without more detail, could be construed as false or misleading and form the basis for state action. Specific statements, such as that a particular strain of marijuana was grown “without pesticides,” may be permissible, but businesses should be prepared to offer evidence supporting their claim.
Marijuana related products sold by dispensaries and other suppliers must not be deceptively labeled or identified.
Labeling requirements differ depending on jurisdiction but as a general rule, marijuana products should not be labeled with any images or graphics that may be appealing to children. Additionally, unless specifically permitted under state law, marijuana products should not display a state or agency seal. Even if a business is appropriately licensed and qualified by a particular agency, misrepresenting governmental support or sponsorship of a marijuana product could result in consumer protection action. Additionally, marijuana strains and products should avoid naming schemes or terminology referencing other brands. Though references to other products and goods have become a tongue-in-cheek staple of the marijuana industry, and while there exists little chance of product confusion, these naming conventions could be construed as unfairly appropriating the brand recognition of another business to promote the marijuana product.
While we’ve shared some of the most common issues examined by regulators, the highly subjective nature of consumer protection laws means that new issues and interpretations can arise at any time. Understanding and anticipating how regulators interpret and enforce these laws is critical to maintaining your business’s success. Retaining experienced counsel to review your marketing initiatives and advertising claims can help you stay abreast of regulatory trends and ensure your marijuana business’s continued compliance with applicable laws.
* Chad Blackham contributed to this post.