Expect wave of cannabis false advertising, unfair competition claims

The cannabis industry in California should expect to see a sharp increase in false advertising and unfair competition claims in 2018. Though premised on violation of the state cannabis regulations, these claims will be actionable under state consumer protection laws. California's cannabis regulations provide ample fodder for an attorney to identify technical violations upon which to make claims brought under the Unfair Competition Law and the Consumers Legal Remedies Act. Anticipated claims include that the cannabis product at issue is misbranded or adulterated due to mislabeling, deficient packaging, improper advertising/marketing, inadequate manufacturing conditions, actual contamination or other technical violations of the regulations

MISBRANDING AND ADULTERATION

Cannabis or a cannabis product may be considered "misbranded" or "adulterated" under the state regulations for many reasons. To avoid inadvertently becoming the target of an expensive consumer fraud claim, it is essential for all licensed cannabis cultivators, manufacturers and retailers to understand their legal obligations, some of which are decidedly burdensome.

Misbranding

The regulations state that a cannabis product is misbranded if its labeling is "false or misleading in any particular" or if its labeling or packaging "does not conform to the requirements of the regulations."

Packaging and Label Requirements: Section 26120 of California's Business and Professions Code sets forth requirements for the packaging and labeling of cannabis and cannabis products, which "shall be labeled and placed in a re-sealable, tamper-evident, child-resistant package and shall include a unique identifier for the purposes of identifying and tracking" the product. Section 26120 also includes a government warning statement that all labels and inserts for cannabis and cannabis products must include in bold print.

The label and inserts for all cannabis and cannabis products must also identify additional information such as the source and date of cultivation, the type of cannabis and information on the pharmacologically active ingredients, including all cannabinoid content.

All edible cannabis products must be marked with a universal symbol for cannabis. The edible product also must be "provided to customers with sufficient information to enable the informed consumption of the product, including the potential effects of the cannabis product and directions as to how to consume the cannabis product, as necessary." Precisely what this means will certainly be tested in the courts.

False Advertising: Cannabis products are subject to strict limitations on how they may be legally advertised and marketed. Section 26152 of the Code mandates that a licensee shall not "advertise or market in a manner that is false or untrue in any material particular, or that, irrespective of falsity ... tends to create a misleading impression."

Substantiation of Claims and the Determination of Falsity: Section 26151 requires that all advertisements and marketing must be "truthful and appropriately substantiated." The regulations are silent on how falsity is determined. However, one may look for guidance in how the courts have determined the truthfulness of claims made by the dietary supplement industry. Courts have held that the falsity of an advertising claim may be established by testing, scientific literature or anecdotal evidence. One cannot prove literal falsity, however, when the scientific evidence is equivocal. See Korolshteyn v. Costco Wholesale Corp., 2017 WL 3622226 (S.D.Cal., Aug. 23, 2017).

Child Protection and Age Verification/Age Affirmation: For good reason, it is prohibited to advertise or market "in a manner intended to encourage persons under 21 years of age to consume cannabis or cannabis products." Packaging must not be "attractive to children" and advertising signs are prohibited within 1,000 feet of a daycare center, school, playground or youth center.

Cannabis advertisers and marketers also are subject to strict requirements on age verification and age affirmation. Any broadcast, cable, radio, print or digital communications "shall only be displayed where at least 71.6 percent of the audience is reasonably expected to be 21 years of age or older, as determined by reliable, up-to-date audience composition data." Similarly, any advertising or marketing that involves "direct, individualized communication or dialogue controlled by the licensee" shall use "a method of age affirmation to verify that the recipient is 21 years of age or older." The method of age affirmation may include user confirmation, birth date disclosure or other similar registration method.

There also are important limitations on health-related statements, which includes "any statement related to health, and includes statements of a curative or therapeutic nature that, expressly or by implication, suggest a relationship between the consumption of cannabis or cannabis products and health benefits, or effects on health." Section 26154 of the Code prohibits any label or advertising/marketing that contains "any health-related statement that is untrue in any particular manner or tends to create a misleading impression as to the effects on health of cannabis consumption."

Adulteration

A cannabis product is considered adulterated for various reasons, including if it has been subject to unsanitary conditions, it contains any harmful substance, it contains a level of THC that exceeds the allowed limits, or it is manufactured or packaged not in conformance with practices established by the regulations.

With regard to edible cannabis products, Section 26130 of the code provides product standards which mandate that edible products must not be designed to be appealing to children or easily confused with commercially sold candy or foods that do not contain cannabis. The standard concentration of 10 milligrams of THC per serving must not be exceeded, and the product must be delineated into standardized serving sizes. All edible cannabis products must be homogenized to ensure uniform disbursement of cannabinoids throughout the product, and "must be manufactured and sold under sanitation standards that are similar to the standards for preparation, storage, handling, and sale of food products." In effect, this means that a cannabis manufacturer will be held to the same standard for Good Manufacturing Practices as other companies in the food industry.

FEDERAL LIMITATIONS

Although the Food and Drug Administration, Federal Trade Commission and other federal agencies do not currently actively regulate the cannabis industry, any cannabis business that advertises or markets its product is well advised to understand federal law as it relates to false advertising and deceptive trade practices, and the interplay with the state-regulated market. The FDA and FTC may enforce claims that violate the law, including disease claims, unsubstantiated claims, and claims that are deceptive, false or misleading. Any company that markets a dietary supplement must have adequate substantiation for any health claim being made. In August 2017, the FDA and FTC issued a joint public statement requesting that consumers report dietary supplements that "didn't work as promised," or that are marketed with "unbelievable" claims.

CONCLUSION

Cannabis businesses must be vigilant against falling prey to false advertising and unfair competition claims brought by the government, competitors and private attorneys. These claims may be predicated on seemingly minor technical violations of the state cannabis regulations, which place onerous burdens on every California cannabis licensee. Further complicating matters, insurance companies often decline coverage for these claims, leaving the company to fend for itself. This has proven disastrous for the dietary supplement industry over the past decade, with many companies forced to shut down after being found liable for uninsured damages and fees. Hopefully, history will not repeat itself with the cannabis industry. Although claims brought under the Unfair Competition Law and Consumers Legal Remedies Act will be very difficult to avoid as the California cannabis market matures, a well-informed licensee may nevertheless effectively mitigate its risk through vigilance and by instituting best practices consistent with the regulations.