Court: District Court, District of Columbia; August 21, 2018; Federal District Court
Plaintiffs, property owners in Harvard Square, allege injury from the impending opening of a licensed marijuana dispensary, filing claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and seeking declaratory and injunctive relief against the dispensary and related parties for violating the Controlled Substances Act (CSA). They also challenge the state and local government entities, arguing that federal law preempts Massachusetts' regulations allowing medical marijuana dispensaries. The Court is considering motions to dismiss from six groups of defendants, including government officials and private entities associated with the dispensary. The Government Defendants' motions are granted, while motions from other defendants are denied with the option to renew. Plaintiffs filed their claims before the dispensary opened, asserting that public knowledge of the planned dispensary harmed their property interests. After the dispensary began operations, Plaintiffs sought judicial notice of this event and requested permission to amend their complaint. Despite deficiencies in their requests, the Court allows Plaintiffs to amend their complaint within 30 days, noting the early case stage and the potential impact of the new facts. The background highlights Massachusetts' legalization of medical marijuana in 2012 and the federal prohibition under the CSA, which remains enforced despite some discretion exercised by federal authorities regarding enforcement.
The Attorney General's discretion regarding marijuana does not legalize it or create a constitutional crisis, although it highlights a conflict between the Controlled Substances Act (CSA) and state marijuana regulations, which is central to the RICO claims in this case. Healthy Pharms operates a marijuana cultivation facility in Georgetown, Massachusetts, with necessary permits and licenses. The facility can accommodate several hundred plants. Healthy Pharms also received a special permit from the City of Cambridge to operate a marijuana dispensary at 98 Winthrop Street, where it leases property from Timbuktu. Key individuals involved include Mr. Averill, the President of Healthy Pharms, and Mr. Overgaag, who holds various roles in the associated entities and has previously managed the property.
The Healthy Pharms Defendants have undertaken actions to establish the dispensary, such as preparing the property, acquiring cultivation equipment, communicating about leasing, and advertising marijuana sales. The 4Front Defendants provide consulting services, while Century Bank knowingly offers banking services for the marijuana business. Plaintiffs, who own nearby properties, claim that the proposed dispensary will decrease their property values due to odor and stigma, making the area less attractive for business and hindering their ability to sell or rent properties. They assert that the planned dispensary disrupts their development plans, as investors are reluctant to finance projects near the proposed RMD.
Plaintiffs hired licensed real estate appraiser Webster A. Collins to assess damages and lost profits due to the stigma from a proposed marijuana dispensary at 98 Winthrop Street. Collins found that potential tenants were uncomfortable with the dispensary, leading to a decrease in market rent and tenant quality. He equated the stigma from the dispensary to that of a drug treatment center or contaminated property, concluding that Plaintiffs suffered a total loss of $18,785,000 in property value and $8,290,000 in lost profits. Although the Complaint referred to the facility as "planned," it opened for business on December 30, 2017, after the Complaint was filed.
In addressing a motion to dismiss for failure to state a claim under Rule 12(b)(6), the Court must accept well-pleaded facts as true, analyze them favorably towards Plaintiffs, and ensure they present a plausible claim for relief. This involves separating factual allegations from legal conclusions and examining if the facts support a reasonable inference of liability. The same standards apply to motions under Rule 12(b)(1) regarding subject matter jurisdiction, though courts can consider evidence outside the pleadings for jurisdictional issues.
When the Complaint was filed on September 7, 2017, the dispensary had not yet opened. Defendants argued that this meant Plaintiffs lacked standing and failed to demonstrate a proximate injury caused by RICO violations. Subsequently, after the dispensary opened, Plaintiffs requested the Court to take judicial notice of this development or allow them to amend the Complaint.
A judge may take judicial notice of an adjudicative fact under Fed. R. Evid. 201(b) only if it is not subject to reasonable dispute; specifically, if it is generally known within the trial court's jurisdiction or can be accurately determined from reliable sources. In Sarvis v. Polyvore, Inc., the plaintiffs failed to demonstrate that their claims were generally known or could be substantiated by credible sources. They presented an undated printout from Healthy Pharms' website stating its opening and a newsletter suggesting a future opening, neither of which confirmed that sales had commenced. The plaintiffs sought judicial notice not only of the existence of these documents but also of the truth of their contents, which is not sufficient under precedent that states the mere appearance of fact in a newspaper does not guarantee it can be reliably determined. The request for judicial notice was denied due to insufficient legal grounding.
Regarding a request for leave to amend, the plaintiffs maintained that their complaint was sufficient but sought amendments if their notice request was denied. However, simply acknowledging the opening of the medical marijuana dispensary without additional allegations related to its operations or injuries would not adequately progress the case. The plaintiffs were advised that they should have filed an amended or supplemental complaint upon the dispensary's opening to provide a complete and accurate picture. The court referenced Kader v. Sarepta Therapeutics, where denial of leave to amend was upheld due to plaintiffs waiting for a ruling on a motion to dismiss after discovering new information, emphasizing that they cannot wait to see if their original complaint survives before acting on new developments.
The Court expresses disapproval of the Plaintiffs' "wait and see" approach and acknowledges a delay in addressing the issues at hand. Under Federal Rule of Civil Procedure 15(a)(2), the Court has the discretion to grant leave to amend a complaint when justice requires, reflecting a liberal amendment policy. However, amendments can be denied based on factors such as undue delay, prejudice to the opposing party, or futility. The Court must assess the overall circumstances to balance these considerations. While the Plaintiffs' claims against the Government Defendants exhibit threshold deficiencies that cannot be remedied through amendment, the Court does not find an amendment futile concerning the non-government Defendants. Plaintiffs are granted 30 days to submit an amended complaint.
Furthermore, the Court examines the non-government Defendants' motions to dismiss to guide the Plaintiffs in their amendments. The review for futility aligns with the standard used in Rule 12(b)(6) motions. The Plaintiffs assert that the state and local regulations concerning registered marijuana dispensaries (RMDs) conflict with the Controlled Substances Act (CSA), seeking to enjoin the Government Defendants from enforcing these conflicting regulations. They argue that, despite the absence of a private right of action under the CSA, the Court possesses equitable authority to intervene. The reference case, Safe Streets Alliance v. Hickenlooper, involved civil RICO claims brought by property owners against a marijuana facility, emphasizing similar claims of preemption and lack of substantive rights. The Plaintiffs, akin to those in Safe Streets Alliance, do not identify any substantive rights underpinning their equitable claims for injunctive relief against state actions purportedly preempted by the CSA.
To invoke the equitable powers of Article III courts for enforcing a federal statute, a plaintiff must possess a federal right against the defendant, as established in Virginia Office for Protection Advocacy v. Stewart. A plaintiff cannot litigate unless they are granted a federal right to vindicate under the relevant statute, which in this case is the Controlled Substances Act (CSA). Therefore, without a federal right to enforce the CSA, a private plaintiff cannot maintain a cause of action, either in law or equity, against any defendant. The court emphasized the necessity for plaintiffs to demonstrate substantive rights under the CSA to proceed with their claims. In this instance, the plaintiffs failed to assert such rights, making their cause of action against the Government Defendants unviable.
The plaintiffs attempted to draw on Armstrong v. Exceptional Child Center, arguing that the lack of a substantive right does not eliminate the possibility of equitable relief. However, the analysis from Armstrong indicates that equitable relief under the CSA is indeed unavailable. The Armstrong court reiterated that federal courts' power to enjoin unlawful executive action is constrained by statutory limits. It identified that a statute might express Congressional intent to preclude private enforcement through specific enforcement methods, or it may delegate enforcement solely to an agency, indicating that remedies provided by the agency are exclusive.
The CSA criminalizes marijuana possession and distribution and is enforceable solely by the United States Attorney General and the Department of Justice, thus reinforcing that Congress intended to limit enforcement to these entities. The absence of any provision in the CSA suggesting private rights of action solidifies that remedies for CSA violations are strictly managed through the established governmental channels.
The district court in Safe Streets Alliance correctly identified the Controlled Substances Act (CSA) as presenting a "judicially unadministrable nature," emphasizing the Attorney General's broad prosecutorial discretion in addressing conflicts with state marijuana laws. This discretion limits the potential for private litigants to challenge the Department of Justice's decisions without creating inconsistent interpretations and misincentives, which undermines any implicit right to equitable relief. Although the Cole Memorandum has been rescinded, the government retains the authority to regulate these matters, thus preventing Plaintiffs from successfully invoking the court's equitable power. Consequently, claims against the Government Defendants were dismissed.
Regarding the non-government Defendants, they argued that the Plaintiffs lacked standing and that their claims were unripe under Article III, as they were based on a hypothetical scenario of opening a Registered Medical Dispensary (RMD). Standing doctrine aims to exclude federal court involvement in speculative injuries, while ripeness doctrine avoids adjudicating claims tied to uncertain future events. Although the Plaintiffs may amend their complaint to establish standing if the RMD opens, the Defendants did not press their objections after the alleged opening, indicating that any lack of standing or ripeness does not preclude a successful amended pleading.
Additionally, Century Bank proposed that the court stay the case based on Burford or Colorado River abstention doctrines due to a related pending appeal regarding a special permit for Healthy Pharms. However, federal courts have a strong obligation to exercise their jurisdiction.
The Supreme Court recognizes specific exceptional circumstances under which federal courts may decline jurisdiction, primarily when doing so serves significant interests such as federal-state relations or judicial efficiency. Abstention is intended to be rare, as it should not be the standard practice. Century Bank invokes Burford abstention, arguing that the case's potential effects on Massachusetts's medical marijuana regulatory framework warrant such a decline. The Burford abstention doctrine mandates that federal courts refrain from interfering with state administrative agency proceedings when significant state law questions are involved, particularly those related to substantial public policy issues. In this case, the remaining RICO claims against private defendants do not directly challenge state laws or necessitate federal review of state orders, indicating that federal involvement would not disrupt state regulatory efforts. While RICO claims may tangentially affect state regulation, they are based on violations of the Controlled Substances Act (CSA) and do not require resolution of state law issues. A stay under Burford abstention has not been justified, as it would merely delay proceedings without addressing the alleged impact on state policy. Century Bank's reliance on Colorado River abstention, linked to a pending state court permit appeal involving similar issues, is also noted. This doctrine requires careful consideration and does not permit abstention based solely on the existence of parallel state litigation.
To assess if exceptional circumstances warrant abstention from federal jurisdiction, the Court evaluates several factors: 1) jurisdiction over a res, 2) geographical convenience of the federal forum, 3) the need to avoid piecemeal litigation, 4) the sequence of jurisdiction acquisition, 5) applicable state or federal law, 6) the state forum's adequacy to protect interests, 7) the nature of the federal claim, and 8) respect for removal jurisdiction principles. In this case, the second factor shows equal convenience for both forums, the seventh factor indicates the federal claim is neither vexatious nor contrived, and the eighth factor is not relevant. Despite the state-court case addressing a permit issued to Healthy Pharms (first factor) and being filed earlier (fourth factor), it is limited to appealing a local planning decision and may not adequately address the federal RICO claims (sixth factor). The need to avoid piecemeal litigation (third factor) requires an "exceptional basis" for dismissal, and dismissal is not justified solely because related issues might be resolved in different courts. Given the dismissal of claims against Government Defendants, there is minimal overlap with the state action. Therefore, the relevant factors argue against abstention, and the case will proceed without a stay.
RICO, established to combat organized crime, allows for both criminal prosecution and a private right of action for plaintiffs injured by RICO violations, permitting triple damages. To plead a violation under section 1962(c), plaintiffs must allege conduct of an enterprise through a pattern of racketeering activity. Section 1962(d) prohibits conspiracy to violate section 1962(c). The private right of action requires that the RICO violation be the proximate cause of the plaintiff's injury. The plaintiffs have filed four RICO counts against non-government defendants. Count I (1962(c)) involves Healthy Pharms Defendants and Red Line, based on a purported enterprise including these defendants and local municipalities. Count II (1962(d)) also pertains to this enterprise and includes all non-government defendants. Count III (1962(c)) lists only Mr. Averill and Mr. Overgaag, while Count IV (1962(d)) encompasses all remaining defendants, excluding Healthy Pharms.
The Healthy Pharms Defendants seek to dismiss the RICO claims on the basis that the Plaintiffs have not demonstrated a proximate injury resulting from the alleged predicate acts. To establish a RICO damages claim, Plaintiffs must show a concrete financial loss rather than mere speculative injury. The claims of injury include potential odors from a proposed marijuana retail medical dispensary (RMD), hindrances to financing for planned projects, and decreased property values due to stigma and crime fears. Although the Complaint appears to assert an injury based on property appraisal, it relies on the future possibility of an RMD rather than actual damages. The Plaintiffs have not cited relevant case law supporting their theory, except for a case involving an operational marijuana facility, indicating that their injuries may be speculative. However, given that the RMD has since opened, the potential for amendment is not considered futile. For a valid RICO claim, any injury must be directly linked to the alleged violations. The Supreme Court's standard for RICO proximate causation involves assessing directness and three functional factors, including the proof of damages, which becomes more complicated with less direct injuries, and concerns about administrative burdens and multiple recoveries among differently injured parties.
The third functional factor examines the societal interest in deterring illegal conduct and its relevance to specific cases. It argues that the general interest in deterring harmful actions may not justify addressing issues of indirect harm, as directly affected victims typically pursue legal remedies effectively, minimizing complications associated with claims from more distantly harmed parties. In this context, the directness concern and first functional factor favor the Defendants, who did not specifically target the Plaintiffs, a group of nearby property owners and real estate market participants. The alleged harm stems from circumstances (e.g., potential renters or buyers losing interest in properties) that are largely disconnected from the Defendants' misconduct of selling marijuana. The excerpt references a precedent where proximate cause was not established due to a failure to connect the alleged harm directly to the conduct in question. The Healthy Pharms Defendants argue that the independent choices of third parties could sever the causal connection. Additionally, when a plaintiff's losses align with broader market trends affecting other investors, the likelihood that those losses resulted from fraudulent actions diminishes. However, the second and third functional factors suggest a possibility of establishing proximate causation, as Plaintiffs may not need to be the primary victims of the RICO violations to pursue their claims. Unlike cases involving identifiable schemes to defraud, Defendants have not shown that a more immediate victim exists, and the Supreme Court's guidance indicates that the proximate cause assessment does not adhere strictly to the notion of identifying primary victims, especially when the alleged violations do not pertain directly to fraud or unfair competition.
Concerns arise when determining proximate causation in civil RICO cases, particularly regarding the viability of plaintiffs to act as private attorneys general. In *Safe Streets Alliance*, the Tenth Circuit found that neighbors of a marijuana growing facility sufficiently alleged injuries—specifically diminished property value and nuisance from marijuana odors—were proximately caused by the facility's operation. The potential buyer's hesitance to purchase property near criminal enterprises supports this inference. Plaintiffs are permitted to amend their complaint to include specific allegations about marijuana odors affecting their property use and value. The assessment of whether these injuries stem directly from the RMD's illegal operations or the sale of marijuana will be clearer once the plaintiffs articulate their RICO claims and injuries. Proximate cause issues may be better resolved at the summary judgment stage rather than at the motion to dismiss stage, suggesting that the request for leave to amend should be granted.
Regarding the claim against Century Bank under RICO conspiracy provisions, to survive a motion to dismiss, the plaintiffs must demonstrate the existence of an enterprise affecting interstate commerce, the defendant's knowledge and participation in the conspiracy, and the defendant's intent to advance a criminal endeavor that meets RICO's pattern requirement. It is not necessary for each conspirator to have committed multiple predicate acts; rather, it suffices that they intended to facilitate the criminal objective. No overt act is required for conspiratorial involvement, and a defendant can be part of a RICO conspiracy without committing a substantive RICO violation. The motion to dismiss by the Healthy Pharms Defendants has been denied with the opportunity to renew.
Outsiders assisting a RICO enterprise to achieve illegal objectives may be held fully liable under 1962(d) if they knowingly agree to provide services that facilitate illegal activities. Mere awareness or association with a conspiracy does not constitute liability; rather, there must be evidence of intentional actions aimed at supporting the criminal enterprise. In the case of Century Bank, the allegations state that it had a banking relationship with Healthy Pharms and was aware of its intention to operate a marijuana business. However, the complaint lacks specific details regarding the nature and extent of the banking services provided. Liability under 1962(d) typically requires more than ordinary banking services and must involve direct facilitation of racketeering activity. Comparisons are made to cases where banks faced claims for knowingly participating in fraudulent schemes, highlighting that mere provision of basic services does not suffice for conspiracy claims. Additionally, the U.S. Treasury has issued guidance allowing financial institutions to serve marijuana-related businesses in compliance with federal law, which Century Bank reportedly did not violate.
Plaintiffs have not sufficiently demonstrated that providing standard banking services to marijuana-related businesses, while adhering to Treasury Department guidelines, constitutes joining or intending to further a RICO conspiracy. The court denies the motion to dismiss but allows for renewal after further development of the allegations, particularly regarding Century Bank's relationship with Healthy Pharms, as mere compliance with banking guidance may not meet the standards for a 1962(d) claim.
Regarding the remaining defendants—Red Line, Tomolly, and the 4Front Defendants—Plaintiffs acknowledge the insufficiency of their allegations and request leave to amend after discovery. The complaint lacks substantial connections between Red Line and Tomolly to the alleged conspiracy or enterprise. Although Plaintiffs state that individuals associated with Red Line are authorized to act on its behalf and that Red Line has an insurance policy linked to Healthy Pharms, there are no specific allegations detailing its role in the enterprise or its management activities.
Tomolly's connection is limited to being a tenant at the same location as Healthy Pharms, and its financial interactions with Healthy Pharms do not demonstrate involvement in the conspiracy. The court highlights that participation in the management or operation of a criminal enterprise must be clearly defined, which the complaint fails to achieve. There is no evidence presented that shows Red Line or Tomolly knowingly joined or intended to further the conspiracy, nor is there clarity on how any financial transactions relate to the marijuana business or the alleged conspiracy.
Allegations against Mr. Overgaag and Mr. Averill regarding the use of Red Line to profit from a nonprofit do not sufficiently establish that Red Line intended to promote any criminal enterprise, as there is no connection made in the Complaint between the nonprofit, the funds extracted, and the dispensary. The shared roles of Healthy Pharms officers in Red Line and Tomolly do not imply a conspiracy or criminal collaboration among these entities. The conspiracy claim against the 4Front Defendants relies on vague assertions; specifically, 4Front Advisors, LLC is accused of maintaining a website to support marijuana companies, including Healthy Pharms, and there are claims of communication between 4Front Advisors, LLC and Healthy Pharms Defendants. However, the Complaint lacks detail about the "consulting activities" or "material support" allegedly provided, and it remains unclear whether Healthy Pharms actually benefited from such interactions. Thus, there is insufficient basis to conclude that the 4Front Defendants engaged in a conspiracy or intended to further racketeering activities. The plaintiffs are allowed to amend their allegations concerning the 4Front Defendants, Red Line, and Tomolly, but must meet the pleading standards of Rules 8(a) and 12(b)(6) prior to discovery. The motions to dismiss by the 4Front Defendants, Red Line, and Tomolly are denied with the option to renew. The Government Defendants' motions to dismiss are granted, while the remaining motions are denied with leave to renew, allowing plaintiffs to file an amended complaint within 30 days. The Complaint includes multiple claims under 18 U.S.C. § 1962 against various defendants and addresses federal preemption of state and local marijuana licensing. The Town of Georgetown has answered the Complaint, and John Doe Defendants refer to unidentified insurance companies linked to the defendants.
The authority of the Department of Justice to enforce federal law remains intact, but state and local law enforcement should primarily address marijuana-related activities unless a state's regulatory structure is deemed insufficiently robust. The Cole Memorandum, which previously guided federal enforcement, was rescinded on January 4, 2018. Courts have established that the Controlled Substances Act (CSA) does not provide a private right of action, meaning individuals cannot initiate civil lawsuits to enforce compliance with the CSA. This principle has been affirmed in cases such as Quillinan v. Ainsworth and Armstrong v. Exceptional Child Center, where it was confirmed that the Supremacy Clause does not create enforceable federal rights.
The court does not address the merits of the claims against the Government Defendants but references cases that have dealt with marijuana dispensary regulations and preemption in other jurisdictions. Notably, the CSA does not preempt state laws like the Arizona Medical Marijuana Act or local zoning regulations related to dispensaries, as seen in White Mountain Health Center and Joe Hemp's First Hemp Bank.
The Healthy Pharms Defendants have not challenged the claims against the non-government Defendants, which include the City of Cambridge and the Town of Georgetown, as plausible enterprises in support of certain counts. However, they argue that the plaintiffs have only alleged one predicate act related to marijuana cultivation and distribution, which is insufficient to establish a pattern of racketeering activity that requires at least two acts. An amended complaint is anticipated to include additional allegations about marijuana sales at a specific location to support the claims.
Leave to amend the complaint regarding a pattern of racketeering activity is not deemed futile. The Healthy Pharms Defendants argue that because RICO incorporates common law principles, the Plaintiffs cannot credibly claim an injury related to the proposed RMD, which operates under a special permit. They cite Massachusetts law indicating that nuisances might be legalized through statute or permit. However, the Defendants have not adequately demonstrated that the lack of a cause of action for certain nuisances addresses whether a specific interest qualifies as 'property' under RICO.
It remains possible that the dispensary could face nuisance claims if it causes significant disturbances, potentially rendering the special permit decision "unwholesome and unreasonable." The Defendants may reassert their arguments in future motions. Furthermore, the Healthy Pharms Defendants contend that under the Plaintiffs' causation theory, numerous local business or property owners could claim damages for similar RICO violations. However, the potential for multiple victims does not inherently suggest the same concerns as the Holmes case regarding double compensation for injuries.
The Plaintiffs' injuries are not derivative of others, distinguishing them from claims seen in Holmes. The Healthy Pharms Defendants may argue against the availability of injunctive relief under civil RICO if the amended complaint raises this issue, noting a split among circuits on this matter. The Court will later assess whether Century Bank's assertion about the necessity of showing that an outsider managed the criminal enterprise for liability under RICO is correct.
In RICO conspiracy cases, a conspirator must intend to further an endeavor that satisfies all elements of a substantive criminal offense, and adopting the goal of facilitating the criminal endeavor is sufficient. A defendant is guilty of conspiracy under 1962(c) if they knowingly agree to facilitate a scheme involving the operation or management of a RICO enterprise. Liability for RICO violations can extend to co-conspirators, meaning that one may be held accountable for the actions of others in the conspiracy, as long as there is a shared common purpose. Unlike general conspiracy statutes, 1962(d) does not require an overt act to forward the RICO enterprise. In cases involving attorneys, mere provision of standard legal services does not constitute sufficient grounds for RICO liability unless there are allegations of involvement in unlawful acts beyond typical legal representation. The First Circuit has consistently ruled that RICO liability does not attach when professionals, like accountants, perform only ordinary professional functions.
