This is the first in a three-part series addressing why companies making and sell hemp-derived CBD products ought to be concerned about state consumer protection laws and offering a few thoughts on how to mitigate the risk of running afoul of those laws. This week we will look at Oregon, followed by Washington, and California. Please note that these laws are complex, so this is just a broad overview.
Increasingly, makers of CBD products are finding themselves on the wrong side of federal regulators and named as defendants in multi-million-dollar lawsuits. We’ve written extensively about warning letters issued by the Food and Drug Administration (FDA) to businesses selling hemp-derived CBD products as unapproved drugs:
- The FDA Issues Hemp-CBD Warning Letters and a Consumer Update
- CBD Topicals are Not Immune from FDA Scrutiny, as Recent Warning Letters Show
- Natural Products, the FDA and Cannabis Regulation
- The FDA and FTC Regulatory Overlap Means Twice as Much Compliance for CBD Companies
- The FDA’s Problem With Hemp-CBD
- FDA Issues Warning Letters to CBD Manufacturers Making “Over-The-Line” Health Claims
And we’ve written about, and forecasted, significant litigation involving hemp-derived CBD:
- Hemp/CBD Litigation: Curaleaf Hit With Federal Class Action Lawsuit Alleging Securities Violations
- Cannabis Company Disasters: Learning from the Brutal Curaleaf Sequence
- Litigation Update: JustCBD Files Motion to Dismiss Class Action Lawsuit
- Hemp/CBD Litigation Forecast: Cloudy with a Chance of Damages
Recently, Alison Malsbury wrote about a new a class action lawsuit against Charlotte’s Web and Infinite Product Co., alleging the former improperly marketing its CBD products as dietary supplements and the latter made unsubstantiated therapeutic claims about CBD. Alison points out that this and other lawsuits should come as no surprise, and she shares some startling statistics about the trustworthiness of CBD labeling. Notably the Charlotte’s Web lawsuit (and others) include claims brought under state consumer protection laws. So let’s take a look at Oregon:
What is the Unlawful Trade Practices Act (UTPA)?
The UTPA is designed to protect consumers from certain business practices. See O.R.S. §§ 646.605-646.656. The UTPA is a potent weapon against consumer fraud and in the hands of a skilled plaintiff’s attorney, one with potentially devastating consequences for your hemp-derived CBD business.
Generally the UTPA provides that a person engages in unlawful trade practices, if, in the course of business, the person: (1) employs any “unconscionable tactic” when selling, renting, or disposing of real estate, goods, or services; or (2) fails to deliver any or all of the portion of real estate, goods or services as promised, and at a customer’s request , refuses to refund money to the consumer for undelivered goods.
The UTPA enumerates 72 specific unlawful business practices. Here are a few that may lend themselves to a lawsuit against company selling CBD products:
- knowingly taking advantage of a customer’s physical infirmity, ignorance, or illiteracy;
- knowingly permitting a customer to enter into a transaction from which the customer will derive no material benefit;
- causing confusion or misunderstanding on the source, approval, affiliations, or ties of a particular good, or service;
- advertising real estate, goods, or services with the intent to not provide the items advertised;
- misrepresenting the characteristics, ingredients, uses, benefits, quantities, or qualities of real estate, goods, or services;
- making false or misleading representations of fact about the real estate, goods, or services of the customer or another;
The UTPA pleading and proof requirements are not as stringent as common-law fraud and, as a consumer protection statute, the UTPA is to be interpreted liberally in favor of consumers. For example, the Oregon Supreme Court has held with respect to whether the defendant acted “willfully” that “‘no more than proof of ordinary negligence by a defendant in not knowing, when it should have known, that a representation made by him was not true.” This is not a tough standard to meet: After all, shouldn’t a company selling hemp-derived CBD know how much CBD is in its product?
What are the significant risks for violating of the UTPA?
There are three significant litigation risks. The first is that the Oregon Attorney General (or District Attorney) commences a proceeding against your company as recently happened with the maker of 5-Hour Energy drinks. Such an action may commence with the Oregon DOJ Civil Enforcement Division issuing your company a letter seeking to resolve the letter. The prosecuting attorney may issue investigative demands, require the production of documents or require that you answer interrogatories. Before filing suit suit, the Oregon DOJ will advise you of the problem and give you an opportunity to enter into an Assurance of Voluntary Compliance (AVC). An AVC requires you to stop the unlawful practice and promise not to engage in the conduct in the future. An AVC is similar to a consent decree, and breach of an AVC is considered contempt of court. (Not something to take lightly.)
The second risk is a lawsuit by a consumer. Although these actions have some limitations as compared to actions by the Attorney General, the key risk is that the consumer may recover her attorneys’ fees along with actual damages or $200, whichever is greater. Although the law also permits punitive damages in limited circumstances, the attorneys’ fees provision is the most worrisome. That part of the UTPA may turn lawsuit where the actual damages are perhaps $100 (e.g. the price of the product) into one in which the consumer’s attorney seeks thousands or tens of thousands of dollars from your CBD business.
A third significant risk is UTPA lawsuits may be brought as class actions. Suppose a small Oregon-based CBD topical company sells its hemp-derived CBD product for $100 and sold 1,000 units in the last year and that the product labels violate the UTPA in some way. A plaintiff’s class action lawyer may commence a lawsuit seeking to recover $200,000 ($200 x 1,000) plus attorneys’ fees. Those fees may easily reach or exceed the actual or statutory damages and will become part of any settlement discussion. The potential liability can skyrocket if the CBD business sells 10,000 units ($2 million + attorneys’ fees) or 100,000 units ($20 million + attorneys’ fees). By way of comparison, the class action lawsuit against Infinite Product Co. alleges damages exceeding $5 million and asks for attorneys’ fees.
What may I do to mitigate risks of running afoul of Oregon’s Unlawful Trade Practices Act?
The most obvious way is to ensure that your hemp-CBD product is what it says it is and that you do not over-promise. (See above links re FDA and other litigation). Notably, the UTPA does not apply to conduct in compliance with the orders or rules of, a statute administered by a federal, state, or local government agency. So pay close attention to any action by the FDA regarding CBD, which of course you can read about here. And when it comes to ensuring your product “is what it says it is,” consider making use of additional and regular testing of your product and constituent materials provided by suppliers. If your company is contracting with a third-party to provide manufacturing or packaging services or crude or distillate, consider how may contract to shift or alleviate risks through reps and warranties clauses and indemnity provisions. Please reach out to one of our cannabis attorneys if you have further questions.