THC, CBD, CBN … the cannabis industry is quite familiar with acronyms. But it’s another nasty little four letters, TCPA, that are—or should be—on the top of mind for every dispensary, delivery service, CRM platform, and private equity holding company. This as the US Supreme Court decides what the byzantine 30-year-old law will look like following a landmark decision expected by the end of June or July.
The Telephone Consumer Protection Act (TCPA), which regulates robocalls and unsolicited texts to consumers, has been the vehicle for a number of class action suits against cannabis companies over the past year, including an uptick of such suits during COVID-19. And with the advertising restrictions and younger demographics of the industry, the class actions are now bring brought in droves, with over 10 being brought over the last 6 weeks alone. Like a tremor before a larger quake, the impact of this trend is only beginning to be felt—just ask Eaze (the “Uber” of marijuana retail), who has been told by a California federal judge twice that its proposed $3.4 million settlement, based on the actions of a third party texting technology, is insufficient, and who was at the same time hit with another separate TCPA suit based on their current terms and conditions.
But it doesn’t take a seismologist to know the “big one(s)” are right around the corner for the cannabis industry, who should have noticed last week as an established cruise line company looked to consummate a $76 million TCPA settlement from 2017, only to have the plaintiffs’ counsel ask the court to bump its initial $15 million fee by another $3.49 million.
Assuming the TCPA is not radically altered by the upcoming Supreme Court decision, this article highlights the most relevant cannabis-related TCPA class action activity to-date, and more importantly, some of the ways cannabis companies can best avoid and defend these high exposure class action suits—including proper consent, opt outs, coordination with the Federal Do Not Call List, use of respectable marketing contractors and experienced marketing counsel, arbitration provisions, class action waivers, and the use of a more data-centric approach to customer data.
The perfect storm: TCPA & cannabis industry factors
The TCPA was enacted in 1991 to combat a rising tide of unwanted telemarketing calls and faxes, and has since been expanded to cover calls to cell phones and non-consensual text messaging. The original intent was to restrict automated or prerecorded (robo) calls unless the receiving party consents to receive the call, though critics have noted that technology has outpaced the federal statutes regulating telemarketing, leaving marketers uncertain as to what is and is not permitted under what was already a complex and difficult law to comply with.
And the law certainly has some teeth—given the statutory damages of $500–$1,500 per call or text, one can see how settlements can be in the nine figures. The law also has some reach, essentially imposing strict liability even when the texts/calls are made by a third party marketing company on behalf of their client. As such, compliance with the TCPA was already difficult for even the most established industries and companies.
Nevertheless, with state-by-state regulations restricting the advertising methods in the nascent cannabis industry, automated text messaging has become the preferred (or even necessary) method of reaching the primarily-younger consumers. Any cannabis consumer with a cellphone knows that these dispensaries and other services are often collecting phone numbers in connection with loyalty and rewards programs, which are then used for direct marketing purposes usually via SMS text messaging.
As such, even the more deliberate and careful cannabis companies face the inherent difficulties of complying with (and avoiding class action exposure from) the TCPA. Making matters even dicier is the flood of new cannabis companies looking to enter the market as quickly and directly as possible. Given all of the other regulation hurdles these companies need to jump over, it is the unknown or ignored TCPA speed bumps that could have the potential to cause the most damage regardless of whether the non-compliance is caused by recklessness or well-intentioned scrappiness.
For these reasons, a target has formed on the backs of cannabis companies for plaintiffs’ counsel looking to take advantage of the TCPA and the nascent cannabis industry, which are often funded by private equity or high net worth individuals/celebrities. When these holding companies also perform managerial or advisory services, the potential for them to be named as co-defendants in these class actions increases significantly—proving that securities litigation may not be the only class action trend worth watching as the money behind marijuana companies expands and becomes more integrated.
Eaze-y-does it: cannabis-related TCPA class action activity
The TCPA class action suits against cannabis companies have, in one form or another, been based on the following fact patterns: (1) texting non-clients who have never signed up or consented due to mass texting policies or practices; (2) texting non-clients who have never signed up or consented due to third party inputting error; (3) texting client consumers who did not give adequate consent to being texted; and (4) texting clients who have opted out of being texted (and/or are on the Federal Do Not Call List).
The most high-profile and widely applicable case study has to be the Eaze, the well-known online marketplace and technology platform for marijuana deliveries that’s been described (in a complaint) as the “Uber” of the cannabis industry. In what feels like a lifetime ago, Eaze user Farrah Williams brought suit on behalf of herself and others who, beginning in 2017, received alleged unwanted and unsolicited marketing text messages without their consent and without offering the option to opt out. Eaze sought to have the case sent to arbitration based on a “clickwrap” agreement in its terms of service, which plaintiffs did not deny agreeing to, but instead tried to dispute the legality of the contract itself due to marijuana’s nebulous federal legal status. In a notable yet limited victory for the cannabis industry, the court did not specifically rule on whether there was a legal contract, but it did find that the arbitration clause was severable from the contract as a whole, and sent the case to arbitration.
But not to rest on the laurels of any “victories”, the same plaintiffs’ counsel filed another lawsuit in 2018, this time with lead plaintiff Kristine Lloyd and over 51,000 class members, who allege they never enrolled in or used Eaze‘s services but nonetheless were “inundated” with the company’s unsolicited, autodialed text messages (sent by a third party technology provider). Eaze argued that Lloyd’s claims are based on verification texts that were accidentally sent to her when another user in Ohio apparently entered a single digit wrong when signing up for the service.
In April 2019, Eaze initially agreed to a $1.75 million proposed settlement of this class action claim, which also required Eaze to implement several “significant changes to its consumer marketing practices going forward.” The changes were to include instituting TCPA compliance training and marketing oversight of key personnel involved in text messaging; refraining from continuing to work with the third party company that sent most of the offending texts; inserting opt-out notices in all verification text messages; ensuring that verification reminder texts do not include advertising copy; and adjusting its user verification process to prevent nonusers from mistakenly and repeatedly receiving messages they had never requested, according to the motion.
This proposed settlement was rejected by a federal judge in the Northern District of California, who was skeptical of the low dollar amounts and felt the proposed claims processes were lacking. Subsequently, a second proposed settlement which increased the monetary sum to $3.49 million was also rejected, leaving the parties to continue litigating to this day, albeit with the inclusion of a new class of plaintiffs who are willing users of the app that may or may not have agreed to arbitration.
But Eaze is by no means alone. In June 2019, a group of plaintiffs filed a class action suit against Baker Technologies and its parent company Tilt Holdings Inc., alleging violations of the TCPA and California’s Unfair Competition Law. Tilt Holdings specializes in cannabis technology, and its subsidiary Baker Technologies provides customer relationship management services to retail stores, including online ordering, customer loyalty, messaging and analytics. Specifically, the suit alleges that Baker Technologies collected cell phone numbers, provided them to its cannabis dispensary clients and facilitated telemarketing text messages to those mobile numbers without first obtaining the necessary consent. The companies maintain that messages were only sent to customers who have voluntarily signed up to receive messages at dispensaries and that those customers may opt-out at any time—in full compliance with the TCPA.
But, that doesn’t stop the case from going forward or discovery from taking place. Baker Technologies urged the court last month to stay the action given the upcoming Supreme Court decision and the complexity of the case, which could implicate more than 1,000 dispensary clients, but that discussion may become moot with the decision expected soon.
Any potential uncertainty around TCPA certainly hasn’t stopped or slowed down the Plaintiffs’ bar, who in anticipation of the upcoming ruling, have instead hit the cannabis industry with more than a dozen class action TCPA suits over the last 6 weeks alone, targeting dispensaries and other companies in Oregon, Denver, Nevada, Florida, Arizona, and California—with the majority of cases brought in California. While the cannabis TCPA trend was emerging over the past year, the volume seems to be increasing over the past few months at an alarming rate, with headlines about “The Latest TCPA Suit Filed Against Cannabis Company” becoming almost ubiquitous in the industry trades.
What to do
The current US Supreme Court case asks whether the government debt collection exception to the TCPA is an unconstitutional, content-based carveout. The justices will soon be deciding whether to uphold the provision, sever the provision, or strike down the law entirely. It is unclear what changes may result from the decision to be handed down any day now, but for purposes of this article, we will assume the TCPA remains substantially intact.
In the meantime, it is clear that even established cannabis companies need to take proactive steps with their text messaging and marketing systems to minimize the risk of unwanted legal actions, knowing that full reliance on a third party to comply with the TCPA will not shield them against direct liability. And it is abundantly clear that younger companies who willfully or inadvertently fail to comply with the TCPA, or those who fail to adequately vet similarly-new third party marketing services, may be exposing themselves to significant liability.
Companies should therefore not only diligently vet the third party marketing companies to ensure proper TCPA compliance protocols, but should also take additional steps as a second layer of protection. One relatively straightforward step would be to routinely cross-check the Federal Do Not Call List, which essentially acts as a published dating service between plaintiffs’ attorneys and prospective plaintiffs. Of course the ability to initially opt out is a basic requirement, but companies need also provide for the continuing ability to opt out, and ensure those subsequent opt outs are complied with. This is already an issue that has been recurring in the cannabis TCPA litigation.
Before the text messages can be sent, the customer information must first be obtained through proper consent procedures—that again is a given. But the terms and conditions by which consent is given are of increasing importance, especially in light of the recent Eaze ruling which enforced the arbitration provision despite questions about the legality of the underlying subject of the contract. A clear, conspicuous and enforceable arbitration provision and class action waiver will go a long way in limiting the potential TCPA class action exposure. However, it must be noted that California law has its own treatment of class action waivers and arbitration provisions, often resulting in challenges on various grounds. In attempting to invalidate these agreements, plaintiffs will typically argue that such a provision cannot be enforceable if it waives an unwaivable public or statutory right, or whether it deals with a waiveable private right. For that reason, choice of law provisions and venue provisions should also be considered when drafting the terms and conditions. Additionally, companies need to ensure that a binding agreement has been formed as part of their sign up process, with appropriate click boxes.
Once the terms are agreed to, the opt outs are in-place, and the other “improvements” outlined in the proposed Eaze settlement, companies would also be wise to employ a more data-centric approach to customer data. Tracking and utilizing current customer data will not only bring all the usual marketing benefits, but it may also assist in defeating class certification by arguing individualized issues predominate over any common issues presented by the class, or that there are not in fact enough class members to warrant a class action. In one recent example, California cannabis delivery company Xaler defeated class certification in a TCPA suit this past January, when a federal judge found there were not enough consumers to justify bringing the case on a class basis (the suit has subsequently been dismissed in March).
Precautions should be taken by cannabis companies, but this is one area of the law where violations can happen even in the absence of negligence, with the potential for millions in damages. Prudent cannabis companies should select their marketing providers wisely and use competent counsel to navigate these minefields. As the cannabis industry landscape continues to evolve even during COVID-19 and as the smoke clears, without appropriate precautions in place, TCPA may soon become as recognizable as THC.