Alert June 25, 2020

U.S. Cannabis Companies Texting & Calling Customers are Growing Targets of Telephone Consumer Protection Act Lawsuits

The cannabis industry is growing rapidly and so too are lawsuits against industry participants. One of the fast-emerging litigation threats is claims against cannabis companies for violation of the federal Telephone Consumer Protection Act (TCPA) statute arising from calls or text messages made to customers and potential customers for informational, marketing, or other purposes. The TCPA’s draconian penalties for violative calls or text messages — $500 to $1500 per violative call or text message — and the limited defenses available to defendants under the statute have made the statute a favorite of the plaintiffs’ bar in recent years. And the TCPA plaintiffs’ bar is now increasingly turning its attention to cannabis industry participants. It is thus essential cannabis companies communicating with customers and potential customers by way of calls or text messages understand the TCPA and implement effective compliance and risk mitigation policies and practices to avoid becoming a TCPA litigation target.

Telephone Consumer Protection Act

While the TCPA contains a number of restrictions on outbound calls and text messages, TCPA litigation typically concerns one of the following prohibitions in the statute:

  • Automated calls or text messages made without the required prior consent of the called/texted party. The TCPA generally restricts calls or text messages to cellphones made using an “automatic telephone dialing system” (ATDS) or artificial or prerecorded voice without first obtaining the prior express consent of the called/texted party. The level of prior consent required depends upon on the purpose of the call or text messages. For calls or texts with a marketing purpose, companies must obtain the “prior express written consent” of the called party and make specific, written disclosures as part of obtaining that consent. For informational or transactional calls or texts with no marketing purpose, prior express consent is required, but it need not be “written” or accompanied by specific, written disclosures. 47 U.S.C. § 227(b)(1)(A); 47 C.F.R. § 64.1200(a). And, while this restriction applies to calls or text made with an ATDS, what constitutes an ATDS is an unsettled question upon which numerous courts throughout the country have disagreed, leaving companies without clear guidelines for compliance.

  • Calls or text messages made to telephone numbers properly registered on the federal do not call list. The TCPA generally restricts companies from calling or texting consumers who have properly added their phone number to the National Do-Not-Call Registry, unless (1) the company maintains specified procedures to prevent such calls or texts and the challenged call or text is the result of an error, or (2) the company obtains the consumer’s “prior express invitation or permission.” 47 C.F.R. § 64.1200(c).

  • Calls or text messages to consumers who have requested that the company stop calling or texting. The TCPA generally requires that a company honor a consumer’s request that it stop calling or texting within a reasonable time. 47 U.S.C. § 227(b)(1)(A); 47 C.F.R. § 64.1200(d)(3).

  • Failure of the company engaging calls or text messages to implement and maintain the required procedures. The TCPA generally requires that, before a company maymake calls or texts for marketing purposes, it must implement and maintain certain procedures, including, for example, procedures (i) to record and honor do-not-call/text requests, (ii) to provide the company’s do-not-call policy to consumers upon request, and (iii) to train personnel engaged in communicating with consumers about the company’s do-not-call procedures. 47 C.F.R. § 64.1200(d).

As noted, the TCPA imposes a minimum (and drastic) automatic $500 penalty for each violative call or text message regardless of whether it causes any tangible harm to the consumer. 47 U.S.C. § 227(b)(3), (c)(5). And, if the court determines that the violation was knowing or willful, the court has the discretion to enhance the penalty up to $1500 for each violative call or text message. For companies that regularly engage in outbound calls and text messages, the potential statutory penalties can add up quickly, particularly in the context of a TCPA class action lawsuit. For this reason, and because of the limited defenses available under the statute, TCPA class actions are quite common, and the TCPA is the third-most commonly invoked statute cases filed in federal courts. These cases — particularly TCPA class actions — can be expensive to defend and resolve. While TCPA class action settlements can range from hundreds of thousands to dollars to tens of millions, publicly available settlement information reveals that the average TCPA settlement is approximately $6.0 million.

Trends in Cannabis TCPA Litigation

As of this writing, the number of TCPA actions filed in federal court against cannabis companies numbers in the dozens.

The majority of the lawsuits assert TCPA claims against the industry on the theory that a cannabis company sent marketing text messages to customers and potential customers without the customers’ consent using an ATDS. See, e.g., Abbink. v. Good Chemistry I, LLC, 1:20-cv-00871 (D. Colo.); Camacho v. Hydroponics Inc., 5:20-cv-00980 (C.D. Cal.); Sharyl Duboise et al. v. Infinite Bloom LLC, 2:20-cv-01073 (D. Ariz.); Rohrer v. Phenos Collective Inc., 1:20-cv-00392 (E.D. Cal.); Klitzner et al. v. WherezHemp LLC, 3:20-cv-00926 (S.D. Cal.); Jackson v. Euphoria Wellness LLC, 3:20-cv-03297 (N.D. Cal.). Two recent class actions against industry participants assert claims for alleged violations of the TCPA’s do-not-call and procedures provisions. See Jackson v. Euphoria Wellness LLC, 3:20-cv-03297 (N.D. Cal.) (alleging dispensary operator sent text messages to class members with phone numbers on the National Do-Not-Call Registry and using an ATDS without consent); Dewoskin v. Desert Lake Group, LLC, No. 20A78718 (Dekalb Cnty. Ct.) (alleging CBD company sent marketing text messages without sufficient internal and national do-not-call procedures).

While a number of cannabis companies have settled TCPA litigation, the amounts of those settlements generally remain confidential. In one recent class action, however, the parties proposed a $1.75 million settlement for calls and texts to approximately 51,000 class members. The court denied preliminary approval of the settlement, finding that the $1.75 million settlement amount was too low. The parties later sought approval of a $3.5 million settlement, which the court again declined to approve because the amount was too low. Lloyd v. Eaze Solutions, Inc., No. 18-5176 (N.D. Cal.). The parties have not yet made a request for approval at a different settlement amount.

Rising Investment in the Cannabis Industry Enhances TCPA Risk

The growth of the cannabis industry has garnered a lot of attention in the public press — including the participation of wealthy investors in forming new companies. As the funding of these new companies remains in the spotlight, TCPA class action attorneys may perceive that there are deep pockets behind recently funded companies, making them ripe targets for TCPA litigation. For example, Hydroponics Inc., a national provider of agricultural supplies and logistics specific to the cannabis and hemp industries, publicly announced in September 2019 that it was committing $75 million to acquire similar growing-related businesses over the next two years. In October 2019, the company acquired California-based Grow Shop Hydroponics. Just six months later (on May 6, 2020), a nationwide TCPA class action was filed against Hydroponics Inc. in federal court in Los Angeles.

Most All Industry Participants are at Risk of Facing a TCPA Lawsuit

The targets of TCPA litigation in the cannabis industry are not cabined to dispensaries or storefronts. Rather, all players in the cannabis industry should be aware of TCPA litigation risks and are potentially at risk even if they are not the entity directly sending text messages or calling customers. Although many TCPA cases do target recreational or medical dispensaries (see, e.g., Abbink. v. Good Chemistry I, LLC, 1:20-cv-00871 (D. Colo.); Sharyl Duboise et al. v. Infinite Bloom LLC, 2:20-cv-01073 (D. Ariz.); Rohrer v. Phenos Collective Inc., 1:20-cv-00392 (E.D. Cal.); Jackson v. Euphoria Wellness LLC, 3:20-cv-03297 (N.D. Cal.)), the TCPA plaintiffs' bar has also gone after a variety of other defendants by taking advantage of the TCPA’s broad provisions permitting indirect and vicarious liability to companies that facilitate, authorize or direct calls or text messages in violation of the TCPA. For example, TCPA defendants among industry participants have included:

  • Technology & CRM provider
  • Marijuana delivery company
  • Suppliers
  • Hemp and CBD business directory
  • Individual owners / executives

Compliance is the Best Defense

The risks of TCPA litigation can be largely (but not totally) mitigated by implementing the proper procedures and compliance steps. Primarily, cannabis dispensaries and retailers must be aware of the risks of marketing products through call and texting programs, and should develop robust procedures for obtaining the necessary level of consent before contacting consumers by phone or text. Companies should also exercise caution before sending what they consider “transactional” or “informational” text messages, which are not exempt from the TCPA (although the type of consent required differs).

Companies involved in marketing cannabis products should ensure that they have sufficient procedures for complying with the TCPA’s National and Internal Do-Not-Call regulations. Compliant procedures will require companies to, among other things, routinely monitor the National Do-Not-Call Registry; honor and record opt-out requests from consumers; and train employees on TCPA compliance.

Medical Marijuana and the Healthcare Exception

Healthcare companies can take advantage of a unique exemption from TCPA liability for communications with patients (such as text messages containing appointment reminders or prescription order information) if they follow certain steps. This exemption applies to calls made or text messages sent by or on behalf of a “covered entity” or its “business associate” that deliver a “healthcare” message, as defined by the HIPAA Privacy Rule, 45 CFR § 160.103, from the TCPA’s written consent requirement. See 47 C.F.R. § 64.1200(a); 29 F.C.C. Red. 15267, 15267 n.7 (Dec. 17, 2014). However, as with many other legal questions the cannabis industry faces, it is uncertain if the exemption will apply to medical marijuana companies. It remains an open question whether medical marijuana dispensaries are “covered entities” pursuant to HIPPA, and the answer will likely vary depending on the specific entity’s operations. Even if medical marijuana dispensaries are considered “covered entities,” whether the exemption applies will turn on the content of the specific text message. The message must concern the “care, services, or supplies related to the health of an individual” to take potential advantage of the health care exemption. 45 CFR § 160.103.

The Cannabis Industry Must Proactively Comply with the TCPA

Individuals and companies involved in the cannabis industry should ensure that affiliates and business partners involved in communicating with customers and potential customers maintain and follow proper procedures to avoid potential liability. Industry participants should consult with internal or external counsel to implement the necessary policies and steps to avoid committing a TCPA violation, and to proactively build risk mitigants and potential defenses. As the Cannabis industry continues to evolve and grow, the industry can expect the attendant TCPA lawsuits to do the same. Acting now to ensure TCPA compliance is the best defense.