“Gram Shop” Laws – What They Are and Why We Need Them in California

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Consumer product companies typically reduce their product liability risk by focusing on product design, safety testing, and quality control. If a product is well made (for example, if it is not defective or adulterated), then its seller generally knows no one is likely going to sue for injury or harm arising out of the product’s use.  

However, this is not true for the sellers and manufacturers of so-called “hedonistic” products, such as alcohol, tobacco and cannabis. Consumers can easily over-indulge in their personal consumption of hedonistic products, even those that are not adulterated, and then behave irrationally, violently or recklessly as a result. And so, perfectly well-made cannabis products can nevertheless create potential product liability risk if a consumer injures others while impaired.  In 2014, for example, a Colorado man (Richard Kirk) went on a shooting spree after claiming to eat a cannabis edible. His adult children later sued the manufacturer and dispensary alleging inadequate warnings on the label.

In this regard, it is hard to find much difference between a cannabis dispensary that allows on-site consumption and a typical bar, where adults are allowed to freely consume alcohol.  However, under California law, the two are arguably worlds apart.

In California there are laws (called “Dram Shop” legislation) protecting alcohol retailers against most civil liability flowing from the bad behaviors of intoxicated consumers. These Dram Shop laws are found at California Business & Professions Code sections 25602 and 25602.1 and Civil Code sections 1714(b) and (c). These protections were adopted by the California Legislature following a string of high-profile legal decisions by the California Supreme Court in the 1970s extending potential civil liability to persons serving alcohol to others. Prior to 1971, the California courts had uniformly held that the consumption of alcoholic beverages, rather than the serving of alcoholic beverages, was the legal cause of injuries resulting from the intoxication of an imbiber. However, in 1971, the California Supreme Court rejected this argument in Vesely v. Sager (1971) 5 Cal.3d 153. Five years later, in Bernhard v. Harrah’s Club (1976) 16 Cal.3d 313, the California Supreme Court extended potential civil liability to venders under common law negligence theories.  And in 1978, the California Supreme Court extended these potential civil liabilities to social hosts, not just licensed commercial retailers. See Coulter v. Superior Court (1978) 21 Cal.3d 144.

Of course, the challenge to the cannabis industry is that the Dram Shop laws are expressly limited to alcohol. And it would not be too challenging to extend the earlier Vesely, Bernhard and Coulter cases to create potential liability for anyone who provides cannabis to consumers. Consider, for example, that in 2014 a California court of appeals concluded that an alcohol-infused energy drink was not immune from civil liability under California’s Dram Shop laws. See Fiorini v. City Brewing Co., LLC (2014) 231 Cal.App.4th 506.

Another immunity against product liability claims that is seemingly unavailable to the cannabis industry is found in California Civil Code section 1714.45, which provides that a manufacturer or seller is not liable for product liability if both of the following apply:

(1) “The product is inherently unsafe and the product is known to be unsafe by the ordinary consumer who consumes the product with the ordinary knowledge common to the community;” and (2) the product “is a common consumer product intended for personal consumption, such as sugar, castor oil, alcohol, and butter.” Because this statute has never been applied to cannabis, it is unclear whether cannabis qualifies as either an “inherently unsafe” product or a “common consumer product.”

Consider, for example, the aforementioned Fioini case in which the court of appeals suggested that a product new to the market cannot be considered a “common consumer product.” Id. at 325.  In any event, the immunity does not apply if a product is adulterated. See, e.g., Naegele v. R.J. Reynolds Tobacco Co. (2002) 28 Cal.4th 856, 864. Neither does it apply if a product is altered in order to increase addiction or if the supplier “misrepresent[s] the additive nature” of the product. See Souders v. Philip Morris Inc. (2002) 104 Cal.App.4th 15, 25.

Given this apparently unfair asymmetry in legal exposure between the cannabis and liquor industries, it should come as no surprise that many cannabis advocates are championing equivalent immunities against civil liability for cannabis dispensaries, so-called “Gram Shop” laws. See “The Product Liability Risks of Legalized Marijuana – How Deep will the Insurance Industry Inhale?” presented at the CLM 2017 Midwest Conference, June 15-16, 2017.

Until the law of the land catches up to the realities of the new commercial cannabis industry, there are pieces of advice generally given to reduce the risks associated with the marketing and sale of cannabis as with any hedonistic product. For example,

  1. operate as a corporation or LLC to protect your personal wealth against third party claims arising out of your business;
  2. limit on-site consumption (one commentator suggested one gram per customer);
  3. post a public warning against over-indulgence in a prominent place;
  4. make public transport readily available (for example, post a number to a local taxi service and offer to make the call); and
  5. be sure your general liability insurance is adequate.

Getting any insurance in the cannabis space can be tricky. The California Department of Insurance (800-927-4357) has reported that at least three admitted carriers are writing cannabis policies — (1) The North River Insurance Company (800-690-5520); (2) U.S. Fire Insurance Company (888-890-1500); and (3) White Pine Insurance Company. Cannabis companies are also encouraged to work with an insurance broker to explore insurance offered by non-admitted surplus line carriers. It is our understanding that general liability insurance often expressly excludes liabilities arising out of “intoxicated” behaviors, so care should be taken to explore whether any particular insurance policy needs an additional rider (sometimes referred to as a “dram shop” or “host liquor coverage” rider) to guard against third-party product liability claims arising out of an imbiber’s dangerous behavior. For example, in the Richard Kirk civil case described above, the manufacturer’s insurance company refused to defend the claim because the policy included a “psychotropic substances exclusion.” Lastly, readers are reminded that MAUCRSA and its implementing regulations require certain insurance coverages from many cannabis operators. See, e.g., 16 C.C.R. § 5308; Bus. & Prof. Code §§ 26070 and 26051.5.

Anyone interested in advancing “Gram Shop” laws, immunities against civil liability for cannabis dispensaries, in Sacramento is welcome to contact our firm.

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