As the Lawsuits Turn: A Tale of Two Catalyst Cannabis Cases

Et tu, counselor?

That might have been the thought running through the mind of Elliot Lewis, chief executive officer of Catalyst Cannabis, when he filed a motion to disqualify counsel for Glass House, the opposing party in 562 Discount Med. Inc. v. Glass House Brands. It’s an action Lewis filed in June, accusing his competitor of fraudulent business practices and unfair competition in violation of California’s Business and Professions Code §§17200.

In the motion to disqualify, 526 Discount Med asserts Venable LLP, a firm representing Glass House in a separate defamation lawsuit filed against Lewis, his business partner Damian Martin and others, “dumped” Lewis and his companies as clients, then “just nineteen days later sued its newly dumped ‘former’ client for defamation and a host of other claims.”

The motion claims Venable had been counsel for several other entities with which 562 is “corporately affiliated,” assisting those companies with “among other things, the full-blown restructuring of its corporate organization.” In this capacity, “Venable was given a veritable treasure trove of highly confidential documents and information” regarding the company, including “entities it holds, controls or oversees (including 562), their finances, shareholders/members, assets, operations, licenses, legal issues as well as various other confidential matters.

“Venable was given the figurative ‘keys to the castle’ in connection with its work,” 562 Discount Med added in its filing, calling the situation a “classic example of the unethical ‘hot potato’ dump-and-sue scenario.”

“After Venable was approached by [Glass House] to represent it, Venable on June 1, 2023, purported to terminate its representation of South Cord by email while intentionally retaining all of SCH’s (and 562’s) confidential documents and information—a termination expressly designed to try to transform South Cord (and 562) from a current client into a former client because Venable knew it could not sue or take any actions adverse to existing clients,” the aggrieved former client stated in the motion.

We won’t know for some time whether Venable can offer a rebuttal to the motion’s assertions, or an explanation for its alleged “dumping” of Lewis and his companies, as the hearing on the motion to disqualify counsel is scheduled for December 7 in Long Beach.

Lewis also recently received some welcome news in another lawsuit he filed, this one against the California Department of Cannabis Control (DCC). Filed in September, 2021, the lawsuit essentially seeks to force the agency to do portions of its job Lewis says the DCC is failing to do, including complying with “mandatory and/or discretionary legal duties vis-à-vis the track-and-trace system and their enforcement obligations under state law.”

Initially, things didn’t appear to be going well for HNHPC Inc., the corporate name under which Lewis filed suit against the DCC. In March, the California Superior Court in Orange County found in favor of the DCC, holding HNHPC “does not have standing to micro-manage the (department’s) compliance,” and the “manner of compliance” is left to the DCC’s discretion. The court also denied HNHPC leave to amend its complaint.

HNHPC appealed the ruling and the matter was passed up to California’s Fourth Appellate District Court. This is where the news started to get better for Lewis and HNHPC.

In an opinion published earlier this month, a three-judge panel from the Fourth Appellate District unanimously overturned the Superior Court’s decision, finding HNHPC “adequately pleaded facts to state a cause of action for a writ of mandate and for injunctive relief.”

The panel disagreed with the lower court on the question of whether documents showing DCC has entered into contracts with vendors to create the tracking systems required by state law fully satisfied the agency’s statutory duties.

“Contrary to the court’s holding, the documents do not conclusively show the department created an electronic database that flags irregularities for further investigation,” the appeals court found.

Later in the opinion, the court observed while the DCC claimed the agency had “complied with its statutory duty so there is nothing to compel,” and the lower court “likewise found the judicially noticed documents demonstrated the Department complied with its ministerial duty.”

“Not true,” the appellate panel flatly stated in response to those assertions.

“The contracts and budget request do not end the inquiry,” the panel found. “The Department did not have a duty to enter into a contract but to establish an electronic database that actually flags irregularities … The fact still remains the full performance and completion of the contract per its terms—i.e., that the Department provided flagging criteria to the developer who in turn incorporated it into the system—is openly in dispute.”

In other words, even if one accepts the contracts DCC entered into could have resulted in the creation of a system that satisfies the law’s requirement for a track-and-trace system, those contracts don’t show the DCC actually created such a system, which is what the law requires, according to the appellate court.

For the broader California cannabis industry, the appellate court’s holding has enormous potential implications, particularly if critics of the DCC like Lewis are correct in asserting that lax oversight on the part of the DCC is helping to foster the state’s illicit market.

There’s a great deal of legal wrangling left to unfold in the case, but should the DCC find its feet being held to the fire by the court, more attentive DCC oversight could be coming to the state’s dispensaries and wholesalers as a result. Closer oversight could help level the playing field and eliminate illicit competition for the state’s legitimate and legally compliant dispensaries.

Of course, neither of these developments signifies a final victory for Lewis and his companies in these cases, but the reversal of the Superior Court’s ruling in the DCC lawsuit is a significant development in Lewis’s favor, and the motion to disqualify counsel in the other case is, if nothing else, an interesting twist in the tale. Where will it all lead? Watch this space.