Avoiding a trip from legal edibles to product liability class actions

Cannabis edibles present cannabis producers with the opportunity to innovate and develop a diverse range of cannabis delivery methods for their consumers. The regulatory framework that came into force in late 2019 imposes strict measures on the content and production measures for edible cannabis products. Licensed producers of cannabis products should ensure they are implementing appropriate measures not just to comply with Health Canada’s regulations, but to mitigate against the potential risks from production liability lawsuits, including class actions.

With great opportunity comes great … liability risk

While a producer of edible cannabis is required to submit a new product notification to Health Canada 60 days prior to a product being sold, Health Canada does not provide an approval or consent authorizing the sale of edible products. Therefore, in addition to understanding the regulatory framework, license producers should also understand the ranges of potential litigation risks facing their business from the sale of edibles.

The sale of edibles may expose the producer to claims of, among other things, adverse health effects from food illness, contaminants including unapproved pesticides, fungicides or surfactants, product mislabeling or misrepresentation about the foregoing.

Product liability claims are based in both the common law and legislation, providing a panoply of options to plaintiffs. At common law, there are four main causes of action:

  1. Negligent design – the edible producer breached a duty of care to use reasonable care in the design, development and/or testing of the product, such that the product is defective, unsafe or does not perform as intended.
  2. Negligent manufacture – the edible producer breached a duty to use reasonable care in manufacturing the product and engaging in quality control processes, such that the product is defective, unsafe or does not perform as intended.
  3. Breach of the duty to warn – the edible producer breached a duty to provide reasonable directions and instructions with the product, or to warn of any alleged defects once discovered.
  4. Negligent misrepresentations – the edible producer negligently marketed or represented that the product had qualities or characteristics that it in fact did not, and the consumer relied on those false representations.

Plaintiffs have other tools available to them for breaches of contract and legislation, such as the Consumer Protection Act, the Competition Act, and the Sale of Goods Act.[i]

The claims noted above are first party claims (i.e. claims by the party who consumed the edible). Plaintiffs may also include third parties who are harmed by the person who consumed the edible; for instance, individuals or business damaged by the actionable conduct of a person caused by ingesting edibles.

For public companies producing or selling edibles, compliance issues with the Health Canada legislation may even provide enterprising plaintiffs with fodder for securities class actions.

Lessons from the first cannabis product liability class action in Canada

Downton v Organigram,[ii] a case we recently discussed, illustrates some of the risks producers face. In that case, the plaintiff purchased and consumed medical cannabis from Organigram, which was subject to a recall by Health Canada. The recall was initiated when testing revealed that the cannabis contained unauthorized pesticides. The plaintiff allegedly experienced nausea and vomiting, which subsided after she discontinued consuming Organigram’s cannabis. She commenced a putative class action against Organigram in Nova Scotia seeking damages for the adverse health consequences of consuming the recalled cannabis. The lower court certified the class action a significant step in the litigation. Organigram appealed.

The Court of Appeal had no difficulty with the viability of claims for negligent design, development and testing, negligent manufacturing, and negligent distribution, marketing and sale; specifically, without determining the merits, the Court of Appeal had no difficulty accepting that the plaintiff had viable allegations that Organigram had:

  • inadequate controls within its facility to ensure that unauthorized pest control products were not used;
  • inadequately developed or implemented, or failure to develop or implement, quality control measures to ensure that the components used in the manufacture of its organic products corresponded with their description and were free of any prohibited contaminants or substances;
  • inadequately developed or implemented, or failed to develop or implement, reasonable testing or screening procedures to ensure prompt detection in its products of any prohibited pesticides, contaminants or substances;
  • a duty of care to her and class members to only distribute, market and sell medical cannabis that was compliant with the regulations and free from unauthorized pesticides; and
  • a duty to inform class members in a transparent and timely manner that the recalled cannabis was not compliant and that its consumption may have exposed them to physical harm.

The Court of Appeal, however, determined that these claims, although viable, were not appropriate in a class action because the plaintiff was unable to, on a common basis, link her and the class members’ exposure to the impugned pesticides to any specific illness. The “general” and “vague” symptoms experienced by the plaintiff were among “predicted side effects of consuming cannabis in general”. The Court was also influenced by the fact that there was no evidence that the impugned pesticides caused adverse health effects; at its highest, the evidence was that their effects are unknown. In fact, a Health Canada report had stated that trace amounts of the chemicals in the pesticides posed “low risk”.

Nevertheless, the class action against Organigram remains certified for breach of contract, and breaches of the Competition Act and Sale of Goods Act and the litigation will continue.

Downton v Organigram is not the final word on whether allegations of negligent design, development and testing, negligent manufacturing, and negligent distribution, marketing and sale can be certified against an edible producer. A plaintiff may have a better prospect of certifying such allegations if there was better evidence that the alleged issue caused her injuries and there was a methodology to determine whether it also caused the alleged injuries of other proposed class members.

Takeaways

  1. Product liability class actions should be treated as an expected risk of manufacturing, distributing or selling cannabis edibles. The risks can be mitigated but not eliminated.
  2. Ensure management and the board of directors is familiar with measures to take if there is an issue with the design, development and testing, manufacturing, distribution, marketing or sale of edible products, especially issues that may lead to a class action. These measures should include the timely retainer of external counsel experienced in both regulatory and class action defence matters, a timely notification to insurers and an external communication plan.
  3. Empower employees in the compliance and quality control departments and ensure they are able to seek appropriate professional advice from internal or external counsel.
  4. To ensure compliance with complex regulations that frequently change, and retain experts in the Cannabis Act and Regulations who have deep relationships with compliance professionals in the cannabis industry and Health Canada.
  5. Review standard operating procedures, and modify/supplement them as necessary, to ensure that cannabis is produced and distributed only as authorized pursuant to applicable laws.
  6. Maintain appropriate records tracking the source and use of ingredients in all edible products.
  7. Understand and adhere to the applicable pesticide regulations and vigilantly test cannabis to ensure all safety standards are met and are consistent with brand marketing.
  8. Ensure product recall measures are up to date and product recall processes are practiced, including notification measures.
  9. Ensure there is indemnification available from licensed producers whose cannabis is used in the edibles and other relevant stakeholders.
  10. Obtain appropriate product liability insurance. Before doing so, seek advice on the scope of the insurance coverage, exclusions and the quantum of coverage.

McCarthy Tetrault LLP can assist you understand, mitigate and address any residual risk from product liability class actions, and defend you in the event that one is commenced. Our national practice has significant cannabis industry experience in helping companies create appropriate corporate governance protocols and controls to minimize the risk associated with class actions, conducting internal investigations when appropriate, and in acting as defense counsel if companies, directors and officers are sued.

 

[i] See e.g., Consumer Protection Act, 2002, S.O. 2002, c. 30, Sched. A, s. 8(1); Competition Act, R.S.C. 1985, c. C-34, ss. 36, 52; Sale of Goods Act, R.S.O. 1990, c. S. 1.

[ii] 2019 NSSC 4.

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