Cannabis consumption lounges present a unique risk management challenge - Part 1
As the marijuana market matures, increased consumer demand has spurred a renewed interest in on-site consumption licensing.
Early cannabis legalization initiatives included bans on any form of public marijuana consumption primarily due to fears of a potential social backlash from Amsterdam-style pot cafés. Although several states, led by Alaska in 2019, now have regulations that provide for some form of on-site cannabis consumption, relatively few licenses have been issued anywhere. Because the risk profile of consumption lounges is still not well understood, regulators and local officials have proceeded cautiously. Meanwhile, operators of the handful of existing licensed facilities have faced onerous local restrictions, lack of available insurance and a higher-than-expected cost of compliance, including expensive air-filtration systems and other nuisance-abatement costs. Pandemic-related limitations have further delayed progress.
On-site consumption licensing grows
A maturing cannabis market and increased consumer demand have spurred a renewed interest in on-site consumption licensing. Recent progress has been seen in cities such as Ann Arbor, Las Vegas, Palm Springs and West Hollywood, which are looking to provide a safe place for people to consume cannabis and reduce public consumption. In addition to newly eased restrictions in California and Colorado, regulations around cannabis consumption lounges are progressing in Illinois, Michigan, New Jersey, New Mexico, New York, Nevada, and Pennsylvania.
On-site consumption licensing requirements vary widely between states. Some states, for example, don’t allow the concurrent sale of food or drink (California), limit sales to single-serving “ready-to-consume” cannabis products (Nevada) or are limited to BYOC (bring your own cannabis) (Illinois). Different nomenclature is used, such as “consumption lounge,” “tasting room” and “hospitality establishment.” Some have questioned the viability of overly restrictive regulations that may result in an unappealing experience for customers.
Regardless of the specific form of on-site cannabis consumption, there are certain common risks to the operator. We will discuss the similarities and differences between well-established liquor liability regimes and the developing law around cannabis consumption. In that context, we comment on risk mitigation that includes understanding the limitations around available liability insurance, developing recognized service standards and implementing reliable training for employees.
Liquor liability as a model
Most states have statutory provisions that allow licensed businesses where alcohol is consumed on-premises to be held liable for selling or serving alcohol to individuals who cause injury or death as a result of their intoxication. These are generally referred to as “dram shop” statutes – historically, a tavern where spirits are sold in a small unit of liquid called a “dram.” For our purposes, “gram shop” liability refers to a similar regime for on-site cannabis use that results in an impaired consumer causing injury or death.
Before the imposition of state dram shop laws, courts generally found the link between selling alcohol and the proximate or legal cause of an injury was too remote; rather, it was often the purchaser’s consumption and subsequent actions that were found to be the sole cause. Today, each state has different rules for potential civil liability against vendors that provide alcohol to a person who then injures someone else.
There are currently 35 states that have dram shop laws holding bars and restaurants liable for injury or loss caused by serving alcohol to minors or visibly intoxicated adult patrons. Several states limit liability to serving minors, and others have unique laws that establish other standards. California, for example, limits liability to serving an “obviously intoxicated minor.” Seven states currently have no dram shop liability laws, even when minors are served alcohol.
In dram shop cases involving alcohol, the injured person seeks damages not only from the intoxicated person who directly caused the injury but also from a third party that contributed to the loss by negligently supplying or serving the intoxicant. Liability varies by state but often depends on a showing that the server of the alcohol could clearly determine that the customer was intoxicated and that by continuing to serve alcohol to the impaired person, the server increased the risk of harm to the general public.
The policy goal in permitting this type of recovery is to encourage vendors to develop reasonable service criteria and to train their employees to refuse service when it appears the patron has had too much to drink and could pose a danger to others. Dram shop laws are generally credited for the widespread adoption of responsible beverage service training and other standards.
Another important rationale for liability based on dram shop principles is the prevention of traffic injuries and deaths due to impaired driving. This also is relevant to cannabis consumption, though it is generally recognized that cannabis-impaired drivers have a lower crash risk compared with drunk drivers. Authorities nevertheless still grapple with how to accurately measure subjective cannabis impairment and the impact of mixed cannabis-alcohol impairment.
Editor’s Note: Part two of this series will appear tomorrow and addresses some of the specific issues related to gram shop liability and how to protect against potential losses.
Ian Stewart is the regional managing partner of Wilson Elser’s Los Angeles office and co-chair of the firm’s national Cannabis Law Practice, where he leads a national multidisciplinary team of lawyers serving all aspects of the cannabis and hemp industries, as well as financial institutions and insurance companies that service those industries. Contact him at ian.stewart@wilsonelser.com.
Otis Felder is a partner with Wilson Elser Los Angeles office and has substantial trial and appellate experience in state and federal court. He represents cruise lines and vessel operators and owners, as well as insurers’ interests in marine and shore-side pollution claims. As corporate counsel supervising brand protection and promotion, he provides substantial experience to the emerging cannabis industry. Contact him at otis.felder@wilsonelser.com.
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