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Cannabis Consumption Lounges Present a Unique Risk Management Challenge

February 7, 2022

Authors: B. Otis Felder, Ian A. Stewart

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. 

Gram Shop Liability
Although Nevada has recently included the same civil liability protections that shield bars and restaurants in the state’s regulations for cannabis consumption lounges, the general trend appears to be going in the other direction. Michigan, for example, recently amended its regulations to expressly allow individuals who are injured or who suffer damage by a minor or visibly intoxicated person to take action against the licensee who sold or transferred the marijuana. The liability landscape is therefore a critical consideration when determining the risk profile for any particular on-site cannabis consumption facility. 

Consider this scenario: 25-year-old Katie meets her friends at a restaurant in West Hollywood where she has two drinks with dinner, followed by two more drinks at a nearby bar. The friends then visit a licensed cannabis consumption lounge where Katie consumes two 10 mg edible products. The group finishes the evening at a nearby nightclub where Katie has another three drinks before deciding to drive home. On the way home, Katie strikes and kills a pedestrian. In this scenario, the restaurant, bar and nightclub are all immune from liability under California’s dram shop statute, but the cannabis consumption lounge is not. The attorney for the deceased pedestrian’s family has an easy choice to make; he sues Katie and the cannabis consumption lounge, which he considers the party with “deep pockets.” 

The chance of successfully defending the cannabis consumption lounge under these facts is far from clear because the law is not developed. How courts will address questions of liability and apportionment in cannabis consumption cases will mature and diverge across jurisdictions. 

Imposition of civil liability may depend on consideration of which type of plaintiff can recover from those furnishing cannabis, how the liability should be apportioned between the licensed vendor and the customer causing the loss, and whether there is any need to protect vendors that provide cannabis to consumers. 

Some argue that, like a bartender, those providing service to on-site consumers have no legal duty to correct a potentially dangerous situation and should face liability only if they aggravate the situation by providing more cannabis to an obviously impaired patron. Using the “reasonable person” standard could permit a case-by-case assessment of whether the vendor should have denied service based on knowledge that the customer posed a risk. This approach is likely to be affected by local views on consumption until the adoption of a recognized standard or through appellate court decisions. 

Protecting Against Potential Loss for Gram Shop Liability
Given the uncertain risk environment for on-site cannabis consumption, those who seek to obtain a license should implement a risk management strategy that incorporates insurance protections and an affirmative program to mitigate risk through procedures and training. 

Liability Insurance for On-Site Cannabis Consumption
Regardless of the type of case brought, litigation is expensive. One study by the Small Business Administration (SBA) found that an average civil case can cost $50,000 to $100,000 to get through trial. Without insurance, the amount of money involved could force a business to convert assets, incur debt or even close its doors. 

The availability of liability insurance for on-site cannabis consumption remains limited. Policies that do exist are modeled after liquor liability insurance, sometimes called host liquor liability insurance, for those who provide or permit alcohol consumption but do not sell it. Licensees are therefore well advised to work with an experienced insurance broker who understands the cannabis insurance market. 

Standards and Training
Similar to how other licensed cannabis operations have matured, on-site consumption activity must be accompanied by the development of recognized standards and procedures to avoid costly litigation. This would include such actions as enforcing a reasonable per-customer consumption limit, posting warnings about potential impairment, possible partnerships with ridesharing services and even obtaining agreement from consumers to refrain from driving as a condition of sale. 

In addition, a modified version of responsible beverage service training must be developed and adopted by the cannabis industry. This training would likely incorporate elements of drug recognition training currently used by law enforcement, though that training has been criticized by some experts and courts as scientifically unreliable. 

Several important questions have been raised by state regulators looking at how to license on-site consumption facilities: 

  • May the lounge be attached to a cannabis retail facility or must it be a stand-alone facility?
  • If cannabis sales are permitted in the lounge, will sales be limited to single-use cannabis products and what are the limits?
  • Will the customer be allowed to bring in cannabis, and if so, how does one verify that the cannabis was legally purchased from a licensed source?
  • What will be the packaging, labeling and warning requirements for single-use cannabis products sold on premises?
  • What warnings are required on the premises?
  • Should there be an education requirement for patrons to ensure against over-consumption and problems caused by delayed effects?
  • Must cannabis that is purchased at the facility be consumed on premises or may the customer leave with the product?
  • What occupational health and safety requirements will be mandated for the protection of employees at the facility to prevent unsafe exposures?
  • What role do local governments have in zoning and permitting? 

At this stage in the development of the regulations and civil tort liability around on-site cannabis consumption, much remains uncertain. Important questions are still unanswered in most jurisdictions that are considering whether to allow on-site cannabis consumption. As we wait for the emergence of recognized standards, operators must closely follow state and local regulations and consider voluntarily adopting other measures that demonstrate advocacy for reasonable use and protection of customers. Efforts to minimize liability and risk should be a key element of the business planning for those seeking to operate in this sector of the cannabis industry. 

This article was previously published in two parts in PropertyCasualty 360o.

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